UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x

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

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

For the quarterly period ended March 31, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

OR

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

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

No

•  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.

x

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

•  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).

x

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

•  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

Smaller reporting company

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

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

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 March 31, 2014

Common Shares, $0.01 par value

  

  

101,573,846 Shares

Series A Common Shares, $0.01 par value

  

  

7,175,948 Shares

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

 


 

 

 

Telephone and Data Systems, Inc.

 

 

 

Quarterly Report on Form 10-Q

 

For the Quarterly Period Ended March 31, 2014

 

 

 

Index

 

 

Page No.

 

Part I.

Financial Information

 

 

 

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

1

 

 

 

 

 

 

 

 

Consolidated Statement of Operations

1

 

 

 

 

Three Months Ended March 31, 2014 and 2013

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Comprehensive Income

2

 

 

 

 

Three Months Ended March 31, 2014 and 2013

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Cash Flows

3

 

 

 

 

Three Months Ended March 31, 2014 and 2013

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheet

4

 

 

 

 

March 31, 2014 and December 31, 2013

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Changes in Equity

6

 

 

 

 

Three Months Ended March 31, 2014 and 2013

 

 

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

 

 

 

 

 

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

22

 

 

 

 

 

 

 

 

 

Overview

22

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2014 and 2013

 

 

 

 

 

Results of Operations — Consolidated

26

 

 

 

 

Results of Operations — U.S. Cellular

28

 

 

 

 

Results of Operations — TDS Telecom

33

 

 

 

 

 

 

 

 

 

Recent Accounting Pronouncements

38

 

 

 

 

 

 

 

 

 

Financial Resources

38

 

 

 

 

 

 

 

 

Liquidity and Capital Resources

39

 

 

 

 

 

 

 

 

Application of Critical Accounting Policies and Estimates

42

 

 

 

 

 

 

 

 

Safe Harbor Cautionary Statement

43

 

 

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

46

 

 

 

 

 

 

 

 

Item 4.

Controls and Procedures

47

 

 

 

 

 

Part II.

Other Information

 

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

48

 

 

 

 

 

 

 

 

Item1A.

Risk Factors

48

 

 

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

 

 

 

 

 

 

 

 

Item 5.

Other Information

49

 

 

 

 

 

 

 

 

Item 6.

Exhibits

50

 

 

 

 

 

 

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

  

  

  

  

March 31,

(Dollars and shares in thousands, except per share amounts)

2014 

  

2013 

Operating revenues

  

  

  

  

  

  

Service

$

 1,080,242 

  

$

 1,198,902 

  

Equipment and product sales

  

 115,720 

  

  

 109,671 

  

  

Total operating revenues

  

 1,195,962 

  

  

 1,308,573 

  

  

  

  

  

  

  

  

  

Operating expenses

  

  

  

  

  

  

Cost of services (excluding Depreciation, amortization and accretion

  reported below)

  

 275,958 

  

  

 299,127 

  

Cost of equipment and products

  

 306,647 

  

  

 260,765 

  

Selling, general and administrative

  

 463,669 

  

  

 486,903 

  

Depreciation, amortization and accretion

  

 224,919 

  

  

 242,077 

  

(Gain) loss on asset disposals, net

  

 2,430 

  

  

 5,616 

  

(Gain) loss on sale of business and other exit costs, net

  

 (6,900) 

  

  

 6,931 

  

(Gain) loss on license sales and exchanges

  

 (91,446) 

  

  

 - 

  

  

Total operating expenses

  

 1,175,277 

  

  

 1,301,419 

  

  

  

  

  

  

  

  

  

Operating income

  

 20,685 

  

  

 7,154 

  

  

  

  

  

  

  

  

  

Investment and other income (expense)

  

  

  

  

  

  

Equity in earnings of unconsolidated entities

  

 37,327 

  

  

 27,089 

  

Interest and dividend income

  

 2,486 

  

  

 1,578 

  

Interest expense

  

 (28,707) 

  

  

 (24,498) 

  

Other, net

  

 160 

  

  

 (154) 

  

  

Total investment and other income

  

 11,266 

  

  

 4,015 

  

  

  

  

  

  

  

  

  

Income before income taxes

  

 31,951 

  

  

 11,169 

  

Income tax expense

  

 11,657 

  

  

 4,180 

Net income

  

 20,294 

  

  

 6,989 

Less: Net income attributable to noncontrolling interests, net of tax

  

 2,040 

  

  

 5,570 

Net income attributable to TDS shareholders

  

 18,254 

  

  

 1,419 

TDS Preferred dividend requirement

  

 (12) 

  

  

 (12) 

Net income available to common shareholders

$

 18,242 

  

$

 1,407 

  

  

  

  

  

  

  

  

  

Basic weighted average shares outstanding

  

 108,988 

  

  

 108,255 

Basic earnings per share attributable to TDS shareholders

$

 0.17 

  

$

 0.01 

  

  

  

  

  

  

  

  

  

Diluted weighted average shares outstanding

  

 109,672 

  

  

 108,693 

Diluted earnings per share attributable to TDS shareholders

$

 0.16 

  

$

 0.01 

  

  

  

  

  

  

  

  

  

Dividends per share to TDS shareholders

$

 0.1340 

  

$

 0.1275 

  

  

  

  

  

  

  

  

  

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

1

 


 

Table of Contents 

 

Telephone and Data Systems, Inc.

Consolidated Statement of Comprehensive Income

(Unaudited)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Three Months Ended

  

  

  

  

  

March 31,

(Dollars in thousands)

2014 

  

2013 

Net income

$

 20,294 

  

$

 6,989 

Net change in accumulated other comprehensive income (loss)

  

  

  

  

  

  

Change in foreign currency translation adjustment

  

 (4) 

  

  

 15 

  

Change related to retirement plan

  

  

  

  

  

  

  

Amounts included in net periodic benefit cost for the period

  

  

  

  

  

  

  

  

Amortization of prior service cost

  

 (911) 

  

  

 (902) 

  

  

  

Amortization of unrecognized net loss

  

 322 

  

  

 602 

  

  

  

  

  

  

 (589) 

  

  

 (300) 

  

  

  

Change in deferred income taxes

  

 224 

  

  

 114 

  

  

Change related to retirement plan, net of tax

  

 (365) 

  

  

 (186) 

  

Net change in accumulated other comprehensive income (loss)

  

 (369) 

  

  

 (171) 

Comprehensive income

  

 19,925 

  

  

 6,818 

  

Less: Comprehensive income attributable to noncontrolling interest

  

 2,040 

  

  

 5,570 

Comprehensive income attributable to TDS shareholders

$

 17,885 

  

$

 1,248 

  

  

  

  

  

  

  

  

  

  

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

2

 


 

Table of Contents 

 

Telephone and Data Systems, Inc.

Consolidated Statement of Cash Flows

(Unaudited)

  

  

  

  

  

Three Months Ended

  

  

  

  

  

March 31,

(Dollars in thousands)

2014 

  

2013 

Cash flows from operating activities

  

  

  

  

  

  

Net income

$

 20,294 

  

$

 6,989 

  

Add (deduct) adjustments to reconcile net income to net cash flows

  from operating activities

  

  

  

  

  

  

  

  

Depreciation, amortization and accretion

  

 224,919 

  

  

 242,077 

  

  

  

Bad debts expense

  

 21,559 

  

  

 17,874 

  

  

  

Stock-based compensation expense

  

 6,759 

  

  

 7,585 

  

  

  

Deferred income taxes, net

  

 (14,510) 

  

  

 3,009 

  

  

  

Equity in earnings of unconsolidated entities

  

 (37,327) 

  

  

 (27,089) 

  

  

  

Distributions from unconsolidated entities

  

 12,820 

  

  

 8,089 

  

  

  

(Gain) loss on asset disposals, net

  

 2,430 

  

  

 5,616 

  

  

  

(Gain) loss on sale of business and other exit costs, net

  

 (6,900) 

  

  

 6,931 

  

  

  

(Gain) loss on license sales and exchanges

  

 (91,446) 

  

  

 - 

  

  

  

Noncash interest expense

  

 506 

  

  

 497 

  

  

  

Other operating activities

  

 47 

  

  

 256 

  

Changes in assets and liabilities from operations

  

  

  

  

  

  

  

  

Accounts receivable

  

 92,949 

  

  

 34,038 

  

  

  

Inventory

  

 19,656 

  

  

 16,860 

  

  

  

Accounts payable

  

 (53,403) 

  

  

 (3,203) 

  

  

  

Customer deposits and deferred revenues

  

 (1,447) 

  

  

 7,904 

  

  

  

Accrued taxes

  

 (1,634) 

  

  

 5,309 

  

  

  

Accrued interest

  

 9,136 

  

  

 9,279 

  

  

  

Other assets and liabilities

  

 (99,471) 

  

  

 (95,669) 

  

  

  

  

  

  

 104,937 

  

  

 246,352 

  

  

  

  

  

  

  

  

  

  

Cash flows from investing activities

  

  

  

  

  

  

Cash used for additions to property, plant and equipment

  

 (150,890) 

  

  

 (176,318) 

  

Cash paid for acquisitions and licenses

  

 (8,254) 

  

  

 (14,150) 

  

Cash received from divestitures

  

 103,042 

  

  

 - 

  

Cash received for investments

  

 10,000 

  

  

 - 

  

Other investing activities

  

 1,623 

  

  

 6,364 

  

  

  

  

  

  

 (44,479) 

  

  

 (184,104) 

  

  

  

  

  

  

  

  

  

  

Cash flows from financing activities

  

  

  

  

  

  

Repayment of long-term debt

  

 (392) 

  

  

 (328) 

  

TDS Common Shares reissued for benefit plans,

  net of tax payments

  

 (50) 

  

  

 140 

  

U.S. Cellular Common Shares reissued for benefit plans, net of tax payments

  

 316 

  

  

 123 

  

Repurchase of TDS Common Shares

  

 (3,342) 

  

  

 - 

  

Repurchase of U.S. Cellular Common Shares

  

 (2,000) 

  

  

 (18,425) 

  

Dividends paid to TDS shareholders

  

 (14,582) 

  

  

 (13,792) 

  

Distributions to noncontrolling interests

  

 (346) 

  

  

 (2,396) 

  

Other financing activities

  

 2,834 

  

  

 (1,351) 

  

  

  

  

  

  

 (17,562) 

  

  

 (36,029) 

  

  

  

  

  

  

  

  

  

  

Net increase in cash and cash equivalents

  

 42,896 

  

  

 26,219 

  

  

  

  

  

  

  

  

  

  

Cash and cash equivalents

  

  

  

  

  

  

Beginning of period

  

 830,014 

  

  

 740,481 

  

End of period

$

 872,910 

  

$

 766,700 

  

  

  

  

  

  

  

  

  

  

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

3

 


 

Table of Contents 

 

Telephone and Data Systems, Inc.

Consolidated Balance Sheet — Assets

(Unaudited)

(Dollars in thousands)

March 31,

2014

  

December 31,

2013

Current assets

  

  

  

  

  

  

Cash and cash equivalents

$

 872,910 

  

$

 830,014 

  

Short-term investments

  

 40,056 

  

  

 50,104 

  

Accounts receivable

  

  

  

  

  

  

  

Due from customers and agents, less allowances of $56,112 and $63,690, respectively

  

 424,451 

  

  

 551,611 

  

  

Other, less allowances of $2,165 and $1,914, respectively

  

 190,558 

  

  

 179,503 

  

Inventory, net

  

 224,904 

  

  

 244,560 

  

Net deferred income tax asset

  

 106,077 

  

  

 106,077 

  

Prepaid expenses

  

 89,344 

  

  

 87,920 

  

Income taxes receivable

  

 5,679 

  

  

 2,397 

  

Other current assets

  

 35,154 

  

  

 35,151 

  

  

  

  

  

 1,989,133 

  

  

 2,087,337 

  

  

  

  

  

  

  

  

  

Assets held for sale

  

 - 

  

  

 16,027 

  

  

  

  

  

  

  

  

  

Investments

  

  

  

  

  

  

Licenses

  

 1,448,598 

  

  

 1,423,779 

  

Goodwill

  

 836,843 

  

  

 836,843 

  

Franchise rights

  

 123,668 

  

  

 123,668 

  

Other intangible assets, net of accumulated amortization of $117,767 and $112,752,

  respectively

  

 66,439 

  

  

 71,454 

  

Investments in unconsolidated entities

  

 326,279 

  

  

 301,772 

  

Other investments

  

 611 

  

  

 641 

  

  

  

  

  

 2,802,438 

  

  

 2,758,157 

Property, plant and equipment

  

  

  

  

  

  

In service and under construction

  

 11,253,631 

  

  

 11,239,804 

  

Less: Accumulated depreciation

  

 7,474,498 

  

  

 7,361,660 

  

  

  

  

  

 3,779,133 

  

  

 3,878,144 

  

  

  

  

  

  

  

  

  

Other assets and deferred charges

  

 178,599 

  

  

 164,482 

  

  

  

  

  

  

  

  

  

Total assets

$

 8,749,303 

  

$

 8,904,147 

  

  

  

  

  

  

  

  

  

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

4

 


 

Table of Contents 

 

Telephone and Data Systems, Inc.

Consolidated Balance Sheet — Liabilities and Equity

(Unaudited)

(Dollars and shares in thousands)

March 31,

2014

  

December 31,

2013

Current liabilities

  

  

  

  

  

  

Current portion of long-term debt

$

 1,415 

  

$

 1,646 

  

Accounts payable

  

 414,015 

  

  

 496,069 

  

Customer deposits and deferred revenues

  

 287,999 

  

  

 289,445 

  

Accrued interest

  

 15,757 

  

  

 6,673 

  

Accrued taxes

  

 72,761 

  

  

 70,518 

  

Accrued compensation

  

 65,486 

  

  

 115,031 

  

Other current liabilities

  

 167,746 

  

  

 212,374 

  

  

  

  

  

  

 1,025,179 

  

  

 1,191,756 

  

  

  

  

  

  

  

  

  

  

Deferred liabilities and credits

  

  

  

  

  

  

Net deferred income tax liability

  

 847,850 

  

  

 862,975 

  

Other deferred liabilities and credits

  

 477,305 

  

  

 458,709 

  

  

  

  

  

  

  

  

  

  

Long-term debt

  

 1,720,031 

  

  

 1,720,074 

  

  

  

  

  

  

  

  

  

  

Commitments and contingencies

  

-

  

  

-

  

  

  

  

  

  

  

  

  

  

Noncontrolling interests with redemption features

  

 543 

  

  

 536 

  

  

  

  

  

  

  

  

  

  

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 132,721 shares (7,176 Series A Common and 125,545 Common Shares) and 132,711 shares (7,166 Series A Common and 125,545 Common Shares), respectively

  

  

  

  

  

  

  

  

Outstanding 108,750 shares (7,176 Series A Common and 101,574 Common Shares) and 108,757 shares (7,166 Series A Common and 101,591 Common Shares), respectively

  

  

  

  

  

  

  

  

Par Value ($.01 per share) of $1,327 ($72 Series A Common and $1,255 Common Shares)

  

 1,327 

  

  

 1,327 

  

  

Capital in excess of par value

  

 2,313,682 

  

  

 2,308,807 

  

  

Treasury shares at cost:

  

  

  

  

  

  

  

  

23,971 and 23,954 Common Shares, respectively

  

 (722,658) 

  

  

 (721,354) 

  

  

Accumulated other comprehensive loss

  

 (938) 

  

  

 (569) 

  

  

Retained earnings

  

 2,533,298 

  

  

 2,529,626 

  

  

  

Total TDS shareholders' equity

  

 4,124,711 

  

  

 4,117,837 

  

  

  

  

  

  

  

  

  

  

  

Preferred shares

  

 824 

  

  

 824 

  

Noncontrolling interests

  

 552,860 

  

  

 551,436 

  

  

  

  

  

  

  

  

  

  

  

  

Total equity

  

 4,678,395 

  

  

 4,670,097 

  

  

  

  

  

  

  

  

  

  

Total liabilities and equity

$

 8,749,303 

  

$

 8,904,147 

  

  

  

  

  

  

  

  

  

  

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

5

 


 

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, 2013

$

 1,327 

  

$

 2,308,807 

  

$

 (721,354) 

  

$

 (569) 

  

$

 2,529,626 

  

$

 4,117,837 

  

$

 824 

  

$

 551,436 

  

$

 4,670,097 

Add (Deduct)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Net income attributable to TDS

  shareholders

  

 - 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 18,254 

  

  

 18,254 

  

  

 - 

  

  

 - 

  

  

 18,254 

Net income attributable

  to noncontrolling interests

  classified as equity

  

 - 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 2,011 

  

  

 2,011 

Change in foreign currency

  translation adjustment

  

 - 

  

  

 - 

  

  

 - 

  

  

 (4) 

  

  

 - 

  

  

 (4) 

  

  

 - 

  

  

 - 

  

  

 (4) 

Change related to retirement

  plan

  

 - 

  

  

 - 

  

  

 - 

  

  

 (365) 

  

  

 - 

  

  

 (365) 

  

  

 - 

  

  

 - 

  

  

 (365) 

TDS Common and Series A

  Common Share dividends

  

 - 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 (14,570) 

  

  

 (14,570) 

  

  

 - 

  

  

 - 

  

  

 (14,570) 

TDS Preferred dividend

  requirement

  

 - 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 (12) 

  

  

 (12) 

  

  

 - 

  

  

 - 

  

  

 (12) 

Repurchase of Common Shares

  

 - 

  

  

 - 

  

  

 (3,843) 

  

  

 - 

  

  

 - 

  

  

 (3,843) 

  

  

 - 

  

  

 - 

  

  

 (3,843) 

Dividend reinvestment plan

  

 - 

  

  

 800 

  

  

 1,874 

  

  

 - 

  

  

 - 

  

  

 2,674 

  

  

 - 

  

  

 - 

  

  

 2,674 

Incentive and compensation

  plans

  

 - 

  

  

 (284) 

  

  

 665 

  

  

 - 

  

  

 - 

  

  

 381 

  

  

 - 

  

  

 - 

  

  

 381 

Adjust investment in

  subsidiaries for repurchases,

  issuances and other compensation

  plans

  

 - 

  

  

 2,780 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 2,780 

  

  

 - 

  

  

 (262) 

  

  

 2,518 

Stock-based compensation

  awards

  

 - 

  

  

 2,011 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 2,011 

  

  

 - 

  

  

 - 

  

  

 2,011 

Tax windfall (shortfall) from

  stock awards

  

 - 

  

  

 (432) 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 (432) 

  

  

 - 

  

  

 - 

  

  

 (432) 

Distributions to

  noncontrolling interests

  

 - 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 (325) 

  

  

 (325) 

March 31, 2014

$

 1,327 

  

$

 2,313,682 

  

$

 (722,658) 

  

$

 (938) 

  

$

 2,533,298 

  

$

 4,124,711 

  

$

 824 

  

$

 552,860 

  

$

 4,678,395 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

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

6

 


 

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, 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

  

 - 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 1,419 

  

  

 1,419 

  

  

 - 

  

  

 - 

  

  

 1,419 

Net income attributable to

  noncontrolling interests

  classified as equity

  

 - 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 5,597 

  

  

 5,597 

Change in foreign currency

  translation adjustment

  

 - 

  

  

 - 

  

  

 - 

  

  

 15 

  

  

 - 

  

  

 15 

  

  

 - 

  

  

 - 

  

  

 15 

Change related to retirement

  plan

  

 - 

  

  

 - 

  

  

 - 

  

  

 (186) 

  

  

 - 

  

  

 (186) 

  

  

 - 

  

  

 - 

  

  

 (186) 

TDS Common and Series A

  Common Share dividends

  

 - 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 (13,780) 

  

  

 (13,780) 

  

  

 - 

  

  

 - 

  

  

 (13,780) 

TDS Preferred dividend

  requirement

  

 - 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 (12) 

  

  

 (12) 

  

  

 - 

  

  

 - 

  

  

 (12) 

Dividend reinvestment plan

  

 - 

  

  

 - 

  

  

 3 

  

  

 - 

  

  

 (2) 

  

  

 1 

  

  

 - 

  

  

 - 

  

  

 1 

Incentive and compensation

  plans

  

 - 

  

  

 534 

  

  

 2,265 

  

  

 - 

  

  

 (2,223) 

  

  

 576 

  

  

 - 

  

  

 - 

  

  

 576 

Adjust investment in

  subsidiaries for repurchases,

  issuances and other

  compensation plans

  

 - 

  

  

 6,561 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 6,561 

  

  

 - 

  

  

 (20,009) 

  

  

 (13,448) 

Stock-based compensation

  awards

  

 - 

  

  

 2,395 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 2,395 

  

  

 - 

  

  

 - 

  

  

 2,395 

Tax windfall (shortfall) from

  stock awards

  

 - 

  

  

 (532) 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 (532) 

  

  

 - 

  

  

 - 

  

  

 (532) 

Distributions to noncontrolling

  interests

  

 - 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 (2,396) 

  

  

 (2,396) 

Adjust investment in subsidiaries

  for noncontrolling interest

  purchases

  

 - 

  

  

 (10,295) 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 (10,295) 

  

  

 - 

  

  

 5,299 

  

  

 (4,996) 

March 31, 2013

$

 1,327 

  

$

 2,302,785 

  

$

 (747,831) 

  

$

 (8,303) 

  

$

 2,449,720 

  

$

 3,997,698 

  

$

 825 

  

$

 632,457 

  

$

 4,630,980 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

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

7

 


 

Table of Contents 

 

 

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 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, 2013.

 

TDS’ business segments reflected in this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014 are U.S. Cellular, TDS Telecom’s Wireline, Cable and 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”).  Periods presented for comparative purposes have been re-presented to conform to this segment presentation.  All of TDS’ segments operate only in the United States, except for HMS, which includes an insignificant foreign operation.  See Note 11 — Business Segment Information for summary financial information on each business segment.

 

The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items, unless otherwise disclosed) necessary for a fair statement of the financial position as of March 31, 2014 and December 31, 2013, and the results of operations, changes in comprehensive income, cash flows and equity for the three months ended March 31, 2014 and 2013. These results are not necessarily indicative of the results to be expected for the full year.

 

Recently Issued Accounting Pronouncements

 

On April 10, 2014, the FASB issued Accounting Standards Update 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). ASU 2014-08 changes the requirements and disclosures for reporting discontinued operations. TDS is required to adopt the provisions of ASU 2014-08 effective January 1, 2015, although early adoption is permitted. The adoption of ASU 2014-08 is not expected to have a significant impact on TDS’ financial position or results of operations.

 

Reclassifications

 

Certain prior year amounts have been reclassified to conform to the 2014 financial statement presentation.  These reclassifications did not affect consolidated net income attributable to TDS shareholders, cash flows, assets, liabilities or equity for the years presented.

 

In 2014, TDS began displaying separately Equipment and product sales and Cost of equipment and products.  As a result of recent HMS acquisitions, these amounts are now more significant to TDS and, accordingly, are shown as separate captions under Operating revenues and Operating expenses, respectively, on the Consolidated Statement of Operations.  Amounts in 2013 have been reclassified to conform to the 2014 presentation.

 

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Table of Contents 

Amounts Collected from Customers and Remitted to Governmental Authorities

 

If a tax is assessed upon the customer and TDS merely acts as an agent in collecting the tax on behalf of the imposing governmental authority, then amounts collected from customers and remitted to governmental authorities are recorded on a net basis within a tax liability account in the Consolidated Balance Sheet.  If the tax is assessed upon TDS, then amounts collected from customers as recovery of the tax are recorded in Service revenues and amounts remitted to governmental authorities are recorded in Selling, general and administrative expenses in the Consolidated Statement of Operations. The amounts recorded gross in revenues that are billed to customers and remitted to governmental authorities totaled $31.0 million and $36.1 million for the three months ended March 31, 2014, and 2013, respectively.

 

2.   Fair Value Measurements

 

As of March 31, 2014 and December 31, 2013, TDS did not have any financial  or nonfinancial assets or liabilities that were required to be recorded at fair value in its Consolidated Balance Sheet in accordance with GAAP. However, TDS has applied the provisions of fair value accounting for purposes of computing the fair value of financial instruments for disclosure purposes as displayed below.

 

  

  

  

Level within the Fair Value Hierarchy

  

March 31, 2014

  

December 31, 2013

  

  

  

  

Book Value

  

Fair Value

  

Book Value

  

Fair Value

(Dollars in thousands)

  

  

  

  

  

  

  

  

  

  

  

  

  

Cash and cash equivalents

  

$

 872,910 

  

$

 872,910 

  

$

 830,014 

  

$

 830,014 

Short-term investments

  

  

  

  

  

  

  

  

  

  

  

  

  

  

U.S. Treasury Notes

  

  

 40,056 

  

  

 40,056 

  

  

 50,104 

  

  

 50,104 

Long-term debt

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Retail

  

  

 1,178,250 

  

  

 1,170,617 

  

  

 1,178,250 

  

  

 1,048,010 

  

Institutional and other

  

  

 537,408 

  

  

 536,843 

  

  

 537,454 

  

  

 512,635 

 

Short-term investments are designated as held-to-maturity investments and recorded at amortized cost in the Consolidated Balance Sheet.  Long-term debt excludes capital lease obligations and the current portion of Long-term debt.

 

The fair values of Cash and cash equivalents and Short-term investments approximate their book values due to the short-term nature of these financial instruments. The fair value of “Retail” Long-term debt was estimated using market prices for TDS’ 7.0% Senior Notes, 6.875% Senior Notes, 6.625% Senior Notes and 5.875% Senior Notes, and U.S. Cellular's 6.95% Senior Notes.  TDS’ institutional debt includes U.S. Cellular’s 6.7% Senior Notes which are traded over the counter. TDS estimated the fair value of its institutional and other debt through a discounted cash flow analysis using the interest rates or estimated yield to maturity for each borrowing, which ranged from 0.00% to 6.91% at March 31, 2014. 

 

3.   Income Taxes

 

TDS’ overall effective tax rate on Income before income taxes for the three months ended March 31, 2014 and 2013 was 36.5% and 37.4%, respectively.  The effective tax rate for the three months ended March 31, 2014 was lower than the rate for the three months ended March 31, 2013 primarily as a result of tax benefits from state law changes in 2014.

 

4.   Earnings Per Share

 

Basic earnings per share attributable to TDS shareholders is computed by dividing Net income available to common shareholders of TDS by the weighted average number of common shares outstanding during the period. Diluted earnings per share attributable to TDS shareholders is computed by dividing Net income available to common shareholders of TDS by the weighted average number of common shares outstanding during the period adjusted to include the effects of potentially dilutive securities. Potentially dilutive securities primarily include incremental shares issuable upon exercise of outstanding stock options and the vesting of restricted stock units.

 

The amounts used in computing earnings per common share and the effects of potentially dilutive securities on the weighted average number of common shares were as follows:

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Table of Contents 

 

  

  

  

  

  

Three Months Ended

  

  

  

  

  

March 31,

  

  

  

  

  

2014 

  

2013 

(Dollars and shares in thousands, except per share amounts)

  

  

  

  

  

Basic earnings per share attributable to TDS shareholders:

  

  

  

  

  

  

Net income available to common shareholders of

   TDS used in basic earnings per share

$

 18,242 

  

$

 1,407 

Adjustments to compute diluted earnings:

  

  

  

  

  

  

Noncontrolling interest adjustment

  

 (165) 

  

  

 (37) 

  

Net income attributable to common shareholders of

   TDS used in diluted earnings per share

$

 18,077 

  

$

 1,370 

  

  

  

  

  

  

  

  

  

  

Weighted average number of shares used in basic earnings per share: