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 September 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 September 30, 2013

Common Shares, $0.01 par value

101,334,304 Shares

Series A Common Shares, $0.01 par value

7,156,880 Shares

Telephone and Data Systems, Inc.

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

Index
				Page No.
Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited)		1

		Consolidated Statement of Operations		1
			Three and Nine Months Ended September 30, 2013 and 2012

		Consolidated Statement of Comprehensive Income		2
			Three and Nine Months Ended September 30, 2013 and 2012

		Consolidated Statement of Cash Flows		3
			Nine Months Ended September 30, 2013 and 2012

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

		Consolidated Statement of Changes in Equity		6
			Nine Months Ended September 30, 2013 and 2012

		Notes to Consolidated Financial Statements		8

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		27

		Overview		27

		2013 Estimates		31

		Nine Months Ended September 30, 2013 and 2012
			Results of Operations — Consolidated	35
			Results of Operations — U.S. Cellular	37
			Results of Operations — TDS Telecom	42

		Three Months Ended September 30, 2013 and 2012
			Results of Operations — Consolidated	47
			Results of Operations — U.S. Cellular	49
			Results of Operations — TDS Telecom	51

		Recent Accounting Pronouncements		53

		Financial Resources		53

		Liquidity and Capital Resources		55

		Application of Critical Accounting Policies and Estimates		58

		Safe Harbor Cautionary Statement		62

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		65

	Item 4.	Controls and Procedures		66

Part II.	Other Information

	Item 1.	Legal Proceedings		67

	Item1A.	Risk Factors		67

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		67

	Item 5.	Other Information		69

	Item 6.	Exhibits		70

Signatures

Table of Contents

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

			Three Months Ended				Nine Months Ended
			September 30,				September 30,
(Dollars and shares in thousands, except per share amounts)			2013		2012		2013		2012
Operating revenues			$	1,180,980	$	1,370,108	$	3,717,719	$	3,999,068

Operating expenses
	Cost of services and products (excluding Depreciation, amortization and accretion expense reported below)			481,285		600,459		1,556,908		1,637,340
	Selling, general and administrative			476,864		506,217		1,434,487		1,516,220
	Depreciation, amortization and accretion			255,295		196,219		751,575		592,162
	Loss on impairment of assets			-		-		-		515
	Loss on asset disposals, net			2,155		11,642		16,090		16,716
	(Gain) loss on sale of business and other exit costs, net			(1,534)		65		(297,637)		(4,109)
		Total operating expenses		1,214,065		1,314,602		3,461,423		3,758,844

Operating income (loss)				(33,085)		55,506		256,296		240,224

Investment and other income (expense)
	Equity in earnings of unconsolidated entities			37,609		25,015		100,303		73,796
	Interest and dividend income			2,507		2,359		6,685		6,894
	Gain (loss) on investments			-		-		14,518		(3,728)
	Interest expense			(24,961)		(20,497)		(73,208)		(68,100)
	Other, net			145		217		(206)		196
		Total investment and other income (expense)		15,300		7,094		48,092		9,058

Income (loss) before income taxes				(17,785)		62,600		304,388		249,282
	Income tax expense (benefit)			(6,731)		22,442		130,056		85,619
Net income (loss)				(11,054)		40,158		174,332		163,663
Less: Net income (loss) attributable to noncontrolling interests, net of tax				(1,542)		11,041		26,348		39,955
Net income (loss) attributable to TDS shareholders				(9,512)		29,117		147,984		123,708
TDS Preferred dividend requirement				(12)		(12)		(37)		(37)
Net income (loss) available to common shareholders			$	(9,524)	$	29,105	$	147,947	$	123,671

Basic weighted average shares outstanding				108,571		108,819		108,405		108,735
Basic earnings (loss) per share attributable to TDS shareholders			$	(0.09)	$	0.27	$	1.36	$	1.14

Diluted weighted average shares outstanding				108,571		109,246		108,993		109,018
Diluted earnings (loss) per share attributable to TDS shareholders			$	(0.09)	$	0.26	$	1.35	$	1.13

Dividends per share to TDS shareholders			$	0.1275	$	0.1225	$	0.3825	$	0.3675

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

Table of Contents

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

				Three Months Ended				Nine Months Ended
				September 30,				September 30,
(Dollars in thousands)				2013		2012		2013		2012
Net income (loss)				$	(11,054)	$	40,158	$	174,332	$	163,663
Net change in accumulated other comprehensive income (loss)
	Change in net unrealized gain (loss) on equity investments				-		-		51		49
	Change in foreign currency translation adjustment				(34)		-		(19)		-
	Change related to retirement plan
		Amounts included in net periodic benefit cost for the period
			Amortization of prior service cost		(900)		(934)		(2,703)		(2,802)
			Amortization of unrecognized net loss		602		623		1,806		1,869
					(298)		(311)		(897)		(933)
			Change in deferred income taxes		114		462		341		1,395
		Change related to retirement plan, net of tax			(184)		151		(556)		462
	Net change in accumulated other comprehensive income (loss)				(218)		151		(524)		511
Comprehensive income (loss)					(11,272)		40,309		173,808		164,174
	Less: Comprehensive income (loss) attributable to noncontrolling interest				(1,542)		11,041		26,348		39,955
Comprehensive income (loss) attributable to TDS shareholders				$	(9,730)	$	29,268	$	147,460	$	124,219

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

Table of Contents

Telephone and Data Systems, Inc. Consolidated Statement of Cash Flows (Unaudited)
			Nine Months Ended
			September 30,
(Dollars in thousands)			2013		2012
Cash flows from operating activities
	Net income		$	174,332	$	163,663
	Add (deduct) adjustments to reconcile net income to net cash flows from operating activities
		Depreciation, amortization and accretion		751,575		592,162
		Bad debts expense		56,693		56,597
		Stock-based compensation expense		21,867		31,724
		Deferred income taxes, net		(30,748)		52,169
		Equity in earnings of unconsolidated entities		(100,303)		(73,796)
		Distributions from unconsolidated entities		51,879		45,558
		Loss on impairment of assets		-		515
		Loss on asset disposals, net		16,090		16,716
		(Gain) loss on sale of business and other exit costs, net		(297,637)		(4,109)
		(Gain) loss on investments		(14,518)		3,728
		Noncash interest expense		1,498		2,555
		Other operating activities		575		1,650
	Changes in assets and liabilities from operations
		Accounts receivable		(216,700)		(69,478)
		Inventory		11,114		(70,918)
		Accounts payable		33,312		(37,728)
		Customer deposits and deferred revenues		21,883		28,323
		Accrued taxes		41,838		107,502
		Accrued interest		9,451		9,488
		Other assets and liabilities		(94,301)		(95,785)
				437,900		760,536

Cash flows from investing activities
	Cash used for additions to property, plant and equipment			(631,370)		(730,897)
	Cash paid for acquisitions and licenses			(280,383)		(97,523)
	Cash received from divestitures			484,300		50,182
	Cash paid for investments			-		(45,000)
	Cash received for investments			80,000		143,444
	Other investing activities			13,860		(13,121)
				(333,593)		(692,915)

Cash flows from financing activities
	Repayment of long-term debt			(1,196)		(2,435)
	Issuance of long-term debt			-		358
	TDS Common Shares and Special Common Shares reissued for benefit plans, net of tax payments			7,537		(23)
	U.S. Cellular Common Shares reissued for benefit plans, net of tax payments			2,840		(2,299)
	Repurchase of TDS Common Shares			(5,813)		-
	Repurchase of U.S. Cellular Common Shares			(18,544)		-
	Dividends paid to TDS shareholders			(41,430)		(39,930)
	U.S. Cellular dividends paid to noncontrolling public shareholders			(75,235)		-
	Payment of debt issuance costs			(23)		-
	Distributions to noncontrolling interests			(3,447)		(1,491)
	Other financing activities			1,612		4,208
				(133,699)		(41,612)

Net increase (decrease) in cash and cash equivalents				(29,392)		26,009

Cash and cash equivalents
	Beginning of period			740,481		563,275
	End of period		$	711,089	$	589,284

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

Table of Contents

Telephone and Data Systems, Inc. Consolidated Balance Sheet — Assets (Unaudited)
(Dollars in thousands)			September 30, 2013		December 31, 2012
Current assets
	Cash and cash equivalents		$	711,089	$	740,481
	Short-term investments			45,162		115,700
	Accounts receivable
		Due from customers and agents, less allowances of $35,691 and $28,152, respectively		509,785		409,720
		Other, less allowances of $2,529 and $5,263, respectively		177,026		164,608
	Inventory			149,489		160,692
	Net deferred income tax asset			62,479		43,411
	Prepaid expenses			94,989		86,385
	Income taxes receivable			1,909		9,625
	Other current assets			36,011		32,815
				1,787,939		1,763,437

Assets held for sale				78,413		163,242

Investments
	Licenses			1,420,541		1,480,039
	Goodwill			821,155		797,194
	Franchise rights			123,668		-
	Other intangible assets, net of accumulated amortization of $107,182 and $143,613, respectively			59,841		58,522
	Investments in unconsolidated entities			345,411		179,921
	Long-term investments			40,099		50,305
	Other investments			689		824
				2,811,404		2,566,805
Property, plant and equipment
	In service and under construction			11,039,077		10,808,499
	Less: Accumulated depreciation			7,157,242		6,811,233
				3,881,835		3,997,266

Other assets and deferred charges				140,109		133,150

Total assets			$	8,699,700	$	8,623,900

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

Table of Contents

Telephone and Data Systems, Inc. Consolidated Balance Sheet — Liabilities and Equity (Unaudited)
(Dollars and shares in thousands)				September 30, 2013		December 31, 2012
Current liabilities
	Current portion of long-term debt			$	1,806	$	1,233
	Accounts payable				398,867		377,291
	Customer deposits and deferred revenues				244,526		222,345
	Accrued interest				15,799		6,565
	Accrued taxes				107,183		48,237
	Accrued compensation				97,266		134,932
	Other current liabilities				142,851		134,005
					1,008,298		924,608

Liabilities held for sale					471		19,594

Deferred liabilities and credits
	Net deferred income tax liability				851,396		862,580
	Other deferred liabilities and credits				445,596		438,727

Long-term debt					1,721,085		1,721,571

Commitments and contingencies					-		-

Noncontrolling interests with redemption features					540		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 132,702 shares (7,157 Series A Common and 125,545 Common Shares) and 132,672 shares (7,160 Series A Common and 125,512 Common Shares), respectively
			Outstanding 108,491 shares (7,157 Series A Common and 101,334 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			2,301,983		2,304,122
		Treasury shares at cost:
			24,211 and 24,641 Common Shares, respectively		(727,577)		(750,099)
		Accumulated other comprehensive loss			(8,656)		(8,132)
		Retained earnings			2,555,765		2,464,318
			Total TDS shareholders' equity		4,122,842		4,011,536

	Preferred shares				825		825
	Noncontrolling interests				548,647		643,966

		Total equity			4,672,314		4,656,327

Total liabilities and equity				$	8,699,700	$	8,623,900

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

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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		-		-		-		-		147,984		147,984		-		-		147,984
Net income attributable to noncontrolling interests classified as equity		-		-		-		-		-		-		-		26,301		26,301
Net unrealized gain (loss) on equity investments		-		-		-		51		-		51		-		-		51
Change in foreign currency translation adjustment		-		-		-		(19)		-		(19)		-		-		(19)
Change related to retirement plan		-		-		-		(556)		-		(556)		-		-		(556)
TDS Common and Series A Common Share dividends		-		-		-		-		(41,393)		(41,393)		-		-		(41,393)
TDS Preferred dividend requirement		-		-		-		-		(37)		(37)		-		-		(37)
U.S. Cellular dividends paid to noncontrolling public shareholders		-		-		-		-		-		-		-		(75,235)		(75,235)
Repurchase of Common Shares		-		-		(5,813)		-		-		(5,813)		-		-		(5,813)
Dividend reinvestment plan		-		671		11,751		-		(5,964)		6,458		-		-		6,458
Incentive and compensation plans		-		532		16,584		-		(9,143)		7,973		-		-		7,973
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans		-		(2,399)		-		-		-		(2,399)		-		(4,462)		(6,861)
Stock-based compensation awards		-		10,381		-		-		-		10,381		-		-		10,381
Tax windfall (shortfall) from stock awards		-		(1,002)		-		-		-		(1,002)		-		-		(1,002)
Distributions to noncontrolling interests		-		-		-		-		-		-		-		(3,447)		(3,447)
Adjust investment in subsidiaries for noncontrolling interest purchases		-		(10,322)		-		-		-		(10,322)		-		5,294		(5,028)
Deconsolidation of partnerships		-		-		-		-		-		-		-		(43,770)		(43,770)
September 30, 2013	$	1,327	$	2,301,983	$	(727,577)	$	(8,656)	$	2,555,765	$	4,122,842	$	825	$	548,647	$	4,672,314

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

Table of Contents

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		-		-		-		-		123,708		123,708		-		-		123,708
Net income attributable to noncontrolling interests classified as equity		-		-		-		-		-		-		-		39,949		39,949
Net unrealized gain (loss) on equity investments		-		-		-		49		-		49		-		-		49
Change related to retirement plan		-		-		-		462		-		462		-		-		462
TDS Common and Series A Common Share dividends		-		-		-		-		(39,893)		(39,893)		-		-		(39,893)
TDS Preferred dividend requirement		-		-		-		-		(37)		(37)		-		-		(37)