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 June 30, 2014



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 June 30, 2014

Common Shares, $0.01 par value

101,032,392 Shares

Series A Common Shares, $0.01 par value

7,185,356 Shares

Telephone and Data Systems, Inc.

Quarterly Report on Form 10-Q
For the Quarterly Period Ended June 30, 2014

Index
				Page No.
Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited)			1

		Consolidated Statement of Operations			1
			Three and Six Months Ended June 30, 2014 and 2013

		Consolidated Statement of Comprehensive Income			2
			Three and Six Months Ended June 30, 2014 and 2013

		Consolidated Statement of Cash Flows			3
			Six Months Ended June 30, 2014 and 2013

		Consolidated Balance Sheet			4
			June 30, 2014 and December 31, 2013

		Consolidated Statement of Changes in Equity			6
			Six Months Ended June 30, 2014 and 2013

		Notes to Consolidated Financial Statements			8

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations			24

		Overview			24

		Six Months Ended June 30, 2014 and 2013
			Results of Operations — Consolidated		29
			Results of Operations — U.S. Cellular		31
			Results of Operations — TDS Telecom		36

			Three Months Ended June 30, 2014 and 2013
			Results of Operations — Consolidated		42
			Results of Operations — U.S. Cellular		44
			Results of Operations — TDS Telecom		46

		Recent Accounting Pronouncements			49

		Financial Resources			49

		Liquidity and Capital Resources			51

		Application of Critical Accounting Policies and Estimates			54

		Safe Harbor Cautionary Statement			55

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk			58

	Item 4.	Controls and Procedures			59

Part II.	Other Information

	Item 1.	Legal Proceedings			60

	Item1A.	Risk Factors			60

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

	Item 5.	Other Information			62

	Item 6.	Exhibits			63

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				Six Months Ended
			June 30,				June 30,
(Dollars and shares in thousands, except per share amounts)			2014		2013		2014		2013
Operating revenues
	Service		$	1,072,179	$	1,115,661	$	2,152,421	$	2,314,563
	Equipment and product sales			164,213		112,505		279,933		222,176
		Total operating revenues		1,236,392		1,228,166		2,432,354		2,536,739

Operating expenses
	Cost of services (excluding Depreciation, amortization and accretion reported below)			286,488		275,837		562,446		574,964
	Cost of equipment and products			313,011		239,894		619,658		500,659
	Selling, general and administrative			470,902		470,720		934,571		957,623
	Depreciation, amortization and accretion			204,567		254,203		429,486		496,280
	(Gain) loss on asset disposals, net			7,903		8,319		10,333		13,935
	(Gain) loss on sale of business and other exit costs, net			2,611		(303,034)		(4,289)		(296,103)
	(Gain) loss on license sales and exchanges			-		-		(91,446)		-
		Total operating expenses		1,285,482		945,939		2,460,759		2,247,358

Operating income (loss)				(49,090)		282,227		(28,405)		289,381

Investment and other income (expense)
	Equity in earnings of unconsolidated entities			34,790		35,605		72,117		62,694
	Interest and dividend income			2,751		2,600		5,237		4,178
	Gain (loss) on investments			-		14,518		-		14,518
	Interest expense			(27,898)		(23,749)		(56,605)		(48,247)
	Other, net			50		(197)		210		(351)
		Total investment and other income		9,693		28,777		20,959		32,792

Income (loss) before income taxes				(39,397)		311,004		(7,446)		322,173
	Income tax expense (benefit)			(13,671)		132,607		(2,014)		136,787
Net income (loss)				(25,726)		178,397		(5,432)		185,386
Less: Net income (loss) attributable to noncontrolling interests, net of tax				(3,688)		22,320		(1,648)		27,890
Net income (loss) attributable to TDS shareholders				(22,038)		156,077		(3,784)		157,496
TDS Preferred dividend requirement				(12)		(12)		(25)		(25)
Net income (loss) available to common shareholders			$	(22,050)	$	156,065	$	(3,809)	$	157,471

Basic weighted average shares outstanding				108,719		108,385		108,853		108,320
Basic earnings (loss) per share attributable to TDS shareholders			$	(0.20)	$	1.44	$	(0.04)	$	1.45

Diluted weighted average shares outstanding				108,719		108,913		108,853		108,827
Diluted earnings (loss) per share attributable to TDS shareholders			$	(0.20)	$	1.42	$	(0.04)	$	1.44

Dividends per share to TDS shareholders			$	0.1340	$	0.1275	$	0.2680	$	0.2550

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				Six Months Ended
				June 30,				June 30,
(Dollars in thousands)				2014		2013		2014		2013
Net income (loss)				$	(25,726)	$	178,397	$	(5,432)	$	185,386
Net change in accumulated other comprehensive income (loss)
	Change in net unrealized gain (loss) on equity investments				341		51		341		51
	Change in foreign currency translation adjustment				(17)		-		(21)		15
	Change related to retirement plan
		Amounts included in net periodic benefit cost for the period
			Amortization of prior service cost		(911)		(902)		(1,822)		(1,804)
			Amortization of unrecognized net loss		322		602		644		1,204
					(589)		(300)		(1,178)		(600)
			Change in deferred income taxes		224		114		447		228
		Change related to retirement plan, net of tax			(365)		(186)		(731)		(372)
	Net change in accumulated other comprehensive income (loss)				(41)		(135)		(411)		(306)
Comprehensive income (loss)					(25,767)		178,262		(5,843)		185,080
	Less: Comprehensive income (loss) attributable to noncontrolling interest				(3,688)		22,320		(1,648)		27,890
Comprehensive income (loss) attributable to TDS shareholders				$	(22,079)	$	155,942	$	(4,195)	$	157,190

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)
			Six Months Ended
			June 30,
(Dollars in thousands)			2014		2013
Cash flows from operating activities
	Net income (loss)		$	(5,432)	$	185,386
	Add (deduct) adjustments to reconcile net income to cash flows from operating activities
		Depreciation, amortization and accretion		429,486		496,280
		Bad debts expense		52,098		35,187
		Stock-based compensation expense		15,488		12,902
		Deferred income taxes, net		(33,346)		(21,246)
		Equity in earnings of unconsolidated entities		(72,117)		(62,694)
		Distributions from unconsolidated entities		65,569		47,635
		(Gain) loss on asset disposals, net		10,333		13,935
		(Gain) loss on sale of business and other exit costs, net		(4,289)		(296,103)
		(Gain) loss on investments		-		(14,518)
		(Gain) loss on license sales and exchanges		(91,446)		-
		Noncash interest expense		1,014		997
		Other operating activities		3		505
	Changes in assets and liabilities from operations
		Accounts receivable		40,459		(5,781)
		Inventory		38,674		(8,105)
		Accounts payable		(43,132)		58,204
		Customer deposits and deferred revenues		13,139		7,897
		Accrued taxes		1,049		150,425
		Accrued interest		22		2,172
		Other assets and liabilities		(101,930)		(81,586)
				315,642		521,492

Cash flows from investing activities
	Cash used for additions to property, plant and equipment			(339,907)		(384,281)
	Cash paid for acquisitions and licenses			(18,681)		(14,150)
	Cash received from divestitures			125,905		480,000
	Cash received for investments			10,000		15,000
	Other investing activities			3,720		14,127
				(218,963)		110,696

Cash flows from financing activities
	Repayment of long-term debt			(589)		(605)
	TDS Common Shares reissued for benefit plans, net of tax payments			401		776
	U.S. Cellular Common Shares reissued for benefit plans, net of tax payments			830		(2,206)
	Repurchase of TDS Common Shares			(20,090)		-
	Repurchase of U.S. Cellular Common Shares			(8,298)		(18,425)
	Dividends paid to TDS shareholders			(29,107)		(27,598)
	U.S. Cellular dividends paid to noncontrolling public shareholders			-		(75,235)
	Distributions to noncontrolling interests			(482)		(3,292)
	Other financing activities			5,502		331
				(51,833)		(126,254)

Net increase in cash and cash equivalents				44,846		505,934

Cash and cash equivalents
	Beginning of period			830,014		740,481
	End of period		$	874,860	$	1,246,415

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)			June 30, 2014		December 31, 2013
Current assets
	Cash and cash equivalents		$	874,860	$	830,014
	Short-term investments			40,035		50,104
	Accounts receivable
		Due from customers and agents, less allowances of $37,543 and $63,690, respectively		460,823		551,611
		Other, less allowances of $2,276 and $1,914, respectively		163,438		179,503
	Inventory, net			205,886		244,560
	Net deferred income tax asset			106,077		106,077
	Prepaid expenses			88,860		87,920
	Income taxes receivable			9,197		2,397
	Other current assets			32,274		35,151
				1,981,450		2,087,337

Assets held for sale				5,980		16,027

Investments
	Licenses			1,460,484		1,423,779
	Goodwill			834,352		836,843
	Franchise rights			124,487		123,668
	Other intangible assets, net of accumulated amortization of $122,767 and $112,752, respectively			61,536		71,454
	Investments in unconsolidated entities			308,661		301,772
	Other investments			589		641
				2,790,109		2,758,157
Property, plant and equipment
	In service and under construction			11,220,652		11,239,804
	Less: Accumulated depreciation			7,470,705		7,361,660
				3,749,947		3,878,144

Other assets and deferred charges				180,183		164,482

Total assets			$	8,707,669	$	8,904,147

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)				June 30, 2014		December 31, 2013
Current liabilities
	Current portion of long-term debt			$	890	$	1,646
	Accounts payable				425,051		496,069
	Customer deposits and deferred revenues				302,496		289,445
	Accrued interest				6,671		6,673
	Accrued taxes				73,227		70,518
	Accrued compensation				98,099		115,031
	Other current liabilities				166,270		212,374
					1,072,704		1,191,756

Liabilities held for sale					722		-

Deferred liabilities and credits
	Net deferred income tax liability				828,458		862,975
	Other deferred liabilities and credits				460,862		458,709

Long-term debt					1,718,832		1,720,074

Commitments and contingencies					-		-

Noncontrolling interests with redemption features					911		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 132,730 shares (7,185 Series A Common and 125,545 Common Shares) and 132,711 shares (7,166 Series A Common and 125,545 Common Shares), respectively
			Outstanding 108,217 shares (7,185 Series A Common and 101,032 Common Shares) and 108,757 shares (7,166 Series A Common and 101,591 Common Shares), respectively
			Par Value ($.01 per share) ($72 Series A Common and $1,255 Common Shares)		1,327		1,327
		Capital in excess of par value			2,312,515		2,308,807
		Treasury shares at cost:
			24,513 and 23,954 Common Shares, respectively		(737,835)		(721,354)
		Accumulated other comprehensive loss			(980)		(569)
		Retained earnings			2,496,735		2,529,626
			Total TDS shareholders' equity		4,071,762		4,117,837

	Preferred shares				824		824
	Noncontrolling interests				552,594		551,436

		Total equity			4,625,180		4,670,097

Total liabilities and equity				$	8,707,669	$	8,904,147

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, 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		-		-		-		-		(3,784)		(3,784)		-		-		(3,784)
Net income (loss) attributable to noncontrolling interests classified as equity		-		-		-		-		-		-		-		(2,045)		(2,045)
Net unrealized gain (loss) on equity investments		-		-		-		341		-		341		-		-		341
Change in foreign currency translation adjustment		-		-		-		(21)		-		(21)		-		-		(21)
Change related to retirement plan		-		-		-		(731)		-		(731)		-		-		(731)
TDS Common and Series A Common Share dividends		-		-		-		-		(29,082)		(29,082)		-		-		(29,082)
TDS Preferred dividend requirement		-		-		-		-		(25)		(25)		-		-		(25)
Repurchase of Common Shares		-		-		(21,096)		-		-		(21,096)		-		-		(21,096)
Dividend reinvestment plan		-		1,470		3,468		-		-		4,938		-		-		4,938
Incentive and compensation plans		-		(314)		1,147		-		-		833		-		-		833
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans		-		(2,224)		-		-		-		(2,224)		-		3,662		1,438
Stock-based compensation awards		-		5,354		-		-		-		5,354		-		-		5,354
Tax windfall (shortfall) from stock awards		-		(578)		-		-		-		(578)		-		-		(578)
Distributions to noncontrolling interests		-		-		-		-		-		-		-		(459)		(459)
June 30, 2014	$	1,327	$	2,312,515	$	(737,835)	$	(980)	$	2,496,735	$	4,071,762	$	824	$	552,594	$	4,625,180

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, 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		-		-		-		-		157,496		157,496		-		-		157,496
Net income attributable to noncontrolling interests classified as equity		-		-		-		-		-		-		-		27,871		27,871
Net unrealized gain (loss) on equity investments		-		-		-		51		-		51		-		-		51
Change in foreign currency translation adjustment		-		-		-		15		-		15		-		-		15
Change related to retirement plan		-		-		-		(372)		-		(372)		-		-		(372)
TDS Common and Series A Common Share dividends		-		-		-		-		(27,573)		(27,573)		-		-