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 September 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 September 30, 2014

Common Shares, $0.01 par value

100,708,894 Shares

Series A Common Shares, $0.01 par value

7,194,724 Shares

Telephone and Data Systems, Inc.

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

Index
					Page No.
Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited)		1

		Consolidated Statement of Operations		1
			Three and Nine Months Ended September 30, 2014 and 2013

		Consolidated Statement of Comprehensive Income		2
			Three and Nine Months Ended September 30, 2014 and 2013

		Consolidated Statement of Cash Flows		3
			Nine Months Ended September 30, 2014 and 2013

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

		Consolidated Statement of Changes in Equity		6
			Nine Months Ended September 30, 2014 and 2013

		Notes to Consolidated Financial Statements		8

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		27

		Overview		27

		Nine Months Ended September 30, 2014 and 2013
			Results of Operations — Consolidated	32
			Results of Operations — U.S. Cellular	34
			Results of Operations — TDS Telecom	39

			Three Months Ended September 30, 2014 and 2013
			Results of Operations — Consolidated	45
			Results of Operations — U.S. Cellular	47
			Results of Operations — TDS Telecom	50

		Recent Accounting Pronouncements		53

		Financial Resources		53

		Liquidity and Capital Resources		55

		Application of Critical Accounting Policies and Estimates		59

		Safe Harbor Cautionary Statement		60

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		63

	Item 4.	Controls and Procedures		64

Part II.	Other Information

	Item 1.	Legal Proceedings		65

	Item1A.	Risk Factors		65

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		65

	Item 5.	Other Information		67

	Item 6.	Exhibits		68

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				Nine Months Ended
			September 30,				September 30,
(Dollars and shares in thousands, except per share amounts)			2014		2013		2014		2013
Operating revenues
	Service		$	1,081,472	$	1,079,157	$	3,233,893	$	3,393,720
	Equipment and product sales			198,551		101,823		478,484		323,999
		Total operating revenues		1,280,023		1,180,980		3,712,377		3,717,719

Operating expenses
	Cost of services (excluding Depreciation, amortization and accretion reported below)			297,183		267,337		859,629		842,301
	Cost of equipment and products			349,209		213,948		968,867		714,607
	Selling, general and administrative			465,014		476,864		1,399,585		1,434,487
	Depreciation, amortization and accretion			205,529		255,295		635,015		751,575
	Loss on impairment of assets			84,000		-		84,000		-
	(Gain) loss on asset disposals, net			9,293		2,155		19,626		16,090
	(Gain) loss on sale of business and other exit costs, net			(4,790)		(1,534)		(9,079)		(297,637)
	(Gain) loss on license sales and exchanges			-		-		(91,446)		-
		Total operating expenses		1,405,438		1,214,065		3,866,197		3,461,423

Operating income (loss)				(125,415)		(33,085)		(153,820)		256,296

Investment and other income (expense)
	Equity in earnings of unconsolidated entities			36,081		37,609		108,198		100,303
	Interest and dividend income			4,526		2,507		9,763		6,685
	Gain (loss) on investments			-		-		-		14,518
	Interest expense			(27,170)		(24,961)		(83,775)		(73,208)
	Other, net			69		145		279		(206)
		Total investment and other income		13,506		15,300		34,465		48,092

Income (loss) before income taxes				(111,909)		(17,785)		(119,355)		304,388
	Income tax expense (benefit)			9,290		(6,731)		7,276		130,056
Net income (loss)				(121,199)		(11,054)		(126,631)		174,332
Less: Net income (loss) attributable to noncontrolling interests, net of tax				(5,169)		(1,542)		(6,817)		26,348
Net income (loss) attributable to TDS shareholders				(116,030)		(9,512)		(119,814)		147,984
TDS Preferred dividend requirement				(12)		(12)		(37)		(37)
Net income (loss) available to common shareholders			$	(116,042)	$	(9,524)	$	(119,851)	$	147,947

Basic weighted average shares outstanding				108,252		108,571		108,650		108,405
Basic earnings (loss) per share attributable to TDS shareholders			$	(1.07)	$	(0.09)	$	(1.10)	$	1.36

Diluted weighted average shares outstanding				108,252		108,571		108,650		108,993
Diluted earnings (loss) per share attributable to TDS shareholders			$	(1.07)	$	(0.09)	$	(1.10)	$	1.35

Dividends per share to TDS shareholders			$	0.1340	$	0.1275	$	0.4020	$	0.3825

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)				2014		2013		2014		2013
Net income (loss)				$	(121,199)	$	(11,054)	$	(126,631)	$	174,332
Net change in accumulated other comprehensive income (loss)
	Change in net unrealized gain (loss) on equity investments				-		-		341		51
	Change in foreign currency translation adjustment				38		(34)		17		(19)
	Change related to retirement plan
		Amounts included in net periodic benefit cost for the period
			Amortization of prior service cost		(911)		(900)		(2,733)		(2,703)
			Amortization of unrecognized net loss		322		602		966		1,806
					(589)		(298)		(1,767)		(897)
			Change in deferred income taxes		224		114		671		341
		Change related to retirement plan, net of tax			(365)		(184)		(1,096)		(556)
	Net change in accumulated other comprehensive income (loss)				(327)		(218)		(738)		(524)
Comprehensive income (loss)					(121,526)		(11,272)		(127,369)		173,808
	Less: Comprehensive income (loss) attributable to noncontrolling interest				(5,169)		(1,542)		(6,817)		26,348
Comprehensive income (loss) attributable to TDS shareholders				$	(116,357)	$	(9,730)	$	(120,552)	$	147,460

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)			2014		2013
Cash flows from operating activities
	Net income (loss)		$	(126,631)	$	174,332
	Add (deduct) adjustments to reconcile net income (loss) to cash flows from operating activities
		Depreciation, amortization and accretion		635,015		751,575
		Bad debts expense		79,218		56,693
		Stock-based compensation expense		25,715		21,867
		Deferred income taxes, net		(33,242)		(30,748)
		Equity in earnings of unconsolidated entities		(108,198)		(100,303)
		Distributions from unconsolidated entities		74,864		51,879
		Loss on impairment of assets		84,000		-
		(Gain) loss on asset disposals, net		19,626		16,090
		(Gain) loss on sale of business and other exit costs, net		(9,079)		(297,637)
		(Gain) loss on investments		-		(14,518)
		(Gain) loss on license sales and exchanges		(91,446)		-
		Noncash interest expense		1,584		1,498
		Other operating activities		13		575
	Changes in assets and liabilities from operations
		Accounts receivable		(7,879)		(216,700)
		Inventory		52,078		11,114
		Accounts payable		11,034		33,312
		Customer deposits and deferred revenues		37,834		21,883
		Accrued taxes		14,307		41,838
		Accrued interest		9,105		9,451
		Other assets and liabilities		(171,707)		(94,301)
				496,211		437,900

Cash flows from investing activities
	Cash used for additions to property, plant and equipment			(553,718)		(631,370)
	Cash paid for acquisitions and licenses			(284,089)		(280,383)
	Cash received from divestitures			151,369		484,300
	Cash received for investments			10,000		80,000
	Other investing activities			5,598		13,860
				(670,840)		(333,593)

Cash flows from financing activities
	Repayment of long-term debt			(819)		(1,196)
	TDS Common Shares reissued for benefit plans, net of tax payments			486		7,537
	U.S. Cellular Common Shares reissued for benefit plans, net of tax payments			1,150		2,840
	Repurchase of TDS Common Shares			(31,293)		(5,813)
	Repurchase of U.S. Cellular Common Shares			(14,698)		(18,544)
	Dividends paid to TDS shareholders			(43,575)		(41,430)
	U.S. Cellular dividends paid to noncontrolling public shareholders			-		(75,235)
	Distributions to noncontrolling interests			(439)		(3,447)
	Other financing activities			6,870		1,589
				(82,318)		(133,699)

Net decrease in cash and cash equivalents				(256,947)		(29,392)

Cash and cash equivalents
	Beginning of period			830,014		740,481
	End of period		$	573,067	$	711,089

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)			September 30, 2014		December 31, 2013
Current assets
	Cash and cash equivalents		$	573,067	$	830,014
	Short-term investments			40,014		50,104
	Accounts receivable
		Due from customers and agents, less allowances of $41,129 and $63,690, respectively		500,168		551,611
		Other, less allowances of $2,278 and $1,914, respectively		152,319		179,503
	Inventory, net			193,694		244,560
	Net deferred income tax asset			100,951		106,077
	Prepaid expenses			89,243		87,920
	Income taxes receivable			10,522		2,397
	Other current assets			31,884		35,151
				1,691,862		2,087,337

Assets held for sale				68,288		16,027

Investments
	Licenses			1,400,808		1,423,779
	Goodwill			783,280		836,843
	Franchise rights			238,950		123,668
	Other intangible assets, net of accumulated amortization of $127,804 and $112,752, respectively			70,075		71,454
	Investments in unconsolidated entities			335,448		301,772
	Other investments			543		641
				2,829,104		2,758,157
Property, plant and equipment
	In service and under construction			11,333,716		11,239,804
	Less: Accumulated depreciation			7,497,248		7,361,660
				3,836,468		3,878,144

Other assets and deferred charges				214,826		164,482

Total assets			$	8,640,548	$	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)				September 30, 2014		December 31, 2013
Current liabilities
	Current portion of long-term debt			$	862	$	1,646
	Accounts payable				469,193		496,069
	Customer deposits and deferred revenues				330,789		289,445
	Accrued interest				15,750		6,673
	Accrued taxes				87,474		70,518
	Accrued compensation				100,297		115,031
	Other current liabilities				153,142		212,374
					1,157,507		1,191,756


Deferred liabilities and credits
	Net deferred income tax liability				823,172		862,975
	Other deferred liabilities and credits				455,360		458,709

Long-term debt					1,718,701		1,720,074

Commitments and contingencies					-		-

Noncontrolling interests with redemption features					1,007		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 132,740 shares (7,195 Series A Common and 125,545 Common Shares) and 132,711 shares (7,166 Series A Common and 125,545 Common Shares), respectively
			Outstanding 107,904 shares (7,195 Series A Common and 100,709 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			2,329,674		2,308,807
		Treasury shares at cost:
			24,836 and 23,954 Common Shares, respectively		(746,660)		(721,354)
		Accumulated other comprehensive loss			(1,307)		(569)
		Retained earnings			2,366,237		2,529,626
			Total TDS shareholders' equity		3,949,271		4,117,837

	Preferred shares				824		824
	Noncontrolling interests				534,706		551,436

		Total equity			4,484,801		4,670,097

Total liabilities and equity				$	8,640,548	$	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 (loss) attributable to TDS shareholders		-		-		-		-		(119,814)		(119,814)		-		-		(119,814)
Net income (loss) attributable to noncontrolling interests classified as equity		-		-		-		-		-		-		-		(7,209)		(7,209)
Net unrealized gain (loss) on equity investments		-		-		-		341		-		341		-		-		341
Change in foreign currency translation adjustment		-		-		-		17		-		17		-		-		17
Change related to retirement plan		-		-		-		(1,096)		-		(1,096)		-		-		(1,096)
TDS Common and Series A Common Share dividends		-		-		-		-		(43,538)		(43,538)		-		-		(43,538)
TDS Preferred dividend requirement		-		-		-		-		(37)		(37)		-		-		(37)
Repurchase of Common Shares		-		-		(31,794)		-		-		(31,794)		-		-		(31,794)
Dividend reinvestment plan		-		2,119		5,268		-		-		7,387		-		-		7,387
Incentive and compensation plans		-		(303)		1,220		-		-		917		-		-		917
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans		-		9,831		-		-		-		9,831		-		(9,004)		827
Stock-based compensation awards		-		9,821		-		-		-		9,821		-		-		9,821
Tax windfall (shortfall) from stock awards		-		(601)		-		-		-		(601)		-		-		(601)
Distributions to noncontrolling interests		-		-		-		-		-		-		-		(517)		(517)
September 30, 2014	$	1,327	$	2,329,674	$	(746,660)	$	(1,307)	$	2,366,237	$	3,949,271	$	824	$	534,706	$	4,484,801

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 (loss) attributable to TDS shareholders		-		-		-		-		147,984		147,984		-		-		147,984
Net income (loss) attributable to noncontrolling interests classified as equity		-		-		-		-		-		-		-		26,301		26,301
Net unrealized gain (loss) on equity investments		-		-		-		51		-		51		-		-		51
Change in foreign currency translation adjustment		-		-		-		(19)		-		(19)		-		-		(19)
Change related to retirement plan		-		-		-		(556)		-		(556)		-		-		(556)
TDS Common and Series A Common Share dividends		-		-		-		-		(41,393)		(41,393)