Edgar Filing: TELEPHONE & DATA SYSTEMS INC /DE/

form_10q.htm - Generated by SEC Publisher for SEC Filing

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 September 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 of incorporation or 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 September 30, 2012
	Common Shares, $.01 par value		101,555,282 Shares
	Series A Common Shares, $.01 par value		7,146,884 Shares

Table of contents
Telephone and Data Systems, Inc.

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

Index

				Page No.
Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited)		3

		Consolidated Statement of Operations Three and Nine Months Ended September 30, 2012 and 2011		3

		Consolidated Statement of Comprehensive Income Three and Nine Months Ended September 30, 2012 and 2011		4

		Consolidated Statement of Cash Flows Nine Months Ended September 30, 2012 and 2011		5

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

		Consolidated Statement of Changes in Equity Nine Months Ended September 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		30
		Nine Months Ended September 30, 2012 and 2011
			Results of Operations — Consolidated	36
			Results of Operations — U.S. Cellular	38
			Results of Operations — TDS Telecom	42
		Three Months Ended September 30, 2012 and 2011
			Results of Operations — Consolidated	47
			Results of Operations — U.S. Cellular	48
			Results of Operations — TDS Telecom	50
		Recent Accounting Pronouncements		53
		Financial Resources		53
		Liquidity and Capital Resources		56
		Application of Critical Accounting Policies and Estimates		59
		Safe Harbor Cautionary Statement		61

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		64

	Item 4.	Controls and Procedures		65

Part II.	Other Information			66

	Item 1.	Legal Proceedings		66

	Item 1A.	Risk Factors		66

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

	Item 5.	Other Information		67

	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				Nine Months Ended
			September 30,				September 30,
(Dollars and shares in thousands, except per share amounts)			2012		2011		2012		2011

Operating revenues			$	1,370,108	$	1,325,423	$	3,999,068	$	3,863,744

Operating expenses
	Cost of services and products (excluding Depreciation, amortization and accretion expense reported below)			600,459		525,134		1,637,340		1,490,293
	Selling, general and administrative			506,217		492,677		1,516,220		1,461,372
	Depreciation, amortization and accretion			196,219		190,039		592,162		573,897
	Loss on impairment of assets			-		-		515		-
	(Gain) loss on asset disposals and exchanges, net			11,707		(9,351)		12,607		(4,970)
		Total operating expenses		1,314,602		1,198,499		3,758,844		3,520,592

Operating income				55,506		126,924		240,224		343,152

Investment and other income (expense)
	Equity in earnings of unconsolidated entities			25,015		22,053		73,796		64,031
	Interest and dividend income			2,359		2,199		6,894		6,916
	Gain (loss) on investment			-		12,730		(3,728)		26,103
	Interest expense			(20,497)		(22,258)		(68,100)		(94,184)
	Other, net			217		115		196		1,501
		Total investment and other income (expense)		7,094		14,839		9,058		4,367

Income before income taxes				62,600		141,763		249,282		347,519
	Income tax expense			22,442		53,545		85,619		95,264
Net income				40,158		88,218		163,663		252,255
Less: Net income attributable to noncontrolling interests, net of tax				(11,041)		(16,924)		(39,955)		(45,503)
Net income attributable to TDS shareholders				29,117		71,294		123,708		206,752
Preferred dividend requirement				(12)		(12)		(37)		(37)
Net income available to common shareholders			$	29,105	$	71,282	$	123,671	$	206,715

Basic weighted average shares outstanding (1)				108,819		108,404		108,735		108,586
Basic earnings per share attributable to TDS shareholders (1)			$	0.27	$	0.66	$	1.14	$	1.90

Diluted weighted average shares outstanding (1)				109,246		108,732		109,018		109,194
Diluted earnings per share attributable to TDS shareholders (1)			$	0.27	$	0.65	$	1.13	$	1.89

Dividends per share (2)			$	0.1225	$	0.1175	$	0.3675	$	0.3525

(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.

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)				2012		2011		2012		2011

Net income				$	40,158	$	88,218	$	163,663	$	252,255
Net change in accumulated other comprehensive income
	Change in net unrealized gain (loss) on equity investments				-		-		49		138
	Change related to retirement plan
		Amounts included in net periodic benefit cost for the period
			Amortization of prior service cost		(934)		(954)		(2,802)		(2,861)
			Amortization of unrecognized net loss		623		480		1,869		1,440
					(311)		(474)		(933)		(1,421)
			Change in deferred income taxes		462		523		1,395		1,568
		Change related to retirement plan, net of tax			151		49		462		147
	Net change in accumulated other comprehensive income				151		49		511		285
Comprehensive income					40,309		88,267		164,174		252,540
	Less: Comprehensive income attributable to noncontrolling interest				(11,041)		(16,924)		(39,955)		(45,503)
Comprehensive income attributable to TDS Shareholders				$	29,268	$	71,343	$	124,219	$	207,037

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)			2012		2011

Cash flows from operating activities
	Net income		$	163,663	$	252,255
	Add (deduct) adjustments to reconcile net income to net cash flows from operating activities
		Depreciation, amortization and accretion		592,162		573,897
		Bad debts expense		56,597		49,101
		Stock-based compensation expense		31,724		27,792
		Deferred income taxes, net		52,169		160,436
		Equity in earnings of unconsolidated entities		(73,796)		(64,031)
		Distributions from unconsolidated entities		45,558		52,385
		Loss on impairment of assets		515		-
		(Gain) loss on asset disposals and exchanges, net		12,607		(4,970)
		(Gain) loss on investment		3,728		(26,103)
		Noncash interest expense		2,555		17,973
		Other operating activities		1,650		1,630
	Changes in assets and liabilities from operations
		Accounts receivable		(69,478)		(69,690)
		Inventory		(70,918)		(36,387)
		Accounts payable		(37,728)		37,369
		Customer deposits and deferred revenues		28,323		31,191
		Accrued taxes		107,502		2,011
		Accrued interest		9,488		10,519
		Other assets and liabilities		(95,785)		(76,177)
				760,536		939,201

Cash flows from investing activities
	Cash used for additions to property, plant and equipment			(730,897)		(601,760)
	Cash paid for acquisitions and licenses			(97,523)		(105,184)
	Cash received from divestitures			50,182		-
	Cash paid for investments			(45,000)		(101,000)
	Cash received for investments			143,444		268,686
	Other investing activities			(13,121)		(3,703)
				(692,915)		(542,961)

Cash flows from financing activities
	Repayment of short-term debt			-		(32,671)
	Repayment of long-term debt			(2,435)		(613,933)
	Issuance of long-term debt			358		643,700
	TDS Common Shares and Special Common Shares reissued for benefit plans, net of tax payments			(23)		1,402
	U.S. Cellular Common Shares reissued for benefit plans, net of tax payments			(2,299)		1,755
	Repurchase of TDS Common and Special Common Shares			-		(21,500)
	Repurchase of U.S. Cellular Common Shares			-		(62,294)
	Dividends paid			(39,930)		(36,496)
	Payment of debt issuance costs			-		(21,650)
	Distributions to noncontrolling interests			(1,491)		(1,676)
	Other financing activities			4,208		(2,657)
				(41,612)		(146,020)

Cash classified as held for sale				-		(11,237)

Net increase in cash and cash equivalents				26,009		238,983

Cash and cash equivalents
	Beginning of period			563,275		341,683
	End of period		$	589,284	$	580,666

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

Current assets
	Cash and cash equivalents		$	589,284	$	563,275
	Short-term investments			180,578		246,273
	Accounts receivable
		Due from customers and agents, less allowances of $28,542 and $25,738, respectively		394,319		393,978
		Other, less allowances of $7,551 and $5,333, respectively		183,876		148,599
	Inventory			201,693		130,044
	Net deferred income tax asset			46,809		40,898
	Prepaid expenses			86,346		80,628
	Income taxes receivable			11,595		85,636
	Other current assets			26,720		16,349
				1,721,220		1,705,680

Assets held for sale				-		49,647

Investments
	Licenses			1,555,118		1,494,014
	Goodwill			816,668		797,077
	Other intangible assets, net of accumulated amortization of $140,262 and $131,101, respectively			61,873		50,734
	Investments in unconsolidated entities			199,480		173,710
	Long-term investments			10,171		45,138
	Other investments			886		3,072
				2,644,196		2,563,745
Property, plant and equipment
	In service and under construction			10,628,583		10,197,596
	Less: Accumulated depreciation			6,725,100		6,413,061
				3,903,483		3,784,535

Other assets and deferred charges				121,917		97,398

Total assets			$	8,390,816	$	8,201,005

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

Current liabilities
	Current portion of long-term debt			$	1,283	$	1,509
	Accounts payable				311,868		364,746
	Customer deposits and deferred revenues				237,281		207,633
	Accrued interest				16,772		7,456
	Accrued taxes				74,296		41,069
	Accrued compensation				85,485		107,719
	Other current liabilities				99,119		144,001
					826,104		874,133

Liabilities held for sale					-		1,051

Deferred liabilities and credits
	Net deferred income tax liability				867,188		808,713
	Other deferred liabilities and credits				405,160		383,567

Long-term debt					1,528,515		1,529,857

Commitments and contingencies					-		-

Noncontrolling interests with redemption features					759		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 132,659 shares (7,147 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 108,702 shares (7,147 Series A Common and 101,555 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)			2,293,008		2,268,711
		Treasury shares at cost:
			23,957 and 24,165 Common Shares, respectively (1)		(739,560)		(750,921)
		Accumulated other comprehensive loss			(8,343)		(8,854)
		Retained earnings (1)			2,528,209		2,451,899
			Total TDS shareholders' equity		4,074,640		3,962,161

	Preferred shares				826		830
	Noncontrolling interests				687,624		639,688

		Total equity			4,763,090		4,602,679

Total liabilities and equity				$	8,390,816	$	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.

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 (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		-		-		-		-		123,708		123,708		-		-		123,708
Net income attributable to noncontrolling interests classified as equity		-		-		-		-		-		-		-		39,949		39,949
Change in net unrealized gain (loss) on equity investments		-		-		-		49		-		49		-		-		49
Change related to retirement plan		-		-		-		462		-		462		-		-		462
Common and Series A Common Shares dividends		-		-		-		-		(39,893)		(39,893)		-		-		(39,893)
Preferred dividend requirement		-		-		-		-		(37)		(37)		-		-		(37)
Repurchase of Preferred Shares		-		-		-		-		(16)		(16)		(4)		-		(20)
Dividend reinvestment plan		-		862		10,066		-		(6,067)		4,861		-		-		4,861
Incentive and compensation plans		-		444		1,295		-		(1,385)		354		-		-		354
Adjust investment in subsidiaries for repurchases, issuances, other compensation plans and noncontrolling interest purchases		-		7,581		-		-		-		7,581		-		9,421		17,002
Stock-based compensation awards (2)		-		15,518		-		-		-		15,518		-		-		15,518
Tax windfall (shortfall) from stock awards (3)		-		(108)		-		-		-		(108)		-		-		(108)
Distributions to noncontrolling interests		-		-		-		-		-		-		-		(1,491)		(1,491)
Other		-		-		-		-		-		-		-		57		57
September 30, 2012	$	1,326	$	2,293,008	$	(739,560)	$	(8,343)	$	2,528,209	$	4,074,640	$	826	$	687,624	$	4,763,090

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, 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