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 June 30, 2015

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 June 30, 2015

Common Shares, $0.01 par value

101,363,899 Shares

Series A Common Shares, $0.01 par value

7,196,018 Shares

Telephone and Data Systems, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended June 30, 2015

Index

Page No.

Part I.

Financial Information

Item 1.

Financial Statements (Unaudited)

4

Consolidated Statement of Operations

4

Three and Six Months Ended June 30, 2015 and 2014

Consolidated Statement of Comprehensive Income

5

Three and Six Months Ended June 30, 2015 and 2014

Consolidated Statement of Cash Flows

6

Six Months Ended June 30, 2015 and 2014

Consolidated Balance Sheet

7

June 30, 2015 and December 31, 2014

Consolidated Statement of Changes in Equity

9

Six Months Ended June 30, 2015 and 2014

Notes to Consolidated Financial Statements

11

Item 2.

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

26

Overview

26

Regulatory Matters

30

Six Months Ended June 30, 2015 and 2014

Results of Operations — Consolidated

31

Results of Operations — U.S. Cellular

33

Results of Operations — TDS Telecom

37

Three Months Ended June 30, 2015 and 2014

Results of Operations — Consolidated

42

Results of Operations — U.S. Cellular

44

Results of Operations — TDS Telecom

46

Recent Accounting Pronouncements

48

Liquidity and Capital Resources

49

Application of Critical Accounting Policies and Estimates

53

Safe Harbor Cautionary Statement

54

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

56

Item 4.

Controls and Procedures

56

Part II. 

Other Information

Item 1.

Legal Proceedings

57

Item1A.

Risk Factors

57

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

57

Item 5.

Other Information

58

Item 6.

Exhibits

59

Signatures

Three months ended

Six Months Ended

June 30,

June 30,

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

2015

2014

2015

2014

Operating revenues

Service

$

1,070,650 

$

1,072,179 

$

2,143,741 

$

2,152,421 

Equipment and product sales

205,745 

164,213 

384,247 

279,933 

Total operating revenues

1,276,395 

1,236,392 

2,527,988 

2,432,354 

Operating expenses

Cost of services (excluding Depreciation,

  amortization and accretion reported below)

300,152 

286,488 

593,799 

562,446 

Cost of equipment and products

298,450 

313,011 

570,431 

619,658 

Selling, general and administrative

435,430 

470,902 

873,470 

934,571 

Depreciation, amortization and accretion

211,104 

204,567 

417,679 

429,486 

(Gain) loss on asset disposals, net

4,752 

7,903 

10,129 

10,333 

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

(5,589)

2,611 

(129,372)

(4,289)

(Gain) loss on license sales and exchanges, net

(25)

– 

(122,898)

(91,446)

Total operating expenses

1,244,274 

1,285,482 

2,213,238 

2,460,759 

Operating income (loss)

32,121 

(49,090)

314,750 

(28,405)

Investment and other income (expense)

Equity in earnings of unconsolidated entities

35,412 

34,790 

70,053 

72,117 

Interest and dividend income

10,117 

2,751 

18,502 

5,237 

Interest expense

(33,919)

(27,898)

(67,749)

(56,605)

Other, net

202 

50 

198 

210 

Total investment and other income

11,812 

9,693 

21,004 

20,959 

Income (loss) before income taxes

43,933 

(39,397)

335,754 

(7,446)

Income tax expense (benefit)

17,433 

(13,671)

133,453 

(2,014)

Net income (loss)

26,500 

(25,726)

202,301 

(5,432)

Less: Net income (loss) attributable to noncontrolling

  interests, net of tax

3,454 

(3,688)

33,515 

(1,648)

Net income (loss) attributable to TDS shareholders

23,046 

(22,038)

168,786 

(3,784)

TDS Preferred dividend requirement

(12)

(12)

(25)

(25)

Net income (loss) available to common shareholders

$

23,034 

$

(22,050)

$

168,761 

$

(3,809)

Basic weighted average shares outstanding

108,484 

108,719 

108,327 

108,853 

Basic earnings (loss) per share attributable to TDS

  shareholders

$

0.21 

$

(0.20)

$

1.56 

$

(0.04)

Diluted weighted average shares outstanding

109,785 

108,719 

109,380 

108,853 

Diluted earnings (loss) per share attributable to TDS

  shareholders

$

0.21 

$

(0.20)

$

1.53 

$

(0.04)

Dividends per share to TDS shareholders

$

0.141 

$

0.134 

$

0.282 

$

0.268 

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

Three months ended

Six Months Ended

June 30,

June 30,

(Dollars in thousands)

2015

2014

2015

2014

Net income (loss)

$

26,500 

$

(25,726)

$

202,301 

$

(5,432)

Net change in accumulated other

comprehensive income (loss)

Change in net unrealized gain (loss) on equity

investments

(353)

341 

(353)

341 

Change in foreign currency translation adjustment

(39)

(17)

(3)

(21)

Change related to retirement plan

Amounts included in net periodic benefit cost for

the period

Amortization of prior service cost

(852)

(911)

(1,704)

(1,822)

Amortization of unrecognized net loss

64 

322 

129 

644 

(788)

(589)

(1,575)

(1,178)

Changes in deferred income taxes

298 

224 

609 

447 

Change related to retirement plan, net of tax

(490)

(365)

(966)

(731)

Net change in accumulated other comprehensive

(882)

(41)

(1,322)

(411)

income (loss)

Comprehensive income (loss)

25,618 

(25,767)

200,979 

(5,843)

Less: Comprehensive income (loss) attributable to

3,454 

(3,688)

33,515 

(1,648)

noncontrolling interest

Comprehensive income (loss) attributable to

$

22,164 

$

(22,079)

$

167,464 

$

(4,195)

TDS shareholders

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

Six Months Ended

June 30,

(Dollars in thousands)

2015

2014

Cash flows from operating activities

Net income (loss)

$

202,301 

$

(5,432)

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

  from operating activities

Depreciation, amortization and accretion

417,679 

429,486 

Bad debts expense

54,599 

52,098 

Stock-based compensation expense

17,949 

15,488 

Deferred income taxes, net

(40,640)

(33,346)

Equity in earnings of unconsolidated entities

(70,053)

(72,117)

Distributions from unconsolidated entities

27,226 

65,569 

(Gain) loss on asset disposals, net

10,129 

10,333 

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

(129,372)

(4,289)

(Gain) loss on license sales and exchanges, net

(122,898)

(91,446)

Noncash interest expense

1,363 

1,014 

Other operating activities

(387)

3 

Changes in assets and liabilities from operations

Accounts receivable

(17,935)

67,136 

Equipment installment plans receivable

(65,124)

(47,971)

Inventory

127,021 

38,674 

Accounts payable

29,589 

(43,132)

Customer deposits and deferred revenues

(7,005)

13,139 

Accrued taxes

191,508 

1,049 

Accrued interest

361 

22 

Other assets and liabilities

(87,880)

(80,636)

538,431 

315,642 

Cash flows from investing activities

Cash used for additions to property, plant and equipment

(359,513)

(339,907)

Cash paid for acquisitions and licenses

(280,710)

(18,681)

Cash received from divestitures and exchanges

291,888 

125,905 

Cash received for investments

– 

10,000 

Other investing activities

2,328 

3,720 

(346,007)

(218,963)

Cash flows from financing activities

Repayment of long-term debt

(434)

(589)

TDS Common Shares reissued for benefit plans, net of tax payments

9,831 

401 

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

(1,570)

830 

Repurchase of TDS Common Shares

– 

(20,090)

Repurchase of U.S. Cellular Common Shares

(2,302)

(8,298)

Dividends paid to TDS shareholders

(30,530)

(29,107)

Payment of debt issuance costs

(3,080)

– 

Distributions to noncontrolling interests

(5,872)

(482)

Other financing activities

1,181 

5,502 

(32,776)

(51,833)

Net increase in cash and cash equivalents

159,648 

44,846 

Cash and cash equivalents

Beginning of period

471,901 

830,014 

End of period

$

631,549 

$

874,860 

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

June 30,

December 31,

(Dollars in thousands)

2015

2014

Current assets

Cash and cash equivalents

$

631,549 

$

471,901 

Accounts receivable

Due from customers and agents, less allowances of $43,485 and $41,431, respectively

588,085 

548,537 

Other, less allowances of $1,153 and $1,141, respectively

115,807 

135,144 

Inventory, net

146,686 

273,707 

Net deferred income tax asset

92,881 

107,686 

Prepaid expenses

102,975 

86,506 

Income taxes receivable

426 

113,708 

Other current assets

30,480 

29,766 

1,708,889 

1,766,955 

Assets held for sale

22,203 

103,343 

Investments

Licenses

1,837,792 

1,453,574 

Goodwill

771,119 

771,352 

Franchise rights

244,300 

244,300 

Other intangible assets, net of accumulated amortization of $139,086 and $133,823,

respectively

55,123 

64,499 

Investments in unconsolidated entities

364,205 

321,729 

Other investments

465 

508 

3,273,004 

2,855,962 

Property, plant and equipment

In service and under construction

11,203,446 

11,194,044 

Less: Accumulated depreciation

7,476,991 

7,347,919 

3,726,455 

3,846,125 

Other assets and deferred charges

255,761 

334,554