Edgar Filing: TELEPHONE & DATA SYSTEMS INC /DE/

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2010

¨ 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

(State or other jurisdiction of

incorporation or organization)

36-2669023

(I.R.S. Employer Identification No.)

30 North LaSalle Street, Chicago, Illinois 60602

(Address of principal executive offices) (Zip Code)

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

Indicate by check mark 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. Yes x No ¨

Indicate by check mark 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). Yes x No ¨

Indicate by check mark 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 x

Accelerated filer ¨

Non-accelerated filer ¨

(Do not check if a smaller reporting company)

Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

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, 2010
	Common Shares, $.01 par value		49,849,632 Shares
	Special Common Shares, $.01 par value		48,716,833 Shares
	Series A Common Shares, $.01 par value		6,504,284 Shares

Table of Contents

Telephone and Data Systems, Inc.

Quarterly Report on Form 10-Q For the Quarterly Period Ended June 30, 2010


Index

				Page No.
Part I.	Financial Information			3

	Item 1.	Financial Statements (Unaudited)
		Consolidated Statement of Operations
			Three and Six Months Ended June 30, 2010 and 2009	3

		Consolidated Statement of Cash Flows
			Six Months Ended June 30, 2010 and 2009	4

		Consolidated Balance Sheet		5
			June 30, 2010 and December 31, 2009

		Consolidated Statement of Changes in Equity		7
			Six Months Ended June 30, 2010 and 2009

		Consolidated Statement of Comprehensive Income
			Three and Six Months Ended June 30, 2010 and 2009	9

		Notes to Consolidated Financial Statements		10

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

		Overview		25
		Six Months Ended June 30, 2010 and 2009		31
			Results of Operations - Consolidated	31
			Results of Operations - Wireless	33
			Results of Operations - Wireline	37
		Three Months Ended June 30, 2010 and 2009		41
			Results of Operations - Consolidated	41
			Results of Operations - Wireless	42
			Results of Operations - Wireline	44
		Recent Accounting Pronouncements		47
		Financial Resources		47
		Liquidity and Capital Resources		49
		Application of Critical Accounting Policies and Estimates		52
		Safe Harbor Cautionary Statement		53

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		57

	Item 4.	Controls and Procedures		58

Part II.	Other Information			59

	Item 1.	Legal Proceedings		59

	Item 1A.	Risk Factors		59

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		60

	Item 5.	Other Information		61

	Item 6.	Exhibits		61

Signatures				63

Table of Contents

Part I. Financial Information Item 1. Financial Statements


Telephone and Data Systems, Inc.

Consolidated Statement of Operations (Unaudited)
Consolidated Statement of Operations (Unaudited)

			Three Months Ended June 30,						Six Months Ended June 30,
			Three Months Ended June 30,						Six Months Ended June 30,
(Dollars and shares in thousands, except per share amounts)			2010			2009			2010			2009


Operating revenues			$	1,232,219		$	1,242,070		$	2,454,654		$	2,500,296

Operating expenses
	Cost of services and products (excluding Depreciation, amortization and accretion expense reported below)			453,037			431,022			897,569			898,414
	Selling, general and administrative			501,329			471,076			982,416			934,939
	Depreciation, amortization and accretion			190,258			183,512			379,647			366,505
	Loss on asset disposals, net			1,214			3,021			6,645			7,191
		Total operating expenses		1,145,838			1,088,631			2,266,277			2,207,049

Operating income				86,381			153,439			188,377			293,247

Investment and other income (expense)
	Equity in earnings of unconsolidated entities			25,997			18,363			50,900			43,700
	Interest and dividend income			2,674			2,902			5,115			4,974
	Interest expense			(29,265	)		(32,534	)		(58,223	)		(63,044	)
	Other, net			(1,929	)		(25	)		(2,119	)		474
		Total investment and other income (expense)		(2,523	)		(11,294	)		(4,327	)		(13,896	)

Income before income taxes				83,858			142,145			184,050			279,351
	Income tax expense			31,469			55,242			69,392			97,081
Net income				52,389			86,903			114,658			182,270
Less: Net income attributable to noncontrolling interests, net of tax				(12,102	)		(20,539	)		(25,957	)		(41,809	)
Net income attributable to TDS shareholders				40,287			66,364			88,701			140,461
Preferred dividend requirement				(12	)		(13	)		(25	)		(26	)
Net income available to common shareholders			$	40,275		$	66,351		$	88,676		$	140,435

Basic weighted average shares outstanding				105,520			110,741			105,728			111,486
Basic earnings per share attributable to TDS shareholders			$	0.38		$	0.60		$	0.84		$	1.26

Diluted weighted average shares outstanding				105,907			110,971			106,071			111,698
Diluted earnings per share attributable to TDS shareholders			$	0.38		$	0.60		$	0.83		$	1.25

Dividends per share			$	0.1125		$	0.1075		$	0.2250		$	0.2150

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

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Telephone and Data Systems, Inc.

Consolidated Statement of Cash Flows (Unaudited)
Consolidated Statement of Cash Flows (Unaudited)

				Six Months Ended June 30,
				Six Months Ended June 30,
(Dollars in thousands)				2010			2009


Cash flows from operating activities
	Net income			$	114,658		$	182,270
	Add (deduct) adjustments to reconcile net income to net cash flows from operating activities
			Depreciation, amortization and accretion		379,647			366,505
			Bad debts expense		39,633			42,761
			Stock-based compensation expense		16,743			14,394
			Deferred income taxes, net		(28,881	)		18,882
			Equity in earnings of unconsolidated entities		(50,900	)		(43,700	)
			Distributions from unconsolidated entities		48,740			13,239
			Loss on asset disposals, net		6,645			7,191
			Other operating activities		3,381			2,125
		Changes in assets and liabilities from operations
			Accounts receivable		(20,985	)		(68,283	)
			Inventory		32,177			(9,928	)
			Accounts payable		(35,572	)		(63,963	)
			Customer deposits and deferred revenues		4,217			(5,151	)
			Accrued taxes		24,209			60,406
			Accrued interest		102			513
			Other assets and liabilities		(31,468	)		(73,300	)
					502,346			443,961

Cash flows from investing activities
	Additions to property, plant and equipment				(317,950	)		(290,821	)
	Cash paid for acquisitions and licenses				(28,264	)		(15,042	)
	Cash paid for investments				(385,000	)		(109,055	)
	Cash received for investments				15,661			—
	Other investing activities				1,479			2,040
					(714,074	)		(412,878	)

Cash flows from financing activities
	Repayment of long-term debt				(1,280	)		(1,655	)
	TDS Common Shares and Special Common Shares reissued for benefit plans, net of tax payments				845			743
	U.S. Cellular Common Shares reissued for benefit plans, net of tax payments				144			(405	)
	Repurchase of TDS Special Common Shares				(31,092	)		(86,565	)
	Repurchase of U.S. Cellular Common Shares				(21,423	)		(19,332	)
	Dividends paid				(23,732	)		(23,814	)
	Payment of debt issuance costs				—			(9,959	)
	Distributions to noncontrolling interests				(4,314	)		(3,417	)
	Other financing activities				65			769
					(80,787	)		(143,635	)

Net decrease in cash and cash equivalents					(292,515	)		(112,552	)

Cash and cash equivalents
	Beginning of period				670,992			777,309
	End of period			$	378,477		$	664,757

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

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Telephone and Data Systems, Inc.

Consolidated Balance Sheet — Assets (Unaudited)
Consolidated Balance Sheet — Assets (Unaudited)

(Dollars in thousands)			June 30, 2010		December 31, 2009
(Dollars in thousands)			June 30, 2010		December 31, 2009


Current assets
	Cash and cash equivalents		$	378,477	$	670,992
	Short-term investments			379,227		113,275
	Accounts receivable
		Due from customers, less allowances of $29,168 and $30,422, respectively		355,004		384,470
		Other, less allowances of $6,691 and $7,201, respectively		143,352		130,973
	Inventory			124,810		156,987
	Net deferred income tax asset			29,948		29,874
	Prepaid expenses			92,770		94,336
	Other current assets			62,659		66,764
				1,566,247		1,647,671
Investments
	Licenses			1,453,526		1,443,025
	Goodwill			718,635		707,840
	Other intangible assets, net of accumulated amortization of $114,740 and $108,944, respectively			28,693		26,589
	Investments in unconsolidated entities			200,352		203,799
	Long-term investments			107,506		—
	Other investments			9,447		9,785
				2,518,159		2,391,038
Property, plant and equipment
	In service and under construction			9,006,920		8,760,327
	Less: Accumulated depreciation			5,544,179		5,252,482
				3,462,741		3,507,845

Other assets and deferred charges				63,281		65,759

Total assets			$	7,610,428	$	7,612,313

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

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Telephone and Data Systems, Inc.

Consolidated Balance Sheet — Liabilities and Equity (Unaudited)


(Dollars and shares in thousands)				June 30, 2010			December 31, 2009
(Dollars and shares in thousands)				June 30, 2010			December 31, 2009


Current liabilities
	Current portion of long-term debt			$	2,038		$	2,509
	Accounts payable				312,527			347,348
	Customer deposits and deferred revenues				169,513			164,451
	Accrued interest				12,208			12,227
	Accrued taxes				84,346			62,568
	Accrued compensation				71,722			93,524
	Other current liabilities				98,467			117,081
					750,821			799,708

Deferred liabilities and credits
	Net deferred income tax liability				492,657			517,762
	Other deferred liabilities and credits				393,485			373,862

Long-term debt					1,492,500			1,492,908

Commitments and contingencies

Noncontrolling interests with redemption features					746			727

Equity
	TDS shareholders’ equity
		Series A Common, Special Common and Common Shares
			Authorized 290,000 shares (25,000 Series A Common, 165,000 Special Common and 100,000 Common Shares)
			Issued 127,030 shares (6,504 Series A Common, 63,442 Special Common and 57,084 Common Shares) and 127,016 shares (6,492 Series A Common, 63,442 Special Common and 57,082 Common Shares), respectively
			Outstanding 105,070 shares (6,504 Series A Common, 48,716 Special Common and 49,850 Common Shares) and 106,022 shares (6,492 Series A Common, 49,725 Special Common and 49,805 Common Shares), respectively
			Par Value ($.01 per share) ($65 Series A Common, $634 Special Common and $571 Common Shares) and ($65 Series A Common, $634 Special Common and $571 Common Shares), respectively		1,270			1,270
		Capital in excess of par value			2,098,380			2,088,807
		Special Common and Common Treasury shares at cost:
			Treasury shares 21,960 (14,726 Special Common and 7,234 Common Shares) and 20,994 (13,717 Special Common and 7,277 Common Shares), respectively		(706,987	)		(681,649	)
		Accumulated other comprehensive loss			(3,139	)		(2,710	)
		Retained earnings			2,420,862			2,358,580
			Total TDS shareholders’ equity		3,810,386			3,764,298

	Preferred shares				831			832
	Noncontrolling interests				669,002			662,216

		Total equity			4,480,219			4,427,346

Total liabilities and equity				$	7,610,428		$	7,612,313

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, Special Common and Common Shares		Capital in Excess of Par Value		Special Common and Common Treasury Shares			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total TDS Shareholders’ Equity			Preferred Shares			Non controlling Interests			Total Equity
December 31, 2009	$	1,270	$	2,088,807	$	(681,649	)	$	(2,710	)	$	2,358,580		$	3,764,298		$	832		$	662,216		$	4,427,346
Add (Deduct)
Net income attributable to TDS shareholders		—		—		—			—			88,701			88,701			—			—			88,701
Net income attributable to noncontrolling interests classified as equity		—		—		—			—			—			—			—			25,938			25,938
Net unrealized gain (loss) on equity investments		—		—		—			84			—			84			—			—			84
Changes related to retirement plan		—		—		—			(513	)		—			(513	)		—			—			(513	)
Common, Special Common and Series A Common Shares dividends		—		—		—			—			(23,707	)		(23,707	)		—			—			(23,707	)
Preferred dividend requirement		—		—		—			—			(25	)		(25	)		—			—			(25	)
Repurchase of shares		—		—		(31,092	)		—			—			(31,092	)		(1	)		—			(31,093	)
Dividend reinvestment plan		—		—		3,192			—			(971	)		2,221			—			—			2,221
Incentive and compensation plans		—		433		2,562			—			(1,716	)		1,279			—			—			1,279
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans		—		1,364		—			—			—			1,364			—			(14,838	)		(13,474	)
Stock-based compensation awards (1)		—		7,731		—			—			—			7,731			—			—			7,731
Tax windfall (shortfall) from stock awards (2)		—		45		—			—			—			45			—			—			45
Distributions to noncontrolling interests		—		—		—			—			—			—			—			(4,314	)		(4,314	)
June 30, 2010	$	1,270	$	2,098,380	$	(706,987	)	$	(3,139	)	$	2,420,862		$	3,810,386		$	831		$	669,002		$	4,480,219

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Telephone and Data Systems, Inc. Consolidated Statement of Changes in Equity (Unaudited)



	TDS Shareholders
(Dollars in thousands)	Series A Common, Special Common and Common Shares		Capital in Excess of Par Value		Special Common and Common Treasury Shares			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total TDS Shareholders’ Equity			Preferred Shares		Non controlling Interests		Total Equity
December 31, 2008	$	1,270	$	2,066,597	$	(513,108	)	$	(13,391	)	$	2,221,469		$	3,762,837		$	852	$	647,915	$	4,411,604
Add (Deduct)
Net income attributable to TDS shareholders		—		—		—			—			140,461			140,461			—		—		140,461
Net income attributable to noncontrolling interests classified as equity		—		—		—			—			—			—			—		41,758		41,758
Net unrealized gain (loss) on equity investments		—		—		—			(501	)		—			(501	)		—		—		(501	)
Changes related to retirement plan		—		—		—			583			—			583			—		—		583
Common, Special Common and Series A Common Shares dividends		—		—		—			—			(23,788	)		(23,788	)		—		—		(23,788	)
Preferred dividend requirement		—		—		—			—			(26	)		(26	)		—		—		(26	)
Repurchase of shares		—		—		(86,018	)		—			—			(86,018	)		—		—		(86,018	)
Dividend reinvestment plan