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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |
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(Mark One) |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended March 31, 2013 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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Commission file number 001-14157 |
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TELEPHONE AND DATA SYSTEMS, INC. |
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(Exact name of Registrant as specified in its charter) |
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Delaware |
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36-2669023 |
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(State or other jurisdiction of incorporation or organization) |
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(IRS Employer Identification No.) |
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30 North LaSalle Street, Chicago, Illinois 60602 (Address of principal executive offices) (Zip code) |
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Registrant’s telephone number, including area code: (312) 630-1900 |
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Indicate by check mark |
Yes |
No |
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• whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |
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• whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). |
x |
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• whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. |
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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• whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). |
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x |
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Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. |
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Class |
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Outstanding at March 31, 2013 |
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Common Shares, $0.01 par value |
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100,917,126 Shares |
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Series A Common Shares, $0.01 par value |
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7,160,055 Shares |
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Telephone and Data Systems, Inc. |
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Quarterly Report on Form 10-Q |
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For the Quarterly Period Ended March 31, 2013 |
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Index |
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Page No. |
Part I. |
Financial Information |
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Item 1. |
Financial Statements (Unaudited) |
1 |
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Consolidated Statement of Operations |
1 |
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Three Months Ended March 31, 2013 and 2012 |
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Consolidated Statement of Comprehensive Income |
2 |
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Three Months Ended March 31, 2013 and 2012 |
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Consolidated Statement of Cash Flows |
3 |
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Three Months Ended March 31, 2013 and 2012 |
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Consolidated Balance Sheet March 31, 2013 and December 31, 2012 |
4 |
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Consolidated Statement of Changes in Equity |
6 |
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Three Months Ended March 31, 2013 and 2012 |
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Notes to Consolidated Financial Statements |
8 |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
21 |
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Overview |
21 |
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Divestiture Transaction |
24 |
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2013 Estimates |
25 |
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Three Months Ended March 31, 2013 and 2012 |
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Results of Operations — Consolidated |
28 |
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Results of Operations — U.S. Cellular |
30 |
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Results of Operations — TDS Telecom |
35 |
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Recent Accounting Pronouncements |
39 |
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Financial Resources |
39 |
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Liquidity and Capital Resources |
40 |
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Application of Critical Accounting Policies and Estimates |
43 |
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Safe Harbor Cautionary Statement |
44 |
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Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
47 |
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Item 4. |
Controls and Procedures |
48 |
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Part II. |
Other Information |
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Item 1. |
Legal Proceedings |
49 |
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Item 1A. |
Risk Factors |
49 |
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Item 5. |
Other Information |
50 |
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Item 6. |
Exhibits |
51 |
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Signatures |
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Part I. Financial Information |
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|||
Item 1. Financial Statements |
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|||
Telephone and Data Systems, Inc. Consolidated Statement of Operations (Unaudited) |
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Three Months Ended |
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March 31, |
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(Dollars and shares in thousands, except per share amounts) |
2013 |
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2012 |
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Operating revenues |
$ |
1,308,573 |
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$ |
1,305,791 |
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Operating expenses |
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Cost of services and products (excluding Depreciation, amortization and accretion expense reported below) |
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559,892 |
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509,211 |
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Selling, general and administrative |
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486,903 |
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507,599 |
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Depreciation, amortization and accretion |
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242,077 |
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197,434 |
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Loss on asset disposals, net |
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5,616 |
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2,079 |
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(Gain) loss on sale of business and other exit costs, net |
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6,931 |
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(4,174) |
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Total operating expenses |
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1,301,419 |
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1,212,149 |
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Operating income |
|
7,154 |
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93,642 |
|||
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Investment and other income (expense) |
|
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|||
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Equity in earnings of unconsolidated entities |
|
27,089 |
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|
23,389 |
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Interest and dividend income |
|
1,578 |
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|
2,183 |
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Interest expense |
|
(24,498) |
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|
(24,464) |
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Other, net |
|
(154) |
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228 |
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|
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Total investment and other income (expense) |
|
4,015 |
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|
1,336 |
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Income before income taxes |
|
11,169 |
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|
94,978 |
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|
Income tax expense |
|
4,180 |
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|
27,412 |
||
Net income |
|
6,989 |
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|
67,566 |
|||
Less: Net income attributable to noncontrolling interests, net of tax |
|
(5,570) |
|
|
(15,312) |
|||
Net income attributable to TDS shareholders |
|
1,419 |
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52,254 |
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Preferred dividend requirement |
|
(12) |
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(12) |
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Net income available to common shareholders |
$ |
1,407 |
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$ |
52,242 |
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Basic weighted average shares outstanding |
|
108,255 |
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|
108,653 |
|||
Basic earnings per share attributable to TDS shareholders |
$ |
0.01 |
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$ |
0.48 |
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Diluted weighted average shares outstanding |
|
108,693 |
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|
109,098 |
|||
Diluted earnings per share attributable to TDS shareholders |
$ |
0.01 |
|
$ |
0.48 |
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|
|
Dividends per share |
$ |
0.1275 |
|
$ |
0.1225 |
|||
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|
The accompanying notes are an integral part of these consolidated financial statements. |
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1
Telephone and Data Systems, Inc. Consolidated Statement of Comprehensive Income (Unaudited) |
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|
|
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|
|
|
Three Months Ended |
||||
|
|
|
|
|
March 31, |
||||
(Dollars in thousands) |
2013 |
|
2012 |
||||||
Net income |
$ |
6,989 |
|
$ |
67,566 |
||||
Net change in accumulated other comprehensive income (loss) |
|
|
|
|
|
||||
|
Change in foreign currency translation adjustment |
|
15 |
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|
- |
|||
|
Change related to retirement plan |
|
|
|
|
|
|||
|
|
Amounts included in net periodic benefit cost for the period |
|
|
|
|
|
||
|
|
|
Amortization of prior service cost |
|
(902) |
|
|
(934) |
|
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Amortization of unrecognized net loss |
|
602 |
|
|
623 |
|
|
|
|
|
|
|
(300) |
|
|
(311) |
|
|
|
Change in deferred income taxes |
|
114 |
|
|
470 |
|
|
|
Change related to retirement plan, net of tax |
|
(186) |
|
|
159 |
||
|
Net change in accumulated other comprehensive income (loss) |
|
(171) |
|
|
159 |
|||
Comprehensive income |
|
6,818 |
|
|
67,725 |
||||
|
Less: Comprehensive income attributable to noncontrolling interest |
|
(5,570) |
|
|
(15,312) |
|||
Comprehensive income attributable to TDS Shareholders |
$ |
1,248 |
|
$ |
52,413 |
||||
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements. |
|||||||||
|
|
|
|
|
|
|
|
|
|
2
Telephone and Data Systems, Inc. Consolidated Statement of Cash Flows (Unaudited) |
|||||||||
|
|
|
|
|
Three Months Ended |
||||
|
|
|
|
|
March 31, |
||||
(Dollars in thousands) |
2013 |
|
2012 |
||||||
Cash flows from operating activities |
|
|
|
|
|
||||
|
Net income |
$ |
6,989 |
|
$ |
67,566 |
|||
|
Add (deduct) adjustments to reconcile net income to net cash flows from operating activities |
|
|
|
|
|
|||
|
|
|
Depreciation, amortization and accretion |
|
242,077 |
|
|
197,434 |
|
|
|
|
Bad debts expense |
|
17,874 |
|
|
15,105 |
|
|
|
|
Stock-based compensation expense |
|
7,585 |
|
|
10,330 |
|
|
|
|
Deferred income taxes, net |
|
3,009 |
|
|
6,187 |
|
|
|
|
Equity in earnings of unconsolidated entities |
|
(27,089) |
|
|
(23,389) |
|
|
|
|
Distributions from unconsolidated entities |
|
8,089 |
|
|
2,938 |
|
|
|
|
Loss on asset disposals, net |
|
5,616 |
|
|
2,079 |
|
|
|
|
(Gain) loss on sale of business and other exit costs, net |
|
6,931 |
|
|
(4,174) |
|
|
|
|
Noncash interest expense |
|
497 |
|
|
862 |
|
|
|
|
Other operating activities |
|
256 |
|
|
852 |
|
|
Changes in assets and liabilities from operations |
|
|
|
|
|
|||
|
|
|
Accounts receivable |
|
34,038 |
|
|
38,941 |
|
|
|
|
Inventory |
|
16,860 |
|
|
(4,842) |
|
|
|
|
Accounts payable |
|
(3,203) |
|
|
(25,372) |
|
|
|
|
Customer deposits and deferred revenues |
|
7,904 |
|
|
10,745 |
|
|
|
|
Accrued taxes |
|
5,309 |
|
|
82,014 |
|
|
|
|
Accrued interest |
|
9,279 |
|
|
9,117 |
|
|
|
|
Other assets and liabilities |
|
(95,669) |
|
|
(104,148) |
|
|
|
|
|
|
|
246,352 |
|
|
282,245 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
||||
|
Cash used for additions to property, plant and equipment |
|
(176,318) |
|
|
(242,611) |
|||
|
Cash paid for acquisitions and licenses |
|
(14,150) |
|
|
(11,096) |
|||
|
Cash received from divestitures |
|
- |
|
|
50,036 |
|||
|
Cash paid for investments |
|
- |
|
|
(10,000) |
|||
|
Cash received for investments |
|
- |
|
|
20,249 |
|||
|
Other investing activities |
|
6,364 |
|
|
(436) |
|||
|
|
|
|
|
|
(184,104) |
|
|
(193,858) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
||||
|
Repayment of long-term debt |
|
(328) |
|
|
(493) |
|||
|
Issuance of long-term debt |
|
- |
|
|
358 |
|||
|
TDS Common Shares and Special Common Shares reissued for benefit plans, net of tax payments |
|
140 |
|
|
(33) |
|||
|
U.S. Cellular Common Shares reissued for benefit plans, net of tax payments |
|
123 |
|
|
357 |
|||
|
Repurchase of U.S. Cellular Common Shares |
|
(18,425) |
|
|
- |
|||
|
Dividends paid |
|
(13,792) |
|
|
(13,301) |
|||
|
Distributions to noncontrolling interests |
|
(2,396) |
|
|
(218) |
|||
|
Other financing activities |
|
(1,351) |
|
|
798 |
|||
|
|
|
|
|
|
(36,029) |
|
|
(12,532) |
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
26,219 |
|
|
75,855 |
||||
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
||||
|
Beginning of period |
|
740,481 |
|
|
563,275 |
|||
|
End of period |
$ |
766,700 |
|
$ |
639,130 |
|||
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements. |
3
Telephone and Data Systems, Inc. Consolidated Balance Sheet — Assets (Unaudited) |
||||||||
(Dollars in thousands) |
March 31, 2013 |
|
December 31, 2012 |
|||||
Current assets |
|
|
|
|
|
|||
|
Cash and cash equivalents |
$ |
766,700 |
|
$ |
740,481 |
||
|
Short-term investments |
|
125,595 |
|
|
115,700 |
||
|
Accounts receivable |
|
|
|
|
|
||
|
|
Due from customers and agents, less allowances of $27,413 and $28,152, respectively |
|
374,715 |
|
|
409,720 |
|
|
|
Other, less allowances of $3,670 and $5,263, respectively |
|
131,995 |
|
|
164,608 |
|
|
Inventory |
|
143,832 |
|
|
160,692 |
||
|
Net deferred income tax asset |
|
44,288 |
|
|
43,411 |
||
|
Prepaid expenses |
|
86,879 |
|
|
86,385 |
||
|
Income taxes receivable |
|
11,301 |
|
|
9,625 |
||
|
Other current assets |
|
30,498 |
|
|
32,815 |
||
|
|
|
|
|
1,715,803 |
|
|
1,763,437 |
|
|
|
|
|
|
|
|
|
Assets held for sale |
|
160,073 |
|
|
163,242 |
|||
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|||
|
Licenses |
|
1,494,189 |
|
|
1,480,039 |
||
|
Goodwill |
|
797,194 |
|
|
797,194 |
||
|
Other intangible assets, net of accumulated amortization of $146,578 and $143,613, respectively |
|
55,557 |
|
|
58,522 |
||
|
Investments in unconsolidated entities |
|
201,171 |
|
|
179,921 |
||
|
Long-term investments |
|
40,142 |
|
|
50,305 |
||
|
Other investments |
|
778 |
|
|
824 |
||
|
|
|
|
|
2,589,031 |
|
|
2,566,805 |
Property, plant and equipment |
|
|
|
|
|
|||
|
In service and under construction |
|
10,917,301 |
|
|
10,808,499 |
||
|
Less: Accumulated depreciation |
|
7,010,706 |
|
|
6,811,233 |
||
|
|
|
|
|
3,906,595 |
|
|
3,997,266 |
|
|
|
|
|
|
|
|
|
Other assets and deferred charges |
|
130,321 |
|
|
133,150 |
|||
|
|
|
|
|
|
|
|
|
Total assets |
$ |
8,501,823 |
|
$ |
8,623,900 |
|||
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements. |
||||||||
|
|
|
|
|
|
|
|
|
4
Telephone and Data Systems, Inc. Consolidated Balance Sheet — Liabilities and Equity (Unaudited) |
|||||||||
(Dollars and shares in thousands) |
March 31, 2013 |
|
December 31, 2012 |
||||||
Current liabilities |
|
|
|
|
|
||||
|
Current portion of long-term debt |
$ |
1,318 |
|
$ |
1,233 |
|||
|
Accounts payable |
|
335,065 |
|
|
377,291 |
|||
|
Customer deposits and deferred revenues |
|
231,478 |
|
|
222,345 |
|||
|
Accrued interest |
|
15,774 |
|
|
6,565 |
|||
|
Accrued taxes |
|
55,944 |
|
|
48,237 |
|||
|
Accrued compensation |
|
75,324 |
|
|
134,932 |
|||
|
Other current liabilities |
|
102,208 |
|
|
134,005 |
|||
|
|
|
|
|
|
817,111 |
|
|
924,608 |
|
|
|
|
|
|
|
|
|
|
Liabilities held for sale |
|
18,360 |
|
|
19,594 |
||||
|
|
|
|
|
|
|
|
|
|
Deferred liabilities and credits |
|
|
|
|
|
||||
|
Net deferred income tax liability |
|
867,954 |
|
|
862,580 |
|||
|
Other deferred liabilities and credits |
|
445,614 |
|
|
438,727 |
|||
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
1,721,338 |
|
|
1,721,571 |
||||
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests with redemption features |
|
466 |
|
|
493 |
||||
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
||||
|
TDS shareholders’ equity |
|
|
|
|
|
|||
|
|
Series A Common and Common Shares |
|
|
|
|
|
||
|
|
|
Authorized 290,000 shares (25,000 Series A Common and 265,000 Common Shares) |
|
|
|
|
|
|
|
|
|
Issued 132,672 shares (7,160 Series A Common and 125,512 Common Shares) |
|
|
|
|
|
|
|
|
|
Outstanding 108,077 shares (7,160 Series A Common and 100,917 Common Shares) and 108,031 shares (7,160 Series A Common and 100,871 Common Shares), respectively |
|
|
|
|
|
|
|
|
|
Par Value ($.01 per share) ($72 Series A Common and $1,255 Common Shares) |
|
1,327 |
|
|
1,327 |
|
|
|
Capital in excess of par value |
|
2,302,785 |
|
|
2,304,122 |
||
|
|
Treasury shares at cost: |
|
|
|
|
|
||
|
|
|
24,595 and 24,641 Common Shares, respectively |
|
(747,831) |
|
|
(750,099) |
|
|
|
Accumulated other comprehensive loss |
|
(8,303) |
|
|
(8,132) |
||
|
|
Retained earnings |
|
2,449,720 |
|
|
2,464,318 |
||
|
|
|
Total TDS shareholders' equity |
|
3,997,698 |
|
|
4,011,536 |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares |
|
825 |
|
|
825 |
|||
|
Noncontrolling interests |
|
632,457 |
|
|
643,966 |
|||
|
|
|
|
|
|
|
|
|
|
|
|
Total equity |
|
4,630,980 |
|
|
4,656,327 |
||
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
$ |
8,501,823 |
|
$ |
8,623,900 |
||||
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements. |
5
Telephone and Data Systems, Inc. Consolidated Statement of Changes in Equity (Unaudited) |
|||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TDS Shareholders |
|
|
|
|
|
|
|
|
|
||||||||||||||||
(Dollars in thousands) |
Series A Common and Common Shares |
|
Capital in Excess of Par Value |
|
Treasury Common Shares |
|
Accumulated Other Comprehensive Income (Loss) |
|
Retained Earnings |
|
Total TDS Shareholders' Equity |
|
Preferred Shares |
|
Non controlling Interests |
|
Total Equity |
||||||||||||
December 31, 2012 |
$ |
1,327 |
|
$ |
2,304,122 |
|
$ |
(750,099) |
|
$ |
(8,132) |
|
$ |
2,464,318 |
|
$ |
4,011,536 |
|
$ |
825 |
|
$ |
643,966 |
|
$ |
4,656,327 |
|||
Add (Deduct) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Net income attributable to TDS shareholders |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
1,419 |
|
|
1,419 |
|
|
- |
|
|
- |
|
|
1,419 |
|||
Net income attributable to noncontrolling interests classified as equity |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
5,597 |
|
|
5,597 |
|||
Change in foreign currency translation adjustment |
|
- |
|
|
- |
|
|
- |
|
|
15 |
|
|
- |
|
|
15 |
|
|
- |
|
|
- |
|
|
15 |
|||
Change related to retirement plan |
|
- |
|
|
- |
|
|
- |
|
|
(186) |
|
|
- |
|
|
(186) |
|
|
- |
|
|
- |
|
|
(186) |
|||
Common and Series A Common Shares dividends |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(13,780) |
|
|
(13,780) |
|
|
- |
|
|
- |
|
|
(13,780) |
|||
Preferred dividend requirement |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(12) |
|
|
(12) |
|
|
- |
|
|
- |
|
|
(12) |
|||
Dividend reinvestment plan |
|
- |
|
|
- |
|
|
3 |
|
|
- |
|
|
(2) |
|
|
1 |
|
|
- |
|
|
- |
|
|
1 |
|||
Incentive and compensation plans |
|
- |
|
|
534 |
|
|
2,265 |
|
|
- |
|
|
(2,223) |
|
|
576 |
|
|
- |
|
|
- |
|
|
576 |
|||
Adjust investment in subsidiaries for repurchases, issuances, other compensation plans and noncontrolling interest purchases |
|
- |
|
|
(3,734) |
|
|
- |
|
|
- |
|
|
- |
|
|
(3,734) |
|
|
- |
|
|
(14,710) |
|
|
(18,444) |
|||
Stock-based compensation awards |
|
- |
|
|
2,395 |
|
|
- |
|
|
- |
|
|
- |
|
|
2,395 |
|
|
- |
|
|
- |
|
|
2,395 |
|||
Tax windfall (shortfall) from stock awards |
|
- |
|
|
(532) |
|
|
- |
|
|
- |
|
|
- |
|
|
(532) |
|
|
- |
|
|
- |
|
|
(532) |
|||
Distributions to noncontrolling interests |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(2,396) |
|
|
(2,396) |
|||
March 31, 2013 |
$ |
1,327 |
|
$ |
2,302,785 |
|
$ |
(747,831) |
|
$ |
(8,303) |
|
$ |
2,449,720 |
|
$ |
3,997,698 |
|
$ |
825 |
|
$ |
632,457 |
|
$ |
4,630,980 |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements. |
6
Telephone and Data Systems, Inc. Consolidated Statement of Changes in Equity (Unaudited) |
|||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TDS Shareholders |
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
(Dollars in thousands) |
Series A Common and Common Shares |
|
Capital in Excess of Par Value |
|
Treasury Common Shares |
|
Accumulated Other Comprehensive Income (Loss) |
|
Retained Earnings |
|
Total TDS Shareholders' Equity |
|
Preferred Shares |
|
Non controlling Interests |
|
Total Equity |
||||||||||||
December 31, 2011 |
$ |
1,326 |
|
$ |
2,268,711 |
|
$ |
(750,921) |
|
$ |
(8,854) |
|
$ |
2,451,899 |
|
$ |
3,962,161 |
|
$ |
830 |
|
$ |
639,688 |
|
$ |
4,602,679 |
|||
Add (Deduct) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Net income attributable to TDS shareholders |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
52,254 |
|
|
52,254 |
|
|
- |
|
|
- |
|
|
52,254 |
|||
Net income attributable to noncontrolling interests classified as equity |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
15,252 |
|
|
15,252 |
|||
Change related to retirement plan |
|
- |
|
|
- |
|
|
- |
|
|
159 |
|
|
- |
|
|
159 |
|
|
- |
|
|
- |
|
|
159 |
|||
Common and Series A Common Shares dividends |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(13,289) |
|
|
(13,289) |
|
|
- |
|
|
- |
|
|
(13,289) |
|||
Preferred dividend requirement |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(12) |
|
|
(12) |
|
|
- |
|
|
- |
|
|
(12) |
|||
Dividend reinvestment plan |
|
- |
|
|
296 |
|
|
2,703 |
|
|
- |
|
|
(1,585) |
|
|
1,414 |
|
|
- |
|
|
- |
|
|
1,414 |
|||
Incentive and compensation plans |
|
- |
|
|
444 |
|
|
1,230 |
|
|
- |
|
|
(1,331) |
|
|
343 |
|
|
- |
|
|
- |
|
|
343 |
|||
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans |
|
- |
|
|
4,157 |
|
|
- |
|
|
- |
|
|
- |
|
|
4,157 |
|
|
- |
|
|
1,678 |
|
|
5,835 |
|||
Stock-based compensation awards |
|
- |
|
|
4,845 |
|
|
- |
|
|
- |
|
|
- |
|
|
4,845 |
|
|
- |
|
|
- |
|
|
4,845 |
|||
Tax windfall (shortfall) from stock awards |
|
- |
|
|
(69) |
|
|
- |
|
|
- |
|
|
- |
|
|
(69) |
|
|
- |
|
|
- |
|
|
(69) |
|||
Distributions to noncontrolling interests |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(218) |
|
|
(218) |
|||
Other |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
84 |
|
|
84 |
|||
March 31, 2012 |
$ |
1,326 |
|
$ |
2,278,384 |
|
$ |
(746,988) |
|
$ |
(8,695) |
|
$ |
2,487,936 |
|
$ |
4,011,963 |
|
$ |
830 |
|
$ |
656,484 |
|
$ |
4,669,277 |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements. |
7
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accounting policies of Telephone and Data Systems, Inc. (“TDS”) conform to accounting principles generally accepted in the United States of America (“GAAP”) as set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The consolidated financial statements include the accounts of TDS and its majority-owned subsidiaries, including TDS’ 85%-owned wireless telephone subsidiary, United States Cellular Corporation (“U.S. Cellular”) and TDS’ wholly-owned wireline telephone subsidiary, TDS Telecommunications Corporation (“TDS Telecom”). In addition, the consolidated financial statements include certain entities in which TDS has a variable interest that require consolidation under GAAP. All material intercompany accounts and transactions have been eliminated.
The consolidated financial statements included herein have been prepared by TDS, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, TDS believes that the disclosures included herein are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in TDS’ Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2012.
TDS’ business segments reflected in this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013, are U.S. Cellular, TDS Telecom’s incumbent local exchange carriers, (“ILEC”), its competitive local exchange carrier (“CLEC”), its Hosted and Managed Services (“HMS”) operations, and the Non-Reportable Segment which includes TDS’ majority-owned printing and distribution company, Suttle-Straus, Inc. (“Suttle-Straus”) and TDS’ wholly-owned wireless telephone subsidiary, Airadigm Communications, Inc. (“Airadigm”). All of TDS’ segments operate only in the United States, except for HMS, which includes an insignificant foreign operation.
The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items, unless otherwise disclosed) necessary for a fair statement of the financial position as of March 31, 2013 and December 31, 2012, and the results of operations, cash flows, changes in comprehensive income and equity for the three months ended March 31, 2013 and 2012. These results are not necessarily indicative of the results to be expected for the full year.
Recent Accounting Pronouncements
As of March 31, 2013, there are no recent accounting pronouncements that are expected to have a material impact on TDS’ financial position or results of operations.
Agent Liabilities
U.S. Cellular has relationships with agents, which are independent businesses that obtain customers for U.S. Cellular. At March 31, 2013 and December 31, 2012, U.S. Cellular had accrued $63.9 million and $88.2 million, respectively, for amounts due to agents, including rebates and commissions. These amounts are included in Other current liabilities in the Consolidated Balance Sheet.
Amounts Collected from Customers and Remitted to Governmental Authorities
If a tax is assessed upon the customer and TDS merely acts as an agent in collecting the tax on behalf of the imposing governmental authority, then amounts collected from customers and remitted to governmental authorities are recorded on a net basis within a tax liability account in the Consolidated Balance Sheet. If the tax is assessed upon TDS, then amounts collected from customers as recovery of the tax are recorded in Operating revenues and amounts remitted to governmental authorities are recorded in Selling, general and administrative expenses in the Consolidated Statement of Operations. The amounts recorded gross in revenues that are billed to customers and remitted to governmental authorities totaled $36.1 million for the three months ended March 31, 2013 and $39.6 million for the three months ended March 31, 2012.
2. Fair Value Measurements
As of March 31, 2013 and December 31, 2012, TDS did not have any financial assets or liabilities that were required to be recorded at fair value in its Consolidated Balance Sheet in accordance with GAAP. However, TDS has applied the provisions of fair value accounting for purposes of computing the fair value of financial instruments for disclosure purposes as displayed below.
8
|
|
|
Level within the Fair Value Hierarchy |
|
March 31, 2013 |
|
December 31, 2012 |
||||||||
|
|
|
|
Book Value |
|
Fair Value |
|
Book Value |
|
Fair Value |
|||||
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Cash and cash equivalents |
1 |
|
$ |
766,700 |
|
$ |
766,700 |
|
$ |
740,481 |
|
$ |
740,481 |
||
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Government-backed securities |
1 |
|
|
125,595 |
|
|
125,595 |
|
|
115,700 |
|
|
115,700 |
|
Long-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Government-backed securities |
1 |
|
|
40,142 |
|
|
40,175 |
|
|
50,305 |
|
|
50,339 |
|
Long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Retail |
1 |
|
|
1,178,250 |
|
|
1,230,244 |
|
|
1,178,250 |
|
|
1,238,204 |
|
|
Institutional and other |
2 |
|
|
538,369 |
|
|
591,696 |
|
|
538,657 |
|
|
589,435 |
Short-term investments and Long-term investments are both designated as held-to-maturity investments and recorded at amortized cost in the Consolidated Balance Sheet. Long-term investment maturities are 20 months at March 31, 2013. Government-backed securities include U.S. treasuries and corporate notes guaranteed under the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program. Long-term debt excludes capital lease obligations and current portion of Long-term debt.
The fair values of Cash and cash equivalents and Short-term investments approximate their book values due to the short-term nature of these financial instruments. The fair values of Long-term investments were estimated using quoted market prices for the individual issuances. The fair value of “Retail” Long-term debt, excluding capital lease obligations and the current portion of such Long-term debt, was estimated using market prices for TDS’ 7.0% Senior Notes, 6.875% Senior Notes, 6.625% Senior Notes and 5.875% Senior Notes, and U.S. Cellular's 6.95% Senior Notes. TDS’ institutional debt includes U.S. Cellular’s 6.7% Senior Notes which are traded over the counter. TDS estimated the fair value of its institutional and other debt through a discounted cash flow analysis using the interest rates or estimated yield to maturity for each borrowing, which ranged from 0.0% to 6.05% at March 31, 2013.
As of March 31, 2013 and December 31, 2012, TDS did not have nonfinancial assets or liabilities that required the application of fair value accounting for purposes of reporting such amounts in the Consolidated Balance Sheet.
3. Income Taxes
TDS’ overall effective tax rate on Income before income taxes for the three months ended March 31, 2013 and March 31, 2012 was 37.4% and 28.9%, respectively. The effective tax rate for the three months ended March 31, 2013 was higher than the rate for the three months ended March 31, 2012 primarily as a result of tax benefits related to the expiration of the statute of limitations for certain tax years and the adjustment of deferred tax balances related to certain partnership investments in 2012.
TDS incurred a federal net operating loss in 2011 largely attributable to 100% bonus depreciation applicable to qualified capital expenditures. TDS carried back this federal net operating loss to prior tax years, and received a $71.4 million federal income tax refund in 2012 for carrybacks to 2009 and 2010 tax years. Of this amount, $59.9 million of the refund was received in the three months ended March 31, 2012.
4. Earnings Per Share
Basic earnings per share attributable to TDS shareholders is computed by dividing Net income available to common shareholders of TDS by the weighted average number of common shares outstanding during the period. Diluted earnings per share attributable to TDS shareholders is computed by dividing Net income available to common shareholders of TDS by the weighted average number of common shares outstanding during the period adjusted to include the effects of potentially dilutive securities. Potentially dilutive securities primarily include incremental shares issuable upon exercise of outstanding stock options and the vesting of restricted stock units.
The amounts used in computing earnings per share and the effects of potentially dilutive securities on the weighted average number of Common and Series A Common Shares were as follows:
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Three Months Ended |
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|
|
|
|
|
March 31, |
||||
|
|
|
|
|
2013 |
|
2012 |
||
(Dollars and shares in thousands, except per share amounts) |
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|
|
|
|
||||
Basic earnings per share attributable to TDS shareholders: |
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|
|
|
|
||||
|
Net income available to common shareholders of TDS used in basic earnings per share |
$ |
1,407 |
|
$ |
52,242 |
|||
Adjustments to compute diluted earnings: |
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|
|
|
|
||||
|
Noncontrolling interest adjustment |
|
(28) |
|
|
(345) |
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|
Preferred dividend adjustment |
|
- |
|
|
12 |
|||
|
Net income attributable to common shareholders of TDS used in diluted earnings per share |
$ |
1,379 |
|
$ |
51,909 |
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|
|
|
|
|
|
|
|
|
Weighted average number of shares used in basic earnings per share: |
|
|
|
|
|
||||
|
|
Common Shares |
|
101,095 |
|
|
101,534 |
||
|
|
Series A Common Shares |
|
7,160 |
|
|
7,119 |
||
|
|
|
Total |
|
108,255 |
|
|
108,653 |
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|
|
|
|
|
|
|
|
|
|
Effects of dilutive securities: |
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|
|
|
|
||||
|
Stock options |
|
112 |
|
|
202 |
|||
|
Restricted stock units |
|
326 |
|
|
180 |
|||
|
Preferred shares |
|
- |
|
|
63 |
|||
Weighted average number of shares used in diluted earnings per share |
|
108,693 |
|
|
109,098 |
||||
|
|
|
|
|
|
|
|
|
|
Basic earnings per share attributable to TDS shareholders |
$ |
0.01 |
|
$ |
0.48 |
||||
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share attributable to TDS shareholders |
$ |
0.01 |
|
$ |
0.48 |
9
Certain Common Shares issuable upon the exercise of stock options, vesting of restricted stock units or conversion of preferred shares were not included in average diluted shares outstanding for the calculation of Diluted earnings per share attributable to TDS shareholders because their effects were antidilutive. The number of such Common Shares excluded, if any, is shown in the table below.
|
|
Three Months Ended |
||
|
|
March 31, |
||
|
|
2013 |
|
2012 |
(Shares in thousands) |
|
|
|
|
Stock options |
6,672 |
|
4,301 |
|
|
|
|
|
|
Preferred shares |
61 |
|
- |
|
|
|
|
|
|
5. Acquisitions, Divestitures and Exchanges
TDS assesses its business interests on an ongoing basis with a goal of improving the competitiveness of its operations and maximizing its long-term return on investment. As part of this strategy, TDS reviews attractive opportunities to acquire additional wireless operating markets and wireless spectrum; and telecommunications companies, cable, HMS or other possible businesses. In addition, TDS may seek to divest outright or include in exchanges for other interests those interests that are not strategic to its long-term success.
Divestiture Transaction
On November 6, 2012, U.S. Cellular entered into a Purchase and Sale Agreement with subsidiaries of Sprint Nextel Corporation (“Sprint”). The Purchase and Sale Agreement provides that U.S. Cellular will transfer customers and certain PCS licensed spectrum to Sprint in U.S. Cellular's Chicago, central Illinois, St. Louis and certain Indiana/Michigan/Ohio markets (“Divestiture Markets”) in consideration for $480 million in cash at closing, subject to pro-rations of certain assets and liabilities. The Purchase and Sale Agreement also contemplates certain other agreements, together with the Purchase and Sale Agreement collectively referred to as the “Divestiture Transaction.” The transaction was approved by the FCC in March 2013 and the closing is expected to occur in the second quarter of 2013.
U.S. Cellular will retain other assets and liabilities related to the Divestiture Markets, including network assets, retail stores and related equipment, and other buildings and facilities. The transaction does not affect spectrum licenses held by U.S. Cellular or variable interest entities (“VIEs”) that are not currently used in the operations of the Divestiture Markets. The Purchase and Sale Agreement also contemplates certain other agreements, including customer and network transition services agreements, which will require that U.S. Cellular provide customer, billing and network services to Sprint for a period of up to 24 months after the closing date. Sprint will reimburse U.S. Cellular for providing such services at an amount equal to U.S. Cellular's cost, including applicable overhead allocations. In addition, these agreements will require Sprint to reimburse U.S. Cellular up to $200 million
10
(the “Sprint Cost Reimbursement”) for certain network decommissioning costs, network site lease rent and termination costs, network access termination costs, and employee termination benefits for specified engineering employees.
Financial impacts of the Divestiture Transaction are classified in the Consolidated Statement of Operations within Operating income. The table below describes the amounts TDS has recognized, and expects to recognize, in the Consolidated Statement of Operations between the date the Purchase and Sale Agreement was signed and the end of the transition services period, as a result of the transaction.
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|
(Dollars in thousands) |
Expected Period of Realization/ Incurrence |
|
Projected Range |
|
Cumulative Amount Incurred as of March 31, 2013 |
|
Actual Amount Incurred Three Months Ended March 31, 2013 |
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(Gain) loss on sale of business and other exit costs, net |
|
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|
Proceeds from Sprint |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase price |
|
2013 |
|
$ |
(480,000) |
|
$ |
(480,000) |
|
$ |
- |
|
$ |
- |
|
|
Sprint Cost Reimbursement |
|
2013-2014 |
|
|
(150,000) |
|
|
(200,000) |
|
|
- |
|
|
- |
|
Net assets transferred |
|
2013 |
|
|
150,000 |
|
|
170,000 |
|
|
- |
|
|
- |
|
|
Non-cash charges for the write-off and write-down of property under construction and related assets |
|
2012-2013 |
|
|
|