Edgar Filing: TELEPHONE & DATA SYSTEMS INC /DE/

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013



TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-14157

TELEPHONE AND DATA SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

Delaware

36-2669023

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

30 North LaSalle Street, Suite 4000, Chicago, Illinois 60602

(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code: (312) 630-1900

Indicate by check mark

Yes

• 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.



• 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).



• 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.

Large accelerated filer

Accelerated filer



Non-accelerated filer



Smaller reporting company



• whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class

Outstanding at June 30, 2013

Common Shares, $0.01 par value

101,140,130 Shares

Series A Common Shares, $0.01 par value

7,148,768 Shares

Telephone and Data Systems, Inc.

Quarterly Report on Form 10-Q
For the Quarterly Period Ended June 30, 2013

Index

				Page No.
Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited)		1

		Consolidated Statement of Operations		1
			Three and Six Months Ended June 30, 2013 and 2012

		Consolidated Statement of Comprehensive Income		2
			Three and Six Months Ended June 30, 2013 and 2012

		Consolidated Statement of Cash Flows		3
			Six Months Ended June 30, 2013 and 2012

		Consolidated Balance Sheet June 30, 2013 and December 31, 2012		4

		Consolidated Statement of Changes in Equity		6
			Six Months Ended June 30, 2013 and 2012

		Notes to Consolidated Financial Statements		8

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		25

		Overview		25
		2013 Estimates		29
		Six Months Ended June 30, 2013 and 2012
			Results of Operations — Consolidated	32
			Results of Operations — U.S. Cellular	34
			Results of Operations — TDS Telecom	39
		Three Months Ended June 30, 2013 and 2012
			Results of Operations — Consolidated	44
			Results of Operations — U.S. Cellular	46
			Results of Operations — TDS Telecom	48
		Recent Accounting Pronouncements		51
		Financial Resources		51
		Liquidity and Capital Resources		53
		Application of Critical Accounting Policies and Estimates		56
		Safe Harbor Cautionary Statement		57

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		60

	Item 4.	Controls and Procedures		61

Part II.	Other Information

	Item 1.	Legal Proceedings		62

	Item 1A.	Risk Factors		62

	Item 5.	Other Information		63

	Item 6.	Exhibits		64

Signatures

Part I. Financial Information
Item 1. Financial Statements
Telephone and Data Systems, Inc. Consolidated Statement of Operations (Unaudited)

			Three Months Ended				Six Months Ended
			June 30,				June 30,
(Dollars and shares in thousands, except per share amounts)			2013		2012		2013		2012
Operating revenues			$	1,228,166	$	1,323,169	$	2,536,739	$	2,628,960

Operating expenses
	Cost of services and products (excluding Depreciation, amortization and accretion expense reported below)			515,731		527,670		1,075,623		1,036,881
	Selling, general and administrative			470,720		502,404		957,623		1,010,003
	Depreciation, amortization and accretion			254,203		198,509		496,280		395,943
	Loss on impairment of assets			-		515		-		515
	Loss on asset disposals, net			8,319		2,995		13,935		5,074
	(Gain) loss on sale of business and other exit costs, net			(303,034)		-		(296,103)		(4,174)
		Total operating expenses		945,939		1,232,093		2,247,358		2,444,242

Operating income				282,227		91,076		289,381		184,718

Investment and other income (expense)
	Equity in earnings of unconsolidated entities			35,605		25,392		62,694		48,781
	Interest and dividend income			2,600		2,352		4,178		4,535
	Gain (loss) on investments			14,518		(3,728)		14,518		(3,728)
	Interest expense			(23,749)		(23,139)		(48,247)		(47,603)
	Other, net			(197)		(249)		(351)		(21)
		Total investment and other income (expense)		28,777		628		32,792		1,964

Income before income taxes				311,004		91,704		322,173		186,682
	Income tax expense			132,607		35,765		136,787		63,177
Net income				178,397		55,939		185,386		123,505
Less: Net income attributable to noncontrolling interests, net of tax				(22,320)		(13,602)		(27,890)		(28,914)
Net income attributable to TDS shareholders				156,077		42,337		157,496		94,591
TDS Preferred dividend requirement				(12)		(12)		(25)		(25)
Net income available to common shareholders			$	156,065	$	42,325	$	157,471	$	94,566

Basic weighted average shares outstanding				108,385		108,732		108,320		108,693
Basic earnings per share attributable to TDS shareholders			$	1.44	$	0.39	$	1.45	$	0.87

Diluted weighted average shares outstanding				108,913		109,022		108,827		108,964
Diluted earnings per share attributable to TDS shareholders			$	1.42	$	0.39	$	1.44	$	0.86

Dividends per share to TDS shareholders			$	0.1275	$	0.1225	$	0.2550	$	0.2450

The accompanying notes are an integral part of these consolidated financial statements.

Telephone and Data Systems, Inc. Consolidated Statement of Comprehensive Income (Unaudited)

				Three Months Ended				Six Months Ended
				June 30,				June 30,
(Dollars in thousands)				2013		2012		2013		2012
Net income				$	178,397	$	55,939	$	185,386	$	123,505
Net change in accumulated other comprehensive income (loss)
	Change in net unrealized gain (loss) on equity investments				51		49		51		49
	Change in foreign currency translation adjustment				-		-		15		-
	Change related to retirement plan								.
		Amounts included in net periodic benefit cost for the period
			Amortization of prior service cost		(902)		(934)		(1,804)		(1,868)
			Amortization of unrecognized net loss		602		623		1,204		1,246
					(300)		(311)		(600)		(622)
			Change in deferred income taxes		114		463		228		933
		Change related to retirement plan, net of tax			(186)		152		(372)		311
	Net change in accumulated other comprehensive income (loss)				(135)		201		(306)		360
Comprehensive income					178,262		56,140		185,080		123,865
	Less: Comprehensive income attributable to noncontrolling interest				(22,320)		(13,602)		(27,890)		(28,914)
Comprehensive income attributable to TDS shareholders				$	155,942	$	42,538	$	157,190	$	94,951

The accompanying notes are an integral part of these consolidated financial statements.

Telephone and Data Systems, Inc. Consolidated Statement of Cash Flows (Unaudited)
			Six Months Ended
			June 30,
(Dollars in thousands)			2013		2012
Cash flows from operating activities
	Net income		$	185,386	$	123,505
	Add (deduct) adjustments to reconcile net income to net cash flows from operating activities
		Depreciation, amortization and accretion		496,280		395,943
		Bad debts expense		35,187		33,626
		Stock-based compensation expense		12,902		20,955
		Deferred income taxes, net		(21,246)		29,929
		Equity in earnings of unconsolidated entities		(62,694)		(48,781)
		Distributions from unconsolidated entities		47,635		6,973
		Loss on impairment of assets		-		515
		Loss on asset disposals, net		13,935		5,074
		(Gain) loss on sale of business and other exit costs, net		(296,103)		(4,174)
		(Gain) loss on investments		(14,518)		3,728
		Noncash interest expense		997		1,728
		Other operating activities		505		1,010
	Changes in assets and liabilities from operations
		Accounts receivable		(5,781)		(10,197)
		Inventory		(8,105)		(58,467)
		Accounts payable		58,204		(23,336)
		Customer deposits and deferred revenues		7,897		22,786
		Accrued taxes		150,425		89,433
		Accrued interest		2,172		(1,823)
		Other assets and liabilities		(81,586)		(81,517)
				521,492		506,910

Cash flows from investing activities
	Cash used for additions to property, plant and equipment			(384,281)		(501,211)
	Cash paid for acquisitions and licenses			(14,150)		(52,213)
	Cash received from divestitures			480,000		50,036
	Cash paid for investments			-		(45,000)
	Cash received for investments			15,000		128,444
	Other investing activities			14,127		(8,916)
				110,696		(428,860)

Cash flows from financing activities
	Repayment of long-term debt			(605)		(952)
	Issuance of long-term debt			-		358
	TDS Common Shares and Special Common Shares reissued for benefit plans, net of tax payments			776		(39)
	U.S. Cellular Common Shares reissued for benefit plans, net of tax payments			(2,206)		(2,465)
	Repurchase of U.S. Cellular Common Shares			(18,425)		-
	Dividends paid to TDS shareholders			(27,598)		(26,610)
	U.S. Cellular dividends paid to noncontrolling public shareholders			(75,235)		-
	Payment of debt issuance costs			(23)		-
	Distributions to noncontrolling interests			(3,292)		(643)
	Other financing activities			354		2,790
				(126,254)		(27,561)

Net increase in cash and cash equivalents				505,934		50,489

Cash and cash equivalents
	Beginning of period			740,481		563,275
	End of period		$	1,246,415	$	613,764

The accompanying notes are an integral part of these consolidated financial statements.

Telephone and Data Systems, Inc. Consolidated Balance Sheet — Assets (Unaudited)
(Dollars in thousands)			June 30, 2013		December 31, 2012
Current assets
	Cash and cash equivalents		$	1,246,415	$	740,481
	Short-term investments			110,352		115,700
	Accounts receivable
		Due from customers and agents, less allowances of $28,368 and $28,152, respectively		353,580		409,720
		Other, less allowances of $3,030 and $5,263, respectively		132,016		164,608
	Inventory			168,700		160,692
	Net deferred income tax asset			56,822		43,411
	Prepaid expenses			93,383		86,385
	Income taxes receivable			9		9,625
	Other current assets			32,375		32,815
				2,193,652		1,763,437

Assets held for sale				78,389		163,242

Investments
	Licenses			1,418,832		1,480,039
	Goodwill			759,885		797,194
	Other intangible assets, net of accumulated amortization of $102,890 and $143,613, respectively			52,592		58,522
	Investments in unconsolidated entities			312,046		179,921
	Long-term investments			40,120		50,305
	Other investments			738		824
				2,584,213		2,566,805
Property, plant and equipment
	In service and under construction			10,758,765		10,808,499
	Less: Accumulated depreciation			6,989,832		6,811,233
				3,768,933		3,997,266

Other assets and deferred charges				129,578		133,150

Total assets			$	8,754,765	$	8,623,900

The accompanying notes are an integral part of these consolidated financial statements.

Telephone and Data Systems, Inc. Consolidated Balance Sheet — Liabilities and Equity (Unaudited)
(Dollars and shares in thousands)				June 30, 2013		December 31, 2012
Current liabilities
	Current portion of long-term debt			$	1,899	$	1,233
	Accounts payable				393,906		377,291
	Customer deposits and deferred revenues				228,259		222,345
	Accrued interest				8,599		6,565
	Accrued taxes				190,836		48,237
	Accrued compensation				95,677		134,932
	Other current liabilities				114,910		134,005
					1,034,086		924,608

Liabilities held for sale					559		19,594

Deferred liabilities and credits
	Net deferred income tax liability				855,623		862,580
	Other deferred liabilities and credits				460,991		438,727

Long-term debt					1,720,642		1,721,571

Commitments and contingencies					-		-

Noncontrolling interests with redemption features					512		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 132,694 shares (7,149 Series A Common and 125,545 Common Shares) and 132,672 shares (7,160 Series A Common and 125,512 Common Shares), respectively
			Outstanding 108,289 shares (7,149 Series A Common and 101,140 Common Shares) and 108,031 shares (7,160 Series A Common and 100,871 Common Shares), respectively
			Par Value ($.01 per share) of $1,327 ($72 Series A Common and $1,255 Common Shares) and $1,327 ($72 Series A Common and $1,255 Common Shares), respectively		1,327		1,327
		Capital in excess of par value			2,299,091		2,304,122
		Treasury shares at cost:
			24,405 and 24,641 Common Shares, respectively		(738,397)		(750,099)
		Accumulated other comprehensive loss			(8,438)		(8,132)
		Retained earnings			2,586,567		2,464,318
			Total TDS shareholders' equity		4,140,150		4,011,536

	Preferred shares				825		825
	Noncontrolling interests				541,377		643,966

		Total equity			4,682,352		4,656,327

Total liabilities and equity				$	8,754,765	$	8,623,900

The accompanying notes are an integral part of these consolidated financial statements.

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		-		-		-		-		157,496		157,496		-		-		157,496
Net income attributable to noncontrolling interests classified as equity		-		-		-		-		-		-		-		27,871		27,871
Net unrealized gain (loss) on equity investments		-		-		-		51		-		51		-		-		51
Change in foreign currency translation adjustment		-		-		-		15		-		15		-		-		15
Change related to retirement plan		-		-		-		(372)		-		(372)		-		-		(372)
TDS Common and Series A Common Share dividends		-		-		-		-		(27,573)		(27,573)		-		-		(27,573)
TDS Preferred dividend requirement		-		-		-		-		(25)		(25)		-		-		(25)
U.S. Cellular dividends paid to noncontrolling public shareholders		-		-		-		-		-		-		-		(75,235)		(75,235)
Dividend reinvestment plan		-		448		7,914		-		(4,540)		3,822		-		-		3,822
Incentive and compensation plans		-		533		3,788		-		(3,109)		1,212		-		-		1,212
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans		-		(1,166)		-		-		-		(1,166)		-		(13,457)		(14,623)
Stock-based compensation awards		-		6,124		-		-		-		6,124		-		-		6,124
Tax windfall (shortfall) from stock awards		-		(648)		-		-		-		(648)		-		-		(648)
Distributions to noncontrolling interests		-		-		-		-		-		-		-		(3,292)		(3,292)
Adjust investment in subsidiaries for noncontrolling interest purchases				(10,322)		-		-		-		(10,322)		-		5,294		(5,028)
Deconsolidation of partnerships		-		-		-		-		-		-		-		(43,770)		(43,770)
June 30, 2013	$	1,327	$	2,299,091	$	(738,397)	$	(8,438)	$	2,586,567	$	4,140,150	$	825	$	541,377	$	4,682,352

The accompanying notes are an integral part of these consolidated financial statements.

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		-		-		-		-		94,591		94,591		-		-		94,591
Net income attributable to noncontrolling interests classified as equity		-		-		-		-		-		-		-		28,869		28,869
Net unrealized gain (loss) on equity investments		-		-		-		49		-		49		-		-		49
Change related to retirement plan		-		-		-		311		-		311		-		-		311
TDS Common and Series A Common Share dividends		-		-		-		-		(26,585)		(26,585)		-		-		(26,585)
TDS Preferred dividend requirement		-		-		-		-		(25)		(25)		-		-		(25)
Dividend reinvestment plan		-		581		6,764		-		(4,196)		3,149		-		-		3,149
Incentive and compensation plans		-		444		1,251		-		(1,357)		338		-		-		338
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans		-		1,438		-		-		-		1,438		-		7,763		9,201
Stock-based compensation awards		-		9,711		-		-		-		9,711		-		-		9,711
Tax windfall (shortfall) from stock awards		-		(83)		-		-		-		(83)		-		-		(83)
Distributions to noncontrolling interests		-		-		-		-		-		-		-		(643)		(643)
Other		-		-		-		-		-		-		-		84		84
June 30, 2012	$	1,326	$	2,280,802	$	(742,906)	$	(8,494)	$	2,514,327	$	4,045,055	$	830	$	675,761	$	4,721,646

The accompanying notes are an integral part of these consolidated financial statements.

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’ 84%-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 June 30, 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.

In April 2013, TDS deconsolidated its investments in the St. Lawrence Seaway RSA Cellular Partnership (“NY1”) and New York RSA 2 Cellular Partnership (“