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 March 31, 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 March 31, 2014

Common Shares, $0.01 par value

101,573,846 Shares

Series A Common Shares, $0.01 par value

7,175,948 Shares

Telephone and Data Systems, Inc.

Quarterly Report on Form 10-Q
For the Quarterly Period Ended March 31, 2014

Index
				Page No.
Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited)			1

		Consolidated Statement of Operations			1
			Three Months Ended March 31, 2014 and 2013

		Consolidated Statement of Comprehensive Income			2
			Three Months Ended March 31, 2014 and 2013

		Consolidated Statement of Cash Flows			3
			Three Months Ended March 31, 2014 and 2013

		Consolidated Balance Sheet			4
			March 31, 2014 and December 31, 2013

		Consolidated Statement of Changes in Equity			6
			Three Months Ended March 31, 2014 and 2013

		Notes to Consolidated Financial Statements			8

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations			22

		Overview			22

		Three Months Ended March 31, 2014 and 2013
			Results of Operations — Consolidated		26
			Results of Operations — U.S. Cellular		28
			Results of Operations — TDS Telecom		33

		Recent Accounting Pronouncements			38

		Financial Resources			38

		Liquidity and Capital Resources			39

		Application of Critical Accounting Policies and Estimates			42

		Safe Harbor Cautionary Statement			43

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk			46

	Item 4.	Controls and Procedures			47

Part II.	Other Information

	Item 1.	Legal Proceedings			48

	Item1A.	Risk Factors			48

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			48

	Item 5.	Other Information			49

	Item 6.	Exhibits			50

Signatures

Table of Contents

Part I. Financial Information
Item 1. Financial Statements

Telephone and Data Systems, Inc. Consolidated Statement of Operations (Unaudited)

			Three Months Ended
			March 31,
(Dollars and shares in thousands, except per share amounts)			2014		2013
Operating revenues
	Service		$	1,080,242	$	1,198,902
	Equipment and product sales			115,720		109,671
		Total operating revenues		1,195,962		1,308,573

Operating expenses
	Cost of services (excluding Depreciation, amortization and accretion reported below)			275,958		299,127
	Cost of equipment and products			306,647		260,765
	Selling, general and administrative			463,669		486,903
	Depreciation, amortization and accretion			224,919		242,077
	(Gain) loss on asset disposals, net			2,430		5,616
	(Gain) loss on sale of business and other exit costs, net			(6,900)		6,931
	(Gain) loss on license sales and exchanges			(91,446)		-
		Total operating expenses		1,175,277		1,301,419

Operating income				20,685		7,154

Investment and other income (expense)
	Equity in earnings of unconsolidated entities			37,327		27,089
	Interest and dividend income			2,486		1,578
	Interest expense			(28,707)		(24,498)
	Other, net			160		(154)
		Total investment and other income		11,266		4,015

Income before income taxes				31,951		11,169
	Income tax expense			11,657		4,180
Net income				20,294		6,989
Less: Net income attributable to noncontrolling interests, net of tax				2,040		5,570
Net income attributable to TDS shareholders				18,254		1,419
TDS Preferred dividend requirement				(12)		(12)
Net income available to common shareholders			$	18,242	$	1,407

Basic weighted average shares outstanding				108,988		108,255
Basic earnings per share attributable to TDS shareholders			$	0.17	$	0.01

Diluted weighted average shares outstanding				109,672		108,693
Diluted earnings per share attributable to TDS shareholders			$	0.16	$	0.01

Dividends per share to TDS shareholders			$	0.1340	$	0.1275

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

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Telephone and Data Systems, Inc. Consolidated Statement of Comprehensive Income (Unaudited)

				Three Months Ended
				March 31,
(Dollars in thousands)				2014		2013
Net income				$	20,294	$	6,989
Net change in accumulated other comprehensive income (loss)
	Change in foreign currency translation adjustment				(4)		15
	Change related to retirement plan
		Amounts included in net periodic benefit cost for the period
			Amortization of prior service cost		(911)		(902)
			Amortization of unrecognized net loss		322		602
					(589)		(300)
			Change in deferred income taxes		224		114
		Change related to retirement plan, net of tax			(365)		(186)
	Net change in accumulated other comprehensive income (loss)				(369)		(171)
Comprehensive income					19,925		6,818
	Less: Comprehensive income attributable to noncontrolling interest				2,040		5,570
Comprehensive income attributable to TDS shareholders				$	17,885	$	1,248

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

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Telephone and Data Systems, Inc. Consolidated Statement of Cash Flows (Unaudited)
			Three Months Ended
			March 31,
(Dollars in thousands)			2014		2013
Cash flows from operating activities
	Net income		$	20,294	$	6,989
	Add (deduct) adjustments to reconcile net income to net cash flows from operating activities
		Depreciation, amortization and accretion		224,919		242,077
		Bad debts expense		21,559		17,874
		Stock-based compensation expense		6,759		7,585
		Deferred income taxes, net		(14,510)		3,009
		Equity in earnings of unconsolidated entities		(37,327)		(27,089)
		Distributions from unconsolidated entities		12,820		8,089
		(Gain) loss on asset disposals, net		2,430		5,616
		(Gain) loss on sale of business and other exit costs, net		(6,900)		6,931
		(Gain) loss on license sales and exchanges		(91,446)		-
		Noncash interest expense		506		497
		Other operating activities		47		256
	Changes in assets and liabilities from operations
		Accounts receivable		92,949		34,038
		Inventory		19,656		16,860
		Accounts payable		(53,403)		(3,203)
		Customer deposits and deferred revenues		(1,447)		7,904
		Accrued taxes		(1,634)		5,309
		Accrued interest		9,136		9,279
		Other assets and liabilities		(99,471)		(95,669)
				104,937		246,352

Cash flows from investing activities
	Cash used for additions to property, plant and equipment			(150,890)		(176,318)
	Cash paid for acquisitions and licenses			(8,254)		(14,150)
	Cash received from divestitures			103,042		-
	Cash received for investments			10,000		-
	Other investing activities			1,623		6,364
				(44,479)		(184,104)

Cash flows from financing activities
	Repayment of long-term debt			(392)		(328)
	TDS Common Shares reissued for benefit plans, net of tax payments			(50)		140
	U.S. Cellular Common Shares reissued for benefit plans, net of tax payments			316		123
	Repurchase of TDS Common Shares			(3,342)		-
	Repurchase of U.S. Cellular Common Shares			(2,000)		(18,425)
	Dividends paid to TDS shareholders			(14,582)		(13,792)
	Distributions to noncontrolling interests			(346)		(2,396)
	Other financing activities			2,834		(1,351)
				(17,562)		(36,029)

Net increase in cash and cash equivalents				42,896		26,219

Cash and cash equivalents
	Beginning of period			830,014		740,481
	End of period		$	872,910	$	766,700

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

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Telephone and Data Systems, Inc. Consolidated Balance Sheet — Assets (Unaudited)
(Dollars in thousands)			March 31, 2014		December 31, 2013
Current assets
	Cash and cash equivalents		$	872,910	$	830,014
	Short-term investments			40,056		50,104
	Accounts receivable
		Due from customers and agents, less allowances of $56,112 and $63,690, respectively		424,451		551,611
		Other, less allowances of $2,165 and $1,914, respectively		190,558		179,503
	Inventory, net			224,904		244,560
	Net deferred income tax asset			106,077		106,077
	Prepaid expenses			89,344		87,920
	Income taxes receivable			5,679		2,397
	Other current assets			35,154		35,151
				1,989,133		2,087,337

Assets held for sale				-		16,027

Investments
	Licenses			1,448,598		1,423,779
	Goodwill			836,843		836,843
	Franchise rights			123,668		123,668
	Other intangible assets, net of accumulated amortization of $117,767 and $112,752, respectively			66,439		71,454
	Investments in unconsolidated entities			326,279		301,772
	Other investments			611		641
				2,802,438		2,758,157
Property, plant and equipment
	In service and under construction			11,253,631		11,239,804
	Less: Accumulated depreciation			7,474,498		7,361,660
				3,779,133		3,878,144

Other assets and deferred charges				178,599		164,482

Total assets			$	8,749,303	$	8,904,147

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

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Telephone and Data Systems, Inc. Consolidated Balance Sheet — Liabilities and Equity (Unaudited)
(Dollars and shares in thousands)				March 31, 2014		December 31, 2013
Current liabilities
	Current portion of long-term debt			$	1,415	$	1,646
	Accounts payable				414,015		496,069
	Customer deposits and deferred revenues				287,999		289,445
	Accrued interest				15,757		6,673
	Accrued taxes				72,761		70,518
	Accrued compensation				65,486		115,031
	Other current liabilities				167,746		212,374
					1,025,179		1,191,756

Deferred liabilities and credits
	Net deferred income tax liability				847,850		862,975
	Other deferred liabilities and credits				477,305		458,709

Long-term debt					1,720,031		1,720,074

Commitments and contingencies					-		-

Noncontrolling interests with redemption features					543		536

Equity
	TDS shareholders’ equity
		Series A Common and Common Shares
			Authorized 290,000 shares (25,000 Series A Common and 265,000 Common Shares)
			Issued 132,721 shares (7,176 Series A Common and 125,545 Common Shares) and 132,711 shares (7,166 Series A Common and 125,545 Common Shares), respectively
			Outstanding 108,750 shares (7,176 Series A Common and 101,574 Common Shares) and 108,757 shares (7,166 Series A Common and 101,591 Common Shares), respectively
			Par Value ($.01 per share) of $1,327 ($72 Series A Common and $1,255 Common Shares)		1,327		1,327
		Capital in excess of par value			2,313,682		2,308,807
		Treasury shares at cost:
			23,971 and 23,954 Common Shares, respectively		(722,658)		(721,354)
		Accumulated other comprehensive loss			(938)		(569)
		Retained earnings			2,533,298		2,529,626
			Total TDS shareholders' equity		4,124,711		4,117,837

	Preferred shares				824		824
	Noncontrolling interests				552,860		551,436

		Total equity			4,678,395		4,670,097

Total liabilities and equity				$	8,749,303	$	8,904,147

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

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Telephone and Data Systems, Inc. Consolidated Statement of Changes in Equity (Unaudited)

	TDS Shareholders
(Dollars in thousands)	Series A Common and Common Shares		Capital in Excess of Par Value		Treasury Common Shares		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total TDS Shareholders' Equity		Preferred Shares		Non controlling Interests		Total Equity
December 31, 2013	$	1,327	$	2,308,807	$	(721,354)	$	(569)	$	2,529,626	$	4,117,837	$	824	$	551,436	$	4,670,097
Add (Deduct)
Net income attributable to TDS shareholders		-		-		-		-		18,254		18,254		-		-		18,254
Net income attributable to noncontrolling interests classified as equity		-		-		-		-		-		-		-		2,011		2,011
Change in foreign currency translation adjustment		-		-		-		(4)		-		(4)		-		-		(4)
Change related to retirement plan		-		-		-		(365)		-		(365)		-		-		(365)
TDS Common and Series A Common Share dividends		-		-		-		-		(14,570)		(14,570)		-		-		(14,570)
TDS Preferred dividend requirement		-		-		-		-		(12)		(12)		-		-		(12)
Repurchase of Common Shares		-		-		(3,843)		-		-		(3,843)		-		-		(3,843)
Dividend reinvestment plan		-		800		1,874		-		-		2,674		-		-		2,674
Incentive and compensation plans		-		(284)		665		-		-		381		-		-		381
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans		-		2,780		-		-		-		2,780		-		(262)		2,518
Stock-based compensation awards		-		2,011		-		-		-		2,011		-		-		2,011
Tax windfall (shortfall) from stock awards		-		(432)		-		-		-		(432)		-		-		(432)
Distributions to noncontrolling interests		-		-		-		-		-		-		-		(325)		(325)
March 31, 2014	$	1,327	$	2,313,682	$	(722,658)	$	(938)	$	2,533,298	$	4,124,711	$	824	$	552,860	$	4,678,395

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

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Telephone and Data Systems, Inc. Consolidated Statement of Changes in Equity (Unaudited)

	TDS Shareholders
(Dollars in thousands)	Series A Common and Common Shares		Capital in Excess of Par Value		Treasury Common Shares		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total TDS Shareholders' Equity		Preferred Shares		Non controlling Interests		Total Equity
December 31, 2012	$	1,327	$	2,304,122	$	(750,099)	$	(8,132)	$	2,464,318	$	4,011,536	$	825	$	643,966	$	4,656,327
Add (Deduct)
Net income attributable to TDS shareholders		-		-		-		-		1,419		1,419		-		-		1,419
Net income attributable to noncontrolling interests classified as equity		-		-		-		-		-		-		-		5,597		5,597
Change in foreign currency translation adjustment		-		-		-		15		-		15		-		-		15
Change related to retirement plan		-		-		-		(186)		-		(186)		-		-		(186)
TDS Common and Series A Common Share dividends		-		-		-		-		(13,780)		(13,780)		-		-		(13,780)
TDS Preferred dividend requirement		-		-		-		-		(12)		(12)		-		-		(12)
Dividend reinvestment plan		-		-		3		-		(2)		1		-		-		1
Incentive and compensation plans		-		534		2,265		-		(2,223)		576		-		-		576
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans		-		6,561		-		-		-		6,561		-		(20,009)		(13,448)
Stock-based compensation awards		-		2,395		-		-		-		2,395		-		-		2,395
Tax windfall (shortfall) from stock awards		-		(532)		-		-		-		(532)		-		-		(532)
Distributions to noncontrolling interests		-		-		-		-		-		-		-		(2,396)		(2,396)
Adjust investment in subsidiaries for noncontrolling interest purchases		-		(10,295)		-		-		-		(10,295)		-		5,299		(4,996)
March 31, 2013	$	1,327	$	2,302,785	$	(747,831)	$	(8,303)	$	2,449,720	$	3,997,698	$	825	$	632,457	$	4,630,980

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

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Telephone and Data Systems, Inc.

Notes to Consolidated Financial Statements

1. Basis of Presentation

The accounting policies of Telephone and Data Systems, Inc. (“TDS”) conform to accounting principles generally accepted in the United States of America (“GAAP”) as set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The consolidated financial statements include the accounts of TDS and its majority-owned subsidiaries, including TDS’ 84%-owned wireless telephone subsidiary, United States Cellular Corporation (“U.S. Cellular”) and TDS’ wholly-owned subsidiary, TDS Telecommunications Corporation (“TDS Telecom”). In addition, the consolidated financial statements include certain entities in which TDS has a variable interest that require consolidation under GAAP. All material intercompany accounts and transactions have been eliminated.

The consolidated financial statements included herein have been prepared by TDS, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, TDS believes that the disclosures included herein are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in TDS’ Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2013.

TDS’ business segments reflected in this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014 are U.S. Cellular, TDS Telecom’s Wireline, Cable and Hosted and Managed Services (“HMS”) operations, and the Non-Reportable Segment which includes TDS’ majority-owned printing and distribution company, Suttle-Straus, Inc. (“Suttle-Straus”) and TDS’ wholly-owned wireless telephone subsidiary, Airadigm Communications, Inc. (“Airadigm”). Periods presented for comparative purposes have been re-presented to conform to this segment presentation. All of TDS’ segments operate only in the United States, except for HMS, which includes an insignificant foreign operation. See Note 11 — Business Segment Information for summary financial information on each business segment.

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

Recently Issued Accounting Pronouncements

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

Reclassifications

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

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

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Amounts Collected from Customers and Remitted to Governmental Authorities

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

2. Fair Value Measurements

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

		Level within the Fair Value Hierarchy	March 31, 2014				December 31, 2013
		Level within the Fair Value Hierarchy	Book Value		Fair Value		Book Value		Fair Value
(Dollars in thousands)
Cash and cash equivalents		1	$	872,910	$	872,910	$	830,014	$	830,014
Short-term investments
	U.S. Treasury Notes	1		40,056		40,056		50,104		50,104
Long-term debt
	Retail	1		1,178,250		1,170,617		1,178,250		1,048,010
	Institutional and other	2		537,408		536,843		537,454		512,635

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

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

3. Income Taxes

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

4. Earnings Per Share

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

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

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		Three Months Ended
		March 31,
		2014		2013
(Dollars and shares in thousands, except per share amounts)
Basic earnings per share attributable to TDS shareholders:
	Net income available to common shareholders of TDS used in basic earnings per share	$	18,242	$	1,407
Adjustments to compute diluted earnings:
	Noncontrolling interest adjustment		(165)		(37)
	Net income attributable to common shareholders of TDS used in diluted earnings per share	$	18,077	$	1,370

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