Edgar Filing: TELEPHONE & DATA SYSTEMS INC /DE/

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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, 2012

¨ 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 or incorporation of organization)	(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, 2012
	Common Shares, $.01 par value		101,495,552 Shares
	Series A Common Shares, $.01 par value		7,135,334 Shares

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Telephone and Data Systems, Inc.

Quarterly Report on Form 10-Q
For the Quarterly Period Ended June 30, 2012

Index
				Page No.
Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited)

		Consolidated Statement of Operations
			Three and Six Months Ended June 30, 2012 and 2011	3

		Consolidated Statement of Comprehensive Income
			Three and Six Months Ended June 30, 2012 and 2011	4

		Consolidated Statement of Cash Flows
			Six Months Ended June 30, 2012 and 2011	5

		Consolidated Balance Sheet
			June 30, 2012 and December 31, 2011	6

		Consolidated Statement of Changes in Equity
			Six Months Ended June 30, 2012 and 2011	8

		Notes to Consolidated Financial Statements		10

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26

		Overview		26
		Six Months Ended June 30, 2012 and 2011		32
			Results of Operations — Consolidated	32
			Results of Operations — U.S. Cellular	34
			Results of Operations — TDS Telecom	39
		Three Months Ended June 30, 2012 and 2011		44
			Results of Operations — Consolidated	44
			Results of Operations — U.S. Cellular	45
			Results of Operations — TDS Telecom	47
		Recent Accounting Pronouncements		51
		Financial Resources		51
		Liquidity and Capital Resources		54
		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			67

	Item 1.	Legal Proceedings		67

	Item 1A.	Risk Factors		67

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

	Item 5.	Other Information		68

	Item 6.	Exhibits		68

Signatures				69

Table of contents

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)			2012			2011			2012			2011

Operating revenues			$	1,323,169		$	1,279,640		$	2,628,960		$	2,538,321

Operating expenses
	Cost of services and products (excluding Depreciation, amortization and accretion expense reported below)			527,670			476,118			1,036,881			965,159
	Selling, general and administrative			502,404			479,884			1,010,003			968,695
	Depreciation, amortization and accretion			198,509			193,045			395,943			383,858
	Loss on impairment of intangible assets			515			—			515			—
	Loss on asset disposals, net			2,995			3,238			900			4,381
		Total operating expenses		1,232,093			1,152,285			2,444,242			2,322,093

Operating income				91,076			127,355			184,718			216,228

Investment and other income (expense)
	Equity in earnings of unconsolidated entities			25,392			22,590			48,781			41,978
	Interest and dividend income			2,352			2,093			4,535			4,717
	Gain (loss) on investment			(3,728	)		13,373			(3,728	)		13,373
	Interest expense			(23,139	)		(45,417	)		(47,603	)		(71,926	)
	Other, net			(249	)		1,306			(21	)		1,386
		Total investment and other income (expense)		628			(6,055	)		1,964			(10,472	)

Income before income taxes				91,704			121,300			186,682			205,756
	Income tax expense			35,765			11,560			63,177			41,719
Net income				55,939			109,740			123,505			164,037
Less: Net income attributable to noncontrolling interests, net of tax				(13,602	)		(17,786	)		(28,914	)		(28,579	)
Net income attributable to TDS shareholders				42,337			91,954			94,591			135,458
Preferred dividend requirement				(12	)		(12	)		(25	)		(25	)
Net income available to common shareholders			$	42,325		$	91,942		$	94,566		$	135,433

Basic weighted average shares outstanding (1)				108,732			108,423			108,693			108,678
Basic earnings per share attributable to TDS shareholders (1)			$	0.39		$	0.85		$	0.87		$	1.25

Diluted weighted average shares outstanding (1)				109,022			109,133			108,964			109,385
Diluted earnings per share attributable to TDS shareholders (1)			$	0.39		$	0.84		$	0.86		$	1.23

Dividends per share (2)			$	0.1225		$	0.1175		$	0.2450		$	0.2350

(1) On January 13, 2012, TDS shareholders approved a Share Consolidation Amendment to the Restated Certificate of Incorporation of TDS. Average basic and diluted shares outstanding used to calculate earnings per share for the comparative periods presented have been retroactively restated to reflect the impact of the increased shares outstanding as a result of the Share Consolidation Amendment.

(2) Dividends per share reflects the amount paid per share outstanding at the date the dividend was declared and has not been retroactively adjusted to reflect the impact of the Share Consolidation Amendment.

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

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Telephone and Data Systems, Inc.

Consolidated Statement of Comprehensive Income (Unaudited)

				Three Months Ended						Six Months Ended
				June 30,						June 30,
(Dollars in thousands)				2012			2011			2012			2011

Net income				$	55,939		$	109,740		$	123,505		$	164,037
Net change in accumulated other comprehensive income
	Change in net unrealized gain (loss) on equity investments				49			138			49			138
	Change related to retirement plan
		Amounts included in net periodic benefit cost for the period
			Amortization of prior service cost		(934	)		(954	)		(1,868	)		(1,908	)
			Amortization of unrecognized net loss		623			480			1,246			960
					(311	)		(474	)		(622	)		(948	)
			Change in deferred income taxes		463			523			933			1,046
		Change related to retirement plan, net of tax			152			49			311			98
	Net change in accumulated other comprehensive income				201			187			360			236
Comprehensive income					56,140			109,927			123,865			164,273
	Less: Comprehensive income attributable to noncontrolling interest				(13,602	)		(17,786	)		(28,914	)		(28,579	)
Comprehensive income attributable to TDS Shareholders				$	42,538		$	92,141		$	94,951		$	135,694

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)

				Six Months Ended
				June 30,
(Dollars in thousands)				2012			2011

Cash flows from operating activities
	Net income			$	123,505		$	164,037
	Add (deduct) adjustments to reconcile net income to net cash flows
		from operating activities
			Depreciation, amortization and accretion		395,943			383,858
			Bad debts expense		33,626			29,906
			Stock-based compensation expense		20,955			18,913
			Deferred income taxes, net		29,929			79,637
			Equity in earnings of unconsolidated entities		(48,781	)		(41,978	)
			Distributions from unconsolidated entities		6,973			47,375
			Loss on impairment of intangible assets		515			—
			Loss on asset disposals, net		900			4,381
			(Gain) loss on investment		3,728			(13,373	)
			Noncash interest expense		1,728			17,147
			Other operating activities		1,010			1,070
	Changes in assets and liabilities from operations
			Accounts receivable		(10,197	)		(37,819	)
			Inventory		(58,467	)		(48,826	)
			Accounts payable		(23,336	)		24,678
			Customer deposits and deferred revenues		22,786			22,600
			Accrued taxes		89,433			(459	)
			Accrued interest		(1,823	)		1,355
			Other assets and liabilities		(81,517	)		(90,291	)
					506,910			562,211

Cash flows from investing activities
	Cash used for additions to property, plant and equipment				(501,211	)		(350,856	)
	Cash paid for acquisitions and licenses				(52,213	)		(22,167	)
	Cash received from divestitures				50,036			—
	Cash paid for investments				(45,000	)		(71,000	)
	Cash received for investments				128,444			213,030
	Other investing activities				(8,916	)		(816	)
					(428,860	)		(231,809	)

Cash flows from financing activities
	Repayment of long-term debt				(952	)		(613,387	)
	Issuance of long-term debt				358			643,700
	TDS Common Shares and Special Common Shares reissued
		for benefit plans, net of tax payments			(39	)		1,055
	U.S. Cellular Common Shares reissued for benefit plans, net of tax payments				(2,465	)		1,264
	Repurchase of TDS Common and Special Common Shares				—			(21,500	)
	Repurchase of U.S. Cellular Common Shares				—			(62,308	)
	Dividends paid				(26,610	)		(24,343	)
	Payment of debt issuance costs				—			(21,191	)
	Distributions to noncontrolling interests				(643	)		(1,377	)
	Other financing activities				2,790			2,077
					(27,561	)		(96,010	)

Cash classified as held for sale					—			(5,687	)

Net increase in cash and cash equivalents					50,489			228,705

Cash and cash equivalents
	Beginning of period				563,275			341,683
	End of period			$	613,764		$	570,388

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)

			June 30,		December 31,
(Dollars in thousands)			2012		2011


Current assets
	Cash and cash equivalents		$	613,764	$	563,275
	Short-term investments			150,921		246,273
	Accounts receivable
		Due from customers and agents, less allowances of $25,195 and $25,738, respectively		380,629		393,978
		Other, less allowances of $6,186 and $5,333, respectively		161,527		148,599
	Inventory			189,242		130,044
	Net deferred income tax asset			44,598		40,898
	Prepaid expenses			86,794		80,628
	Income taxes receivable			9,376		85,636
	Other current assets			19,224		16,349
				1,656,075		1,705,680

Assets held for sale				—		49,647

Investments
	Licenses			1,507,447		1,494,014
	Goodwill			816,668		797,077
	Other intangible assets, net of accumulated amortization of $136,851 and $131,101, respectively			65,285		50,734
	Investments in unconsolidated entities			213,049		173,710
	Long-term investments			55,468		45,138
	Other investments			1,017		3,072
				2,658,934		2,563,745
Property, plant and equipment
	In service and under construction			10,482,936		10,197,596
	Less: Accumulated depreciation			6,629,649		6,413,061
				3,853,287		3,784,535

Other assets and deferred charges				115,435		97,398

Total assets			$	8,283,731	$	8,201,005

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)

				June 30,			December 31,
(Dollars and shares in thousands)				2012			2011


Current liabilities
	Current portion of long-term debt			$	1,283		$	1,509
	Accounts payable				310,610			364,746
	Customer deposits and deferred revenues				231,743			207,633
	Accrued interest				5,522			7,456
	Accrued taxes				53,698			41,069
	Accrued compensation				83,080			107,719
	Other current liabilities				105,640			144,001
					791,576			874,133

Liabilities held for sale					—			1,051

Deferred liabilities and credits
	Net deferred income tax liability				847,725			808,713
	Other deferred liabilities and credits				391,898			383,567

Long-term debt					1,529,836			1,529,857

Commitments and contingencies					—			—

Noncontrolling interests with redemption features					1,050			1,005

Equity
	TDS shareholders’ equity
		Series A Common and Common Shares (1)
			Authorized 290,000 shares (25,000 Series A Common and 265,000 Common Shares) (1)
			Issued 132,647 shares (7,135 Series A Common and 125,512 Common Shares) and 132,621 shares (7,119 Series A Common and 125,502 Common Shares), respectively (1)
			Outstanding 108,631 shares (7,135 Series A Common and 101,496 Common Shares) and 108,456 shares (7,119 Series A Common and 101,337 Common Shares), respectively (1)
			Par Value ($.01 per share) ($71 Series A Common and $1,255 Common Shares) (1)		1,326			1,326
		Capital in excess of par value (1)			2,280,802			2,268,711
		Treasury shares at cost:
			24,017 and 24,165 Common Shares, respectively (1)		(742,906	)		(750,921	)
		Accumulated other comprehensive loss			(8,494	)		(8,854	)
		Retained earnings (1)			2,514,327			2,451,899
			Total TDS shareholders’ equity		4,045,055			3,962,161

	Preferred shares				830			830
	Noncontrolling interests				675,761			639,688

		Total equity			4,721,646			4,602,679

Total liabilities and equity				$	8,283,731		$	8,201,005

(1) The December 31, 2011 amounts reflect the impact of the Share Consolidation Amendment to the Restated Certificate of Incorporation of TDS, as approved by the TDS shareholders on January 13, 2012.

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 (1)		Capital in Excess of Par Value (1)			Treasury Common Shares(1)			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (1)			Total TDS Shareholders’ Equity (1)			Preferred Shares		Non controlling Interests			Total Equity (1)
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
Change in net unrealized gain (loss) on equity investments		—		—			—			49			—			49			—		—			49
Change related to retirement plan		—		—			—			311			—			311			—		—			311
Common and Series A Common Shares dividends		—		—			—			—			(26,585	)		(26,585	)		—		—			(26,585	)
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 (2)		—		9,711			—			—			—			9,711			—		—			9,711
Tax windfall (shortfall) from stock awards (3)		—		(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.

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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		Treasury Special Common and Common Shares			Accumulated Other Comprehensive Income (Loss)			Retained Earnings		Total TDS Shareholders’ Equity		Preferred Shares		Non controlling Interests		Total Equity
December 31, 2010	$	1,270	$	2,107,929	$	(738,695	)	$	(3,208	)	$	2,450,599	$	3,817,895	$	830	$	647,013	$	4,465,738
Add (Deduct)
Net income attributable to TDS shareholders		—		—		—			—			135,458		135,458		—		—		135,458
Net income attributable to noncontrolling interests classified as equity		—		—		—			—			—		—		—		28,571		28,571
Change in net unrealized gain (loss) on equity investments		—		—		—			138			—		138		—		—		138
Change related to retirement plan		—		—		—			98			—		98		—		—		98
Common, Special Common and Series A Common Shares dividends		—