UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2011
OR
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o |
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)
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Delaware |
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36-2669023 |
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(State or other jurisdiction of incorporation or organization) |
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(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 o
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 o
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.
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Large accelerated filer x |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class |
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Outstanding at September 30, 2011 |
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Common Shares, $.01 par value |
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49,962,745 Shares |
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Special Common Shares, $.01 par value |
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46,886,045 Shares |
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Series A Common Shares, $.01 par value |
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6,538,176 Shares |
Telephone and Data Systems, Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended September 30, 2011
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Consolidated Statement of Operations Three and Nine Months Ended September 30, 2011 and 2010 |
3 |
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Consolidated Statement of Cash Flows Nine Months Ended September 30, 2011 and 2010 |
4 |
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Consolidated Balance Sheet September 30, 2011 and December 31, 2010 |
5 |
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Consolidated Statement of Changes in Equity Nine Months Ended September 30, 2011 and 2010 |
7 |
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9 | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
28 | |
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28 | |
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Nine Months Ended September 30, 2011 and 2010 |
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69 | ||
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Telephone and Data Systems, Inc.
Consolidated Statement of Operations
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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(Dollars and shares in thousands, except per share amounts) |
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2011 |
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2010 |
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2011 |
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2010 |
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Operating revenues |
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$ |
1,325,423 |
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$ |
1,266,416 |
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$ |
3,863,744 |
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$ |
3,721,070 |
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Operating expenses |
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Cost of services and products (excluding Depreciation, amortization and accretion expense reported below) |
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522,396 |
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487,311 |
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1,483,041 |
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1,384,880 |
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Selling, general and administrative |
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495,415 |
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502,594 |
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1,468,624 |
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1,485,010 |
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Depreciation, amortization and accretion |
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190,039 |
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189,446 |
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573,897 |
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566,045 |
| ||||
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(Gain) loss on asset disposals and exchanges, net |
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(9,351 |
) |
2,378 |
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(4,970 |
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9,023 |
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Total operating expenses |
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1,198,499 |
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1,181,729 |
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3,520,592 |
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3,444,958 |
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Operating income |
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126,924 |
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84,687 |
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343,152 |
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276,112 |
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Investment and other income (expense) |
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Equity in earnings of unconsolidated entities |
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22,053 |
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24,147 |
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64,031 |
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75,047 |
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Interest and dividend income |
|
2,199 |
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2,785 |
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6,916 |
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7,900 |
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Gain on investment |
|
12,730 |
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— |
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26,103 |
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— |
| ||||
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Interest expense |
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(22,258 |
) |
(28,297 |
) |
(94,184 |
) |
(86,520 |
) | ||||
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Other, net |
|
115 |
|
(438 |
) |
1,501 |
|
(2,557 |
) | ||||
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Total investment and other income (expense) |
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14,839 |
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(1,803 |
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4,367 |
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(6,130 |
) | ||||
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Income before income taxes |
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141,763 |
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82,884 |
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347,519 |
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269,982 |
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Income tax expense |
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53,545 |
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29,354 |
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95,264 |
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99,904 |
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Net income |
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88,218 |
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53,530 |
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252,255 |
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170,078 |
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Less: Net income attributable to noncontrolling interests, net of tax |
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(16,924 |
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(12,111 |
) |
(45,503 |
) |
(38,373 |
) | ||||
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Net income attributable to TDS shareholders |
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71,294 |
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41,419 |
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206,752 |
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131,705 |
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Preferred dividend requirement |
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(12 |
) |
(12 |
) |
(37 |
) |
(37 |
) | ||||
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Net income available to common shareholders |
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$ |
71,282 |
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$ |
41,407 |
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$ |
206,715 |
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$ |
131,668 |
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Basic weighted average shares outstanding |
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103,487 |
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104,881 |
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103,672 |
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105,443 |
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Basic earnings per share attributable to TDS shareholders |
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$ |
0.69 |
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$ |
0.39 |
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$ |
1.99 |
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$ |
1.25 |
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Diluted weighted average shares outstanding |
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103,806 |
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105,298 |
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104,094 |
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105,800 |
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Diluted earnings per share attributable to TDS shareholders |
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$ |
0.68 |
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$ |
0.39 |
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$ |
1.98 |
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$ |
1.24 |
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Dividends per share |
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$ |
0.1175 |
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$ |
0.1125 |
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$ |
0.3525 |
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$ |
0.3375 |
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The accompanying notes are an integral part of these consolidated financial statements.
Telephone and Data Systems, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
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Nine Months Ended |
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(Dollars in thousands) |
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2011 |
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2010 |
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Cash flows from operating activities |
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Net income |
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$ |
252,255 |
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$ |
170,078 |
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Add (deduct) adjustments to reconcile net income to net cash flows from operating activities |
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Depreciation, amortization and accretion |
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573,897 |
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566,045 |
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Bad debts expense |
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49,101 |
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61,087 |
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Stock-based compensation expense |
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27,792 |
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26,055 |
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Deferred income taxes, net |
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160,436 |
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56,839 |
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Equity in earnings of unconsolidated entities |
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(64,031 |
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(75,047 |
) | ||
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Distributions from unconsolidated entities |
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52,385 |
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59,519 |
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(Gain) loss on asset disposals and exchanges, net |
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(4,970 |
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9,023 |
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Gain on investment |
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(26,103 |
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— |
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Noncash interest expense |
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17,973 |
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4,143 |
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Other operating activities |
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1,630 |
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502 |
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Changes in assets and liabilities from operations |
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Accounts receivable |
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(69,690 |
) |
(48,891 |
) | ||
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Inventory |
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(36,387 |
) |
32,571 |
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Accounts payable |
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69,929 |
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(49,034 |
) | ||
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Customer deposits and deferred revenues |
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31,191 |
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2,363 |
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Accrued taxes |
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2,011 |
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(42,843 |
) | ||
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Accrued interest |
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10,519 |
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9,343 |
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Other assets and liabilities |
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(74,673 |
) |
(16,973 |
) | ||
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973,265 |
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764,780 |
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Cash flows from investing activities |
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Additions to property, plant and equipment |
|
(643,396 |
) |
(486,138 |
) | ||
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Cash paid for acquisitions and licenses |
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(105,184 |
) |
(28,264 |
) | ||
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Cash paid for investments |
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(101,000 |
) |
(433,750 |
) | ||
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Cash received for investments |
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268,686 |
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40,765 |
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Other investing activities |
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(3,703 |
) |
1,681 |
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(584,597 |
) |
(905,706 |
) | ||
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Cash flows from financing activities |
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Repayment of long-term debt |
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(613,933 |
) |
(2,182 |
) | ||
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Issuance of long-term debt |
|
643,700 |
|
— |
| ||
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TDS Common Shares and Special Common Shares reissued for benefit plans, net of tax payments |
|
1,402 |
|
1,183 |
| ||
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U.S. Cellular Common Shares reissued for benefit plans, net of tax payments |
|
1,755 |
|
738 |
| ||
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Repurchase of TDS Common and Special Common Shares |
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(21,500 |
) |
(50,543 |
) | ||
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Repurchase of U.S. Cellular Common Shares |
|
(62,294 |
) |
(40,520 |
) | ||
|
Dividends paid |
|
(36,496 |
) |
(35,502 |
) | ||
|
Payment of debt issuance costs |
|
(21,650 |
) |
— |
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Distributions to noncontrolling interests |
|
(1,676 |
) |
(5,828 |
) | ||
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Other financing activities |
|
(35,328 |
) |
(7,404 |
) | ||
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|
|
(146,020 |
) |
(140,058 |
) | ||
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|
|
|
|
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Cash classified as held for sale |
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(11,237 |
) |
— |
| ||
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|
|
|
|
|
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Net increase (decrease) in cash and cash equivalents |
|
231,411 |
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(280,984 |
) | ||
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|
|
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Cash and cash equivalents |
|
|
|
|
| ||
|
Beginning of period |
|
368,134 |
|
670,992 |
| ||
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End of period |
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$ |
599,545 |
|
$ |
390,008 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Telephone and Data Systems, Inc.
Consolidated Balance Sheet — Assets
(Unaudited)
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|
September 30, |
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December 31, |
| ||
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(Dollars in thousands) |
|
2011 |
|
2010 |
| ||
|
|
|
|
|
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| ||
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Current assets |
|
|
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Cash and cash equivalents |
|
$ |
599,545 |
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$ |
368,134 |
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Short-term investments |
|
249,816 |
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402,882 |
| ||
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Accounts receivable |
|
|
|
|
| ||
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Due from customers and agents, less allowances of $25,667 and $28,859, respectively |
|
363,658 |
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378,976 |
| ||
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Other, less allowances of $6,249 and $6,148, respectively |
|
172,471 |
|
133,970 |
| ||
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Inventory |
|
153,077 |
|
116,330 |
| ||
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Net deferred income tax asset |
|
37,132 |
|
37,079 |
| ||
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Prepaid expenses |
|
80,742 |
|
76,935 |
| ||
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Income taxes receivable |
|
60,960 |
|
64,985 |
| ||
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Other current assets |
|
17,922 |
|
17,384 |
| ||
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|
|
1,735,323 |
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1,596,675 |
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|
|
|
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Assets held for sale |
|
60,829 |
|
— |
| ||
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|
|
|
|
|
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Investments |
|
|
|
|
| ||
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Licenses |
|
1,493,796 |
|
1,460,126 |
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Goodwill |
|
797,084 |
|
728,455 |
| ||
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Other intangible assets, net of accumulated amortization of $127,544 and $119,555, respectively |
|
54,291 |
|
30,810 |
| ||
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Investments in unconsolidated entities |
|
195,872 |
|
197,922 |
| ||
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Long-term investments |
|
85,676 |
|
102,185 |
| ||
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Other investments |
|
5,189 |
|
8,988 |
| ||
|
|
|
2,631,908 |
|
2,528,486 |
| ||
|
Property, plant and equipment |
|
|
|
|
| ||
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In service and under construction |
|
9,918,395 |
|
9,351,341 |
| ||
|
Less: Accumulated depreciation |
|
6,291,132 |
|
5,833,557 |
| ||
|
|
|
3,627,263 |
|
3,517,784 |
| ||
|
|
|
|
|
|
| ||
|
Other assets and deferred charges |
|
107,237 |
|
79,623 |
| ||
|
|
|
|
|
|
| ||
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Total assets |
|
$ |
8,162,560 |
|
$ |
7,722,568 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Telephone and Data Systems, Inc.
Consolidated Balance Sheet — Liabilities and Equity
(Unaudited)
|
|
|
September 30, |
|
December 31, |
| ||
|
(Dollars and shares in thousands) |
|
2011 |
|
2010 |
| ||
|
|
|
|
|
|
| ||
|
Current liabilities |
|
|
|
|
| ||
|
Current portion of long-term debt |
|
$ |
3,554 |
|
$ |
1,711 |
|
|
Accounts payable |
|
416,288 |
|
344,355 |
| ||
|
Customer deposits and deferred revenues |
|
203,367 |
|
171,781 |
| ||
|
Accrued interest |
|
14,678 |
|
4,308 |
| ||
|
Accrued taxes |
|
45,682 |
|
46,110 |
| ||
|
Accrued compensation |
|
76,481 |
|
99,020 |
| ||
|
Other current liabilities |
|
108,634 |
|
144,938 |
| ||
|
|
|
868,684 |
|
812,223 |
| ||
|
|
|
|
|
|
| ||
|
Liabilities held for sale |
|
858 |
|
— |
| ||
|
|
|
|
|
|
| ||
|
Deferred liabilities and credits |
|
|
|
|
| ||
|
Net deferred income tax liability |
|
771,049 |
|
589,092 |
| ||
|
Other deferred liabilities and credits |
|
363,291 |
|
354,798 |
| ||
|
|
|
|
|
|
| ||
|
Long-term debt |
|
1,528,350 |
|
1,499,862 |
| ||
|
|
|
|
|
|
| ||
|
Commitments and contingencies |
|
|
|
|
| ||
|
|
|
|
|
|
| ||
|
Noncontrolling interests with redemption features |
|
923 |
|
855 |
| ||
|
|
|
|
|
|
| ||
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Equity |
|
|
|
|
| ||
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TDS shareholders’ equity |
|
|
|
|
| ||
|
Series A Common, Special Common and Common Shares |
|
|
|
|
| ||
|
Authorized 290,000 shares (25,000 Series A Common, 165,000 Special Common and 100,000 Common Shares) |
|
|
|
|
| ||
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Issued 127,073 shares (6,538 Series A Common, 63,442 Special Common and 57,093 Common Shares) and 127,045 shares (6,510 Series A Common, 63,442 Special Common and 57,093 Common Shares), respectively |
|
|
|
|
| ||
|
Outstanding 103,387 shares (6,538 Series A Common, 46,886 Special Common and 49,963 Common Shares) and 103,936 shares (6,510 Series A Common, 47,531 Special Common and 49,895 Common Shares), respectively |
|
|
|
|
| ||
|
Par Value ($.01 per share) ($65 Series A Common, $634 Special Common and $571 Common Shares) |
|
1,270 |
|
1,270 |
| ||
|
Capital in excess of par value |
|
2,116,063 |
|
2,107,929 |
| ||
|
Special Common and Common Treasury shares at cost: |
|
|
|
|
| ||
|
Treasury shares 23,686 (16,556 Special Common and 7,130 Common Shares) and 23,109 (15,911 Special Common and 7,198 Common Shares), respectively |
|
(754,302 |
) |
(738,695 |
) | ||
|
Accumulated other comprehensive loss |
|
(2,923 |
) |
(3,208 |
) | ||
|
Retained earnings |
|
2,619,055 |
|
2,450,599 |
| ||
|
Total TDS shareholders’ equity |
|
3,979,163 |
|
3,817,895 |
| ||
|
|
|
|
|
|
| ||
|
Preferred shares |
|
830 |
|
830 |
| ||
|
Noncontrolling interests |
|
649,412 |
|
647,013 |
| ||
|
|
|
|
|
|
| ||
|
Total equity |
|
4,629,405 |
|
4,465,738 |
| ||
|
|
|
|
|
|
| ||
|
Total liabilities and equity |
|
$ |
8,162,560 |
|
$ |
7,722,568 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Telephone and Data Systems, Inc.
Consolidated Statement of Changes in Equity
(Unaudited)
|
|
|
TDS Shareholders |
|
|
|
|
|
|
| |||||||||||||||||||
|
(Dollars in thousands) |
|
Series A Common, |
|
Capital in |
|
Special Common and |
|
Accumulated |
|
Retained |
|
Total TDS |
|
Preferred Shares |
|
Non |
|
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 |
|
— |
|
— |
|
— |
|
— |
|
206,752 |
|
206,752 |
|
— |
|
— |
|
206,752 |
| |||||||||
|
Net income attributable to noncontrolling interests classified as equity |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
45,435 |
|
45,435 |
| |||||||||
|
Net unrealized gain (loss) on equity investments |
|
— |
|
— |
|
— |
|
138 |
|
— |
|
138 |
|
— |
|
— |
|
138 |
| |||||||||
|
Changes related to retirement plan |
|
— |
|
— |
|
— |
|
147 |
|
— |
|
147 |
|
— |
|
— |
|
147 |
| |||||||||
|
Common, Special Common and Series A Common Shares dividends |
|
— |
|
— |
|
— |
|
— |
|
(36,459 |
) |
(36,459 |
) |
— |
|
— |
|
(36,459 |
) | |||||||||
|
Preferred dividend requirement |
|
— |
|
— |
|
— |
|
— |
|
(37 |
) |
(37 |
) |
— |
|
— |
|
(37 |
) | |||||||||
|
Repurchase of shares |
|
— |
|
— |
|
(21,500 |
) |
— |
|
— |
|
(21,500 |
) |
— |
|
— |
|
(21,500 |
) | |||||||||
|
Dividend reinvestment plan |
|
— |
|
73 |
|
4,131 |
|
— |
|
(1,344 |
) |
2,860 |
|
— |
|
— |
|
2,860 |
| |||||||||
|
Incentive and compensation plans |
|
— |
|
540 |
|
1,762 |
|
— |
|
(456 |
) |
1,846 |
|
— |
|
— |
|
1,846 |
| |||||||||
|
Adjust investment in subsidiaries for repurchases, issuances, and other compensation plans |
|
— |
|
(4,515 |
) |
— |
|
— |
|
— |
|
(4,515 |
) |
— |
|
(41,727 |
) |
(46,242 |
) | |||||||||
|
Stock-based compensation awards (a) |
|
— |
|
12,317 |
|
— |
|
— |
|
— |
|
12,317 |
|
— |
|
— |
|
12,317 |
| |||||||||
|
Tax windfall (shortfall) from stock awards (b) |
|
— |
|
(281 |
) |
— |
|
— |
|
— |
|
(281 |
) |
— |
|
— |
|
(281 |
) | |||||||||
|
Distributions to noncontrolling interests |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(1,676 |
) |
(1,676 |
) | |||||||||
|
Other |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
367 |
|
367 |
| |||||||||
|
September 30, 2011 |
|
$ |
1,270 |
|
$ |
2,116,063 |
|
$ |
(754,302 |
) |
$ |
(2,923 |
) |
$ |
2,619,055 |
|
$ |
3,979,163 |
|
$ |
830 |
|
$ |
649,412 |
|
$ |
4,629,405 |
|
Telephone and Data Systems, Inc.
Consolidated Statement of Changes in Equity
(Unaudited)
|
|
|
TDS Shareholders |
|
|
|
|
|
|
| |||||||||||||||||||
|
(Dollars in thousands) |
|
Series A Common, |
|
Capital in |
|
Special Common and |
|
Accumulated |
|
Retained |
|
Total TDS |
|
Preferred |
|
Non |
|
Total Equity |
| |||||||||
|
December 31, 2009 |
|
$ |
1,270 |
|
$ |
2,088,807 |
|
$ |
(681,649 |
) |
$ |
(2,710 |
) |
$ |
2,361,560 |
|
$ |
3,767,278 |
|
$ |
832 |
|
$ |
662,561 |
|
$ |
4,430,671 |
|
|
Add (Deduct) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
Net income attributable to TDS shareholders |
|
— |
|
— |
|
— |
|
— |
|
131,705 |
|
131,705 |
|
— |
|
— |
|
131,705 |
| |||||||||
|
Net income attributable to noncontrolling interests classified as equity |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
38,344 |
|
38,344 |
| |||||||||
|
Net unrealized gain (loss) on equity investments |
|
— |
|
— |
|
— |
|
84 |
|
— |
|
84 |
|
— |
|
— |
|
84 |
| |||||||||
|
Changes related to retirement plan |
|
— |
|
— |
|
— |
|
(769 |
) |
— |
|
(769 |
) |
— |
|
— |
|
(769 |
) | |||||||||
|
Common, Special Common and Series A Common Shares dividends |
|
— |
|
— |
|
— |
|
— |
|
(35,465 |
) |
(35,465 |
) |
— |
|
— |
|
(35,465 |
) | |||||||||
|
Preferred dividend requirement |
|
— |
|
— |
|
— |
|
— |
|
(37 |
) |
(37 |
) |
— |
|
— |
|
(37 |
) | |||||||||
|
Repurchase of shares |
|
— |
|
— |
|
(50,543 |
) |
— |
|
(1 |
) |
(50,544 |
) |
(2 |
) |
— |
|
(50,546 |
) | |||||||||
|
Dividend reinvestment plan |
|
— |
|
— |
|
4,454 |
|
— |
|
(1,323 |
) |
3,131 |
|
— |
|
— |
|
3,131 |
| |||||||||
|
Incentive and compensation plans |
|
— |
|
433 |
|
3,205 |
|
— |
|
(2,020 |
) |
1,618 |
|
— |
|
— |
|
1,618 |
| |||||||||
|
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans |
|
— |
|
98 |
|
— |
|
— |
|
— |
|
98 |
|
— |
|
(33,517 |
) |
(33,419 |
) | |||||||||
|
Stock-based compensation awards (a) |
|
— |
|
12,516 |
|
— |
|
— |
|
— |
|
12,516 |
|
— |
|
— |
|
12,516 |
| |||||||||
|
Tax windfall (shortfall) from from stock awards (b) |
|
— |
|
28 |
|
— |
|
— |
|
— |
|
28 |
|
— |
|
— |
|
28 |
| |||||||||
|
Distributions to noncontrolling interests |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(5,828 |
) |
(5,828 |
) | |||||||||
|
September 30, 2010 |
|
$ |
1,270 |
|
$ |
2,101,882 |
|
$ |
(724,533 |
) |
$ |
(3,395 |
) |
$ |
2,454,419 |
|
$ |
3,829,643 |
|
$ |
830 |
|
$ |
661,560 |
|
$ |
4,492,033 |
|
(a) Reflects TDS Corporate and TDS Telecom’s current year stock-based compensation awards impact on Capital in excess of par value. U.S. Cellular’s amounts are included in Adjust investment in subsidiaries for repurchases, issuances and other compensation plans.
(b) Reflects tax windfalls/(shortfalls) associated with the exercise of options and the vesting of restricted stock awards of TDS Common Shares and TDS Special Common Shares. U.S. Cellular’s tax windfalls/(shortfalls) associated with the exercise of options and vesting of restricted stock awards of U.S. Cellular are included in Adjust investment in subsidiaries for repurchases, issuances, and other compensation plans.
The accompanying notes are an integral part of these consolidated financial statements.
Telephone and Data Systems, Inc.
Consolidated Statement of Comprehensive Income
(Unaudited)
|
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
|
September 30, |
|
September 30, |
| ||||||||
|
(Dollars in thousands) |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Net income |
|
$ |
88,218 |
|
$ |
53,530 |
|
$ |
252,255 |
|
$ |
170,078 |
|
|
Net change in accumulated other comprehensive income |
|
|
|
|
|
|
|
|
| ||||
|
Net unrealized gain (loss) on equity investments |
|
— |
|
— |
|
138 |
|
84 |
| ||||
|
Changes related to retirement plan |
|
49 |
|
(256 |
) |
147 |
|
(769 |
) | ||||
|
Comprehensive income |
|
88,267 |
|
53,274 |
|
252,540 |
|
169,393 |
| ||||
|
Less: Comprehensive income attributable to noncontrolling interests |
|
(16,924 |
) |
(12,111 |
) |
(45,503 |
) |
(38,373 |
) | ||||
|
Comprehensive income attributable to TDS shareholders |
|
$ |
71,343 |
|
$ |
41,163 |
|
$ |
207,037 |
|
$ |
131,020 |
|
The accompanying notes are an integral part of these consolidated financial statements.
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”), TDS’ wholly-owned wireline telephone subsidiary, TDS Telecommunications Corporation (“TDS Telecom”), TDS’ majority-owned printing and distribution company, Suttle-Straus, Inc. and TDS’ majority-owned wireless telephone subsidiary Airadigm Communications, Inc. (“Airadigm”). 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. Certain prior year amounts have been reclassified to conform to the 2011 presentation.
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, 2010.
The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items, unless otherwise disclosed) necessary to present fairly the financial position as of September 30, 2011 and December 31, 2010, the results of operations and changes in comprehensive income for the three and nine months ended September 30, 2011 and 2010 and cash flows and changes in equity for the nine months ended September 30, 2011 and 2010. The results of operations and comprehensive income for the three and nine months ended, and cash flows and changes in equity for the nine months ended September 30, 2011 are not necessarily indicative of the results to be expected for the full year.
Recent Accounting Pronouncements
On May 12, 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure. Although TDS does not currently value any financial assets or liabilities at fair value, certain assets and liabilities are disclosed at fair value (see Note 3 — Fair Value Measurements). Under ASU 2011-04, for these instruments, TDS will be required to disclose, in a tabular format, the level within the fair value hierarchy that each of these assets and liabilities are measured. TDS is required to adopt the provisions of ASU 2011-04 effective January 1, 2012. Early adoption is prohibited. The adoption of ASU 2011-04 is not expected to have a significant impact on TDS’ financial position or results of operations.
On June 16, 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 amends how other comprehensive income (“OCI”) is presented in the financial statements. Under this standard, the Statement of Operations and OCI can be presented either continuously in a Statement of Comprehensive Income or in two separate but consecutive statements. TDS is required to adopt the provisions of ASU 2011-05 effective January 1, 2012. TDS currently provides this information in two separate statements. The adoption of ASU 2011-05 is not expected to have an impact on TDS’ financial position or results of operations.
On September 15, 2011, the FASB issued ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. TDS is required to adopt the provisions of ASU 2011-08 effective January 1, 2012. Early adoption is permitted. The adoption of ASU 2011-08 is not expected to have a significant impact on TDS’ financial position or results of operations.
Agent Liabilities
U.S. Cellular has relationships with agents, which are independent businesses that obtain customers for U.S. Cellular. At September 30, 2011 and December 31, 2010, U.S. Cellular had accrued $44.2 million and $71.3 million, respectively, for amounts due to agents, including rebates and commissions. These amounts are included in Other current liabilities in the Consolidated Balance Sheet.
Amounts Collected from Customers and Remitted to Governmental Authorities
TDS records amounts collected from customers and remitted to governmental authorities net within a tax liability account if the tax is assessed upon the customer and TDS merely acts as an agent in collecting the tax on behalf of the imposing governmental authority. If the tax is assessed upon TDS, then amounts collected from customers as recovery of the tax are recorded in Operating 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 $34.2 million and $104.8 million for the three and nine months ended September 30, 2011 and $38.1 million and $118.0 million for the three and nine months ended September 30, 2010, respectively.
2. Revision of Prior Period Amounts
In preparing its financial statements for the nine months ended September 30, 2011, TDS discovered certain errors related to accounting for asset retirement obligations and asset retirement costs. These errors resulted in the overstatement of Total operating expenses, Property, plant and equipment, net and Other deferred liabilities and credits in the first and second quarter 2011 interim financial statements and in the 2010, 2009 and 2008 annual periods reported in the Company’s December 31, 2010 financial statements. The December 31, 2007 Retained earnings balance presented in the December 31, 2010 annual financial statements was also overstated as a result of these errors. In accordance with SEC Staff Accounting Bulletin Nos. 99 and 108 (“SAB 99” and “SAB 108”), TDS evaluated these errors and determined that they were immaterial to each of the reporting periods affected and, therefore, amendments of previously filed reports were not required. However, if the adjustments to correct the cumulative errors had been recorded in the third quarter 2011, TDS believes the impact would have been significant to the third quarter results and would have impacted comparisons to prior periods. As permitted by SAB 108, revisions for these immaterial amounts to previously reported annual and quarterly results are reflected in the financial information herein and will be reflected in future filings containing such financial information. In addition, TDS has recorded adjustments to prior-year amounts to correct other immaterial items. In total, the impact of all errors was an increase to Retained earnings of $1.0 million, $2.4 million and $2.2 million in 2010, 2009 and 2008, respectively.
The Consolidated Balance Sheet at December 31, 2010 was revised to reflect the cumulative effect of these errors which resulted in an increase to Retained earnings of $4.0 million. In accordance with SAB 108, the Consolidated Balance Sheet, the Consolidated Statement of Operations and the Consolidated Statement of Cash Flows have been revised as follows:
Consolidated Balance Sheet — December 31, 2010
|
|
|
As previously |
|
|
|
|
| |||
|
(Dollars in thousands) |
|
reported (1) |
|
Adjustment |
|
Revised |
| |||
|
|
|
|
|
|
|
|
| |||
|
Income taxes receivable |
|
$ |
64,386 |
|
$ |
599 |
|
$ |
64,985 |
|
|
Total current assets |
|
1,596,076 |
|
599 |
|
1,596,675 |
| |||
|
Property, plant and equipment, net |
|
3,558,334 |
|
(40,550 |
) |
3,517,784 |
| |||
|
Total assets |
|
7,762,519 |
|
(39,951 |
) |
7,722,568 |
| |||
|
Accrued interest |
|
2,718 |
|
1,590 |
|
4,308 |
| |||
|
Total current liabilities |
|
810,633 |
|
1,590 |
|
812,223 |
| |||
|
Net deferred income tax liability |
|
585,468 |
|
3,624 |
|
589,092 |
| |||
|
Other deferred liabilities and credits |
|
404,892 |
|
(50,094 |
) |
354,798 |
| |||
|
Retained earnings |
|
2,446,626 |
|
3,973 |
|
2,450,599 |
| |||
|
Total TDS shareholders’ equity |
|
3,813,922 |
|
3,973 |
|
3,817,895 |
| |||
|
Noncontrolling interests |
|
646,057 |
|
956 |
|
647,013 |
| |||
|
Total equity |
|
4,460,809 |
|
4,929 |
|
4,465,738 |
| |||
|
Total liabilities and equity |
|
7,762,519 |
|
(39,951 |
) |
7,722,568 |
| |||
Consolidated Statement of Operations — Three Months Ended September 30, 2010
|
|
|
As previously |
|
|
|
|
| |||
|
(Dollars in thousands) |
|
reported (2) |
|
Adjustment |
|
Revised |
| |||
|
|
|
|
|
|
|
|
| |||
|
Depreciation, amortization and accretion |
|
$ |
190,972 |
|
$ |
(1,526 |
) |
$ |
189,446 |
|
|
Total operating expenses |
|
1,183,255 |
|
(1,526 |
) |
1,181,729 |
| |||
|
Operating income |
|
83,161 |
|
1,526 |
|
84,687 |
| |||
|
Income before income taxes |
|
81,358 |
|
1,526 |
|
82,884 |
| |||
|
Income tax expense |
|
28,775 |
|
579 |
|
29,354 |
| |||
|
Net income |
|
52,583 |
|
947 |
|
53,530 |
| |||
|
Net income attributable to noncontrolling interests, net of tax |
|
(11,958 |
) |
(153 |
) |
(12,111 |
) | |||
|
Net income attributable to TDS shareholders |
|
40,625 |
|
794 |
|
41,419 |
| |||
|
Net income available to common shareholders |
|
40,613 |
|
794 |
|
41,407 |
| |||
|
Basic earnings per share attributable to TDS shareholders |
|
0.39 |
|
— |
|
0.39 |
| |||
|
Diluted earnings per share attributable to TDS shareholders |
|
0.38 |
|
0.01 |
|
0.39 |
| |||
Consolidated Statement of Operations — Nine Months Ended September 30, 2010
|
|
|
As previously |
|
|
|
|
| |||
|
(Dollars in thousands) |
|
reported (2) |
|
Adjustment |
|
Revised |
| |||
|
|
|
|
|
|
|
|
| |||
|
Depreciation, amortization and accretion |
|
$ |
570,619 |
|
$ |
(4,574 |
) |
$ |
566,045 |
|
|
Total operating expenses |
|
3,449,532 |
|
(4,574 |
) |
3,444,958 |
| |||
|
Operating income |
|
271,538 |
|
4,574 |
|
276,112 |
| |||
|
Income before income taxes |
|
265,408 |
|
4,574 |
|
269,982 |
| |||
|
Income tax expense |
|
98,167 |
|
1,737 |
|
99,904 |
| |||
|
Net income |
|
167,241 |
|
2,837 |
|
170,078 |
| |||
|
Net income attributable to noncontrolling interests, net of tax |
|
(37,915 |
) |
(458 |
) |
(38,373 |
) | |||
|
Net income attributable to TDS shareholders |
|
129,326 |
|
2,379 |
|
131,705 |
| |||
|
Net income available to common shareholders |
|
129,289 |
|
2,379 |
|
131,668 |
| |||
|
Basic earnings per share attributable to TDS shareholders |
|
1.23 |
|
0.02 |
|
1.25 |
| |||
|
Diluted earnings per share attributable to TDS shareholders |
|
1.22 |
|
0.02 |
|
1.24 |
| |||
Consolidated Statement of Cash Flows — Nine Months Ended September 30, 2010
|
|
|
As previously |
|
|
|
|
| |||
|
(Dollars in thousands) |
|
reported (2) |
|
Adjustment |
|
Revised |
| |||
|
|
|
|
|
|
|
|
| |||
|
Net income |
|
$ |
167,241 |
|
$ |
2,837 |
|
$ |
170,078 |
|
|
Depreciation, amortization and accretion |
|
570,619 |
|
(4,574 |
) |
566,045 |
| |||
|
Deferred income taxes, net |
|
55,102 |
|
1,737 |
|
56,839 |
| |||
|
Cash flows from operating activities |
|
764,780 |
|
— |
|
764,780 |
| |||
(1) In Annual Report on Form 10-K for the year ended December 31, 2010, filed on February 25, 2011.
(2) In Quarterly Report on Form 10-Q for the period ended September 30, 2010, filed on November 4, 2010.
3. Fair Value Measurements
As of September 30, 2011 and December 31, 2010, TDS did not have any financial 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.
|
|
|
September 30, |
|
December 31, |
| ||||||||
|
|
|
2011 |
|
2010 |
| ||||||||
|
(Dollars in thousands) |
|
Book Value |
|
Fair Value |
|
Book Value |
|
Fair Value |
| ||||
|
Cash and cash equivalents |
|
$ |
599,545 |
|
$ |
599,545 |
|
$ |
368,134 |
|
$ |
368,134 |
|
|
Short-term investments (1)(2) |
|
|
|
|
|
|
|
|
| ||||
|
Certificates of deposit |
|
53,584 |
|
53,584 |
|
97,270 |
|
97,270 |
| ||||
|
Government-backed securities (3) |
|
196,232 |
|
196,232 |
|
305,612 |
|
305,612 |
| ||||
|
Long-term investments (1)(4) |
|
|
|
|
|
|
|
|
| ||||
|
Government-backed securities (3) |
|
85,676 |
|
86,058 |
|
102,185 |
|
102,325 |
| ||||
|
Long-term debt (5) |
|
1,523,936 |
|
1,516,835 |
|
1,495,461 |
|
1,482,181 |
| ||||
(1) Designated as held-to-maturity investments and recorded at amortized cost in the Consolidated Balance Sheet.
(2) Maturities are less than twelve months from the respective balance sheet dates.
(3) Includes U.S. treasuries and corporate notes guaranteed under the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program.
(4) At September 30, 2011, maturities range between 13 and 23 months.
(5) Excludes capital lease obligations and 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 values of Long-term investments were estimated using quoted market prices for the individual issuances. The fair value of long-term debt, excluding capital lease obligations and the current portion of such long-term debt, was estimated using market prices for TDS’ 7.6% Series A notes, 7.0% senior notes, 6.875% senior notes and 6.625% senior notes, and U.S. Cellular’s 7.5% and 6.95% senior notes, and discounted cash flow analysis for remaining debt.
As of September 30, 2011 and December 31, 2010, TDS did not have nonfinancial assets or liabilities that required the application of fair value accounting for purposes of reporting such amounts in the Consolidated Balance Sheet.
4. Income Taxes
TDS’ overall effective tax rate on Income before income taxes for the three and nine months ended September 30, 2011 was 37.8% and 27.4%, respectively, and for the three and nine months ended September 30, 2010 was 35.4% and 37.0%, respectively.
The effective tax rate for the three months ended September 30, 2010 was lower than the rate for the three months ended September 30, 2011 primarily as a result of tax benefits from the favorable settlement of certain state income tax audits in 2010. The benefits from these changes, along with other discrete items, decreased income tax expense for the three months ended September 30, 2010 by $4.5 million; absent these benefits, the effective tax rate for such period would have been higher by 3.2 percentage points.
The effective tax rate for the nine months ended September 30, 2011 was lower than the rate for the nine months ended September 30, 2010 primarily as a result of tax benefits from state tax law changes and the expiration of statutes of limitations for certain tax years. The benefits from these changes, along with other discrete items, decreased income tax expense for the nine months ended September 30, 2011 by $21.5 million; absent these benefits, the effective tax rate for such period would have been higher by 10.3 percentage points.
TDS expects to incur a federal net operating loss in 2011 for federal income tax purposes as a result of 100% bonus depreciation that applies to qualified capital expenditures. TDS plans to carryback this federal net operating loss to prior tax years, and has recorded $55.5 million as a component of Income taxes receivable at September 30, 2011 primarily related to the benefit associated with this estimated federal net operating loss carryback. TDS’ future federal income tax liabilities associated with the benefits being realized from bonus depreciation are accrued as a component of Net deferred income tax liability (noncurrent) in the Consolidated Balance Sheet.
5. 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 share and the effects of potentially dilutive securities on income and the weighted average number of Common, Special Common and Series A Common Shares are as follows:
|
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
|
September 30, |
|
September 30, |
| ||||||||
|
(Dollars and shares in thousands, except per share amounts) |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Basic earnings per share attributable to TDS shareholders: |
|
|
|
|
|
|
|
|
| ||||
|
Net income available to common shareholders of TDS used in basic earnings per share |
|
$ |
71,282 |
|
$ |
41,407 |
|
$ |
206,715 |
|
$ |
131,668 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
Adjustments to compute diluted earnings: |
|
|
|
|
|
|
|
|
| ||||
|
Noncontrolling interest (1) |
|
(239 |
) |
(160 |
) |
(783 |
) |
(466 |
) | ||||
|
Preferred dividend (2) |
|
12 |
|
12 |
|
37 |
|
37 |
| ||||
|
Net income attributable to common shareholders of TDS used in diluted earnings per share |
|
$ |
71,055 |
|
$ |
41,259 |
|
$ |
205,969 |
|
$ |
131,239 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
Weighted average number of shares used in basic earnings per share: |
|
|
|
|
|
|
|
|
| ||||
|
Common Shares |
|
49,985 |
|
49,898 |
|
49,965 |
|
49,873 |
| ||||
|
Special Common Shares |
|
46,975 |
|
48,479 |
|
47,189 |
|
49,071 |
| ||||
|
Series A Common Shares |
|
6,527 |
|
6,504 |
|
6,518 |
|
6,499 |
| ||||
|
Total |
|
103,487 |
|
104,881 |
|
103,672 |
|
105,443 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Effects of dilutive securities: |
|
|
|
|
|
|
|
|
| ||||
|
Stock options |
|
9 |
|
123 |
|
149 |
|
119 |
| ||||
|
Restricted stock units |
|
244 |
|
244 |
|
207 |
|
188 |
| ||||
|
Preferred shares |
|
66 |
|
50 |
|
66 |
|
50 |
| ||||
|
Weighted average number of shares used in diluted earnings per share |
|
103,806 |
|
105,298 |
|
104,094 |
|
105,800 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Basic earnings per share attributable to TDS shareholders |
|
$ |
0.69 |
|
$ |
0.39 |
|
$ |
1.99 |
|
$ |
1.25 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
Diluted earnings per share attributable to TDS shareholders |
|
$ |
0.68 |
|
$ |
0.39 |
|
$ |
1.98 |
|
$ |
1.24 |
|
(1) The noncontrolling income adjustment reflects the additional noncontrolling share of U.S. Cellular’s income computed as if all of U.S. Cellular’s issuable securities were outstanding.
(2) The preferred dividend adjustment reflects the dividend reduction related to preferred securities that were dilutive, and therefore treated as if converted for shares.
Certain Common Shares and Special Common Shares issuable upon the exercise of stock options, vesting of restricted stock units or conversion of Convertible preferred shares were not included in average diluted shares outstanding for the calculation of Diluted earnings per share because their effects were antidilutive. The number of such Common Shares and Special Common Shares excluded is shown in the table below.
|
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||
|
|
|
September 30, |
|
September 30, |
| ||||
|
(Shares in thousands) |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
|
|
|
|
|
|
|
|
Common Shares |
|
547 |
|
620 |
|
480 |
|
606 |
|
|
Special Common Shares |
|
6,449 |
|
4,447 |
|
4,672 |
|
3,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units |
|
|
|
|
|
|
|
|
|
|
Common Shares |
|
— |
|
— |
|
— |
|
— |
|
|
Special Common Shares |
|
192 |
|
— |
|
122 |
|
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred shares |
|
|
|
|
|
|
|
|
|
|
Common Shares |
|
— |
|
— |
|
— |
|
— |
|
6. Acquisitions, Divestitures and Exchanges
TDS assesses its existing wireless and wireline interests on an ongoing basis with a goal of improving the competitiveness of its operations and maximizing its long-term return on investments. As part of this strategy, TDS reviews attractive opportunities to acquire additional wireless operating markets and wireless spectrum; and telecommunications companies and related service businesses. In addition, TDS may seek to divest outright or include in exchanges for other interests those interests that are not strategic to its long-term success.
On May 9, 2011, U.S. Cellular paid $24.6 million in cash to purchase the remaining ownership interest in a wireless business in which it previously held a 49% noncontrolling interest, pursuant to certain required terms of the partnership agreement. Prior to this acquisition, the partnership had been accounted for under the equity method of accounting. In connection with the acquisition, a $13.4 million gain was recorded to adjust the carrying value of this 49% investment to its fair value of $25.7 million based on an income approach valuation method. The gain was recorded in Gain on investment in the Consolidated Statement of Operations. U.S. Cellular is actively trying to sell this business and, as a result, $60.8 million of assets and $0.9 million of liabilities have been classified in the Consolidated Balance Sheet as “held for sale”. Included in Assets held for sale are $15.9 million of Current assets, $36.5 million of Investments (primarily licenses) and $8.4 million of Property, plant and equipment. Liabilities held for sale primarily includes Current liabilities. For the period since acquisition, this business generated revenues of $13.2 million and operating income of $9.6 million.
On July 1, 2011, TDS paid $95.0 million in cash, plus a subsequent working capital adjustment of $0.9 million, to purchase 100% of the outstanding shares of OneNeck IT Services Corporation (“OneNeck”). OneNeck is a provider of hosted application management and managed IT hosting services to middle market businesses. The acquisition of OneNeck is expected to complement TDS’ existing hosted and managed services and is included in the TDS Telecom ILEC segment for reporting purposes.
On September 23, 2011, pursuant to a plan of reorganization in the United States Bankruptcy Court for the Western District of Wisconsin, TDS acquired 63% of Airadigm and a note for $15.5 million in satisfaction of loans made by TDS to Airadigm and interests in Airadigm acquired by TDS from third-parties. Airadigm is a Wisconsin-based wireless service provider. The noncontrolling interest was valued at $0.4 million based on an income approach valuation method. TDS recognized a gain of $12.7 million as a result of the transaction which was recorded in Gain on investment in the Consolidated Statement of Operations for the three and nine months ended September 30, 2011. Airadigm operates independently from U.S. Cellular and at this time, there are no plans to combine the operations of these subsidiaries. Airadigm’s financial results are included in “Non-Reportable segment” for reporting purposes.
On September 30, 2011, U.S. Cellular completed an exchange whereby U.S. Cellular received eighteen 700 MHz spectrum licenses covering portions of Idaho, Illinois, Indiana, Kansas, Nebraska, Oregon and Washington in exchange for two PCS spectrum licenses covering portions of Illinois and Indiana. The exchange of licenses will provide U.S. Cellular with additional spectrum to meet anticipated future capacity and coverage requirements in several of its markets. No cash, customers, network assets or other assets or liabilities were included in the exchange. As a result of this transaction, TDS recognized a gain of $11.8 million, representing the difference between the fair value, calculated using a market approach valuation method, and the carrying value of the licenses surrendered. This gain was recorded in (Gain) loss on asset disposals and exchanges, net in the Consolidated Statement of Operations for the three and nine months ended September 30, 2011. The Indiana PCS spectrum included in the exchange was originally awarded to Carroll Wireless in Federal Communications Commission (“FCC”) Auction 58 and was purchased by U.S. Cellular prior to the exchange. Carroll Wireless is a variable interest entity which TDS consolidates; see Note 11 — Variable Interest Entities (VIEs) for additional information.
Acquisitions and exchanges did not have a material impact in TDS’ consolidated financial statements for the periods presented, and pro forma results, assuming acquisitions and exchanges had occurred at the beginning of each period presented, would not be materially different from the results reported.
TDS’ acquisitions during the nine months ended September 30, 2011 and 2010 and the allocation of the purchase price for these acquisitions were as follows:
|
|
|
|
|
Allocation of Purchase Price |
| |||||||||||
|
|
|
|
|
|
|
|
|
Intangible |
|
|
| |||||
|
|
|
|
|
|
|
|
|
assets |
|
Net tangible |
| |||||
|
|
|
Purchase |
|
|
|
|
|
subject to |
|
assets/ |
| |||||
|
(Dollars in thousands) |
|
price (1) |
|
Goodwill (2) |
|
Licenses |
|
amortization (3) |
|
(liabilities) |
| |||||
|
2011 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
U.S. Cellular licenses |
|
$ |
4,406 |
|
$ |
— |
|
$ |
4,406 |
|
$ |
— |
|
$ |
— |
|
|
U.S. Cellular business (4) |
|
24,572 |
|
— |
|
15,592 |
|
2,252 |
|
6,728 |
| |||||
|
TDS Telecom ILEC business |
|
95,865 |
|
68,107 |
|
— |
|
28,300 |
|
(542 |
) | |||||
|
Non-Reportable segment business |
|
983 |
|
522 |
|
15,220 |
|
3,194 |
|
(17,953 |
) | |||||
|
Total |
|
$ |
125,826 |
|
$ |
68,629 |
|
$ |
35,218 |
|
$ |
33,746 |
|
$ |
(11,767 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
2010 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
U.S. Cellular licenses |
|
$ |
10,501 |
|
$ |
— |
|
$ |
10,501 |
|
$ |
— |
|
$ |
— |
|
|
TDS Telecom ILEC business |
|
18,191 |
|
5,336 |
|
— |
|
7,900 |
|
4,955 |
| |||||
|
Total |
|
$ |
28,692 |
|
$ |
5,336 |
|
$ |
10,501 |
|
$ |
7,900 |
|
$ |
4,955 |
|
(1) Cash amounts paid for acquisitions may differ from the purchase price due to cash acquired in the transactions and the timing and amounts of cash payments related to the respective transactions.
(2) In 2011, $0.7 million of acquired goodwill was amortizable for income tax purposes. No goodwill was acquired in 2010 that was amortizable for tax purposes.
(3) The weighted average amortization period for Intangible assets subject to amortization acquired in 2011 and 2010 was 8 years.
(4) Includes only the acquired interest and does not include amounts attributable to U.S. Cellular’s pre-existing noncontrolling interest described above in this Note 6.
7. Licenses and Goodwill
Changes in TDS’ licenses and goodwill for the nine months ended September 30, 2011 and 2010 are presented below.
Licenses
|
|
|
U.S. |
|
|
|
Non-Reportable |
|
|
| ||||
|
(Dollars in thousands) |
|
Cellular (1) |
|
TDS Telecom |
|
segment (2) |
|
Total |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Balance, beginning of period December 31, 2010 |
|
$ |
1,457,326 |
|
$ |
2,800 |
|
$ |
— |
|
$ |
1,460,126 |
|
|
Acquisitions (3) |
|
4,406 |
|
— |
|
15,220 |
|
19,626 |
| ||||
|
Exchanges |
|
11,842 |
|
— |
|
— |
|
11,842 |
| ||||
|
Other |
|
2,202 |
|
— |
|
— |
|
2,202 |
| ||||
|
Balance, end of period September 30, 2011 |
|
$ |
1,475,776 |
|
$ |
2,800 |
|
$ |
15,220 |
|
$ |
1,493,796 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
Balance, beginning of period December 31, 2009 |
|
$ |
1,440,225 |
|
$ |
2,800 |
|
$ |
— |
|
$ |
1,443,025 |
|
|
Acquisitions |
|
10,501 |
|
— |
|
— |
|
10,501 |
| ||||
|
Balance, end of period September 30, 2010 |
|
$ |
1,450,726 |
|
$ |
2,800 |
|
$ |
— |
|
$ |
1,453,526 |
|
Goodwill
|
|
|
U.S. |
|
TDS |
|
Non-Reportable |
|
|
| ||||
|
(Dollars in thousands) |
|
Cellular (1) |
|
Telecom (4) |
|
segment (2) |
|
Total |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Assigned value at time of acquisition |
|
$ |
622,681 |
|
$ |
465,312 |
|
$ |
3,802 |
|
$ |
1,091,795 |
|
|
Accumulated impairment losses in prior periods |
|
(333,900 |
) |
(29,440 |
) |
— |
|
(363,340 |
) | ||||
|
Balance, beginning of period December 31, 2010 |
|
288,781 |
|
435,872 |
|
3,802 |
|
728,455 |
| ||||
|
Acquisitions |
|
— |
|
68,107 |
|
522 |
|
68,629 |
| ||||
|
Balance, end of period September 30, 2011 |
|
$ |
288,781 |
|
$ |
503,979 |
|
$ |
4,324 |
|
$ |
797,084 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
Assigned value at time of acquisition |
|
$ |
617,222 |
|
$ |
450,156 |
|
$ |
3,802 |
|
$ |
1,071,180 |
|
|
Accumulated impairment losses in prior periods |
|
(333,900 |
) |
(29,440 |
) |
— |
|
(363,340 |
) | ||||
|
Balance, beginning of period December 31, 2009 |
|
283,322 |
|
420,716 |
|
3,802 |
|
707,840 |
| ||||
|
Acquisitions |
|
— |
|
5,336 |
|
— |
|
5,336 |
| ||||
|
Other (5) |
|
5,459 |
|
— |
|
— |
|
5,459 |
| ||||
|
Balance, end of period September 30, 2010 |
|
$ |
288,781 |
|
$ |
426,052 |
|
$ |
3,802 |
|
$ |
718,635 |
|
(1) Prior to January 1, 2009, TDS accounted for U.S. Cellular’s share repurchases as step acquisitions, allocating a portion of the share repurchase value to TDS licenses and goodwill, as required by GAAP in effect at that time. Consequently, U.S. Cellular’s licenses, goodwill and accumulated impairment loss reported on a stand-alone basis do not match the TDS consolidated licenses, goodwill and accumulated impairment losses related to U.S. Cellular.
(2) ‘‘Non-Reportable segment’’ consists of amounts related to Suttle-Straus and Airadigm. See Note 6 — Acquisitions, Divestitures and Exchanges for additional information related to Airadigm.
(3) Does not include amounts reported as Assets held for sale in the Consolidated Balance Sheet.
(4) Remaining goodwill at TDS Telecom is attributed to the ILEC business segment.
(5) Amount reclassified from Investments in unconsolidated entities to Goodwill in June 2010.
Goodwill and Licenses Impairment Assessment
Goodwill and licenses must be assessed for impairment annually or more frequently if events or changes in circumstances indicate that such assets might be impaired. TDS performs annual impairment testing of goodwill and licenses, as required by GAAP, in the fourth quarter of its fiscal year, based on fair values and net carrying values determined as of November 1.
During the third quarter of 2011, the deterioration of macroeconomic conditions and financial markets coupled with a sustained decrease in TDS’ stock price resulted in a triggering event, as defined by GAAP, requiring an interim impairment test of goodwill and licenses as of September 30, 2011. TDS performed an interim impairment assessment of goodwill and licenses as of September 30, 2011. The assessment resulted in no impairment of either goodwill or licenses.
8. Investments in Unconsolidated Entities
Investments in unconsolidated entities consist of amounts invested in wireless and wireline entities in which TDS holds a noncontrolling interest. These investments are accounted for using either the equity or cost method.
Equity in earnings of unconsolidated entities totaled $22.1 million and $24.1 million in the three months ended September 30, 2011 and 2010, respectively, and $64.0 million and $75.0 million in the nine months ended, respectively; of those amounts, TDS’ investment in the Los Angeles SMSA Limited Partnership (“LA Partnership”) contributed $16.6 million and $16.1 million in the three months ended September 30, 2011 and 2010, respectively, and $43.7 million and $49.5 million in the nine months ended September 30, 2011 and 2010, respectively. TDS held a 5.5% ownership interest in the LA Partnership during these periods.
The following table, which is based on information provided in part by third parties, summarizes the combined results of operations of TDS’ equity method investments:
|
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
|
September 30, |
|
September 30, |
| ||||||||
|
(Dollars in thousands) |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
| ||||
|
Revenues |
|
$ |
1,392,000 |
|
$ |
1,266,000 |
|||||||