UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[x]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

OR

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                    to                                   

Commission file number 001-14157

TELEPHONE AND DATA SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

Delaware

36-2669023

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

30 North LaSalle Street, Suite 4000, Chicago, Illinois 60602

(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code: (312) 630-1900

Indicate by check mark

Yes

No

•  whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[x]

[ ]

•  whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

[x]

[ ]

•  whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

[x]

Accelerated filer

[ ]

Non-accelerated filer

[ ]

Smaller reporting company

[ ]

•  whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[ ]

[x]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class

Outstanding at September 30, 2015

Common Shares, $0.01 par value

101,556,713 Shares

Series A Common Shares, $0.01 par value

7,204,168 Shares

Telephone and Data Systems, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended September 30, 2015

Index

Page No.

Part I.

Financial Information

Item 1.

Financial Statements (Unaudited)

1

Consolidated Statement of Operations

1

Three and Nine Months Ended September 30, 2015 and 2014

Consolidated Statement of Comprehensive Income (Loss)

2

Three and Nine Months Ended September 30, 2015 and 2014

Consolidated Statement of Cash Flows

3

Nine Months Ended September 30, 2015 and 2014

Consolidated Balance Sheet

4

September 30, 2015 and December 31, 2014

Consolidated Statement of Changes in Equity

6

Nine Months Ended September 30, 2015 and 2014

Notes to Consolidated Financial Statements

8

Item 2.

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

23

Overview

23

Regulatory Matters

26

Nine Months Ended September 30, 2015 and 2014

Results of Operations — Consolidated

27

Results of Operations — U.S. Cellular

29

Results of Operations — TDS Telecom

33

Three Months Ended September 30, 2015 and 2014

Results of Operations — Consolidated

38

Results of Operations — U.S. Cellular

40

Results of Operations — TDS Telecom

42

Recent Accounting Pronouncements

45

Liquidity and Capital Resources

45

Application of Critical Accounting Policies and Estimates

50

Safe Harbor Cautionary Statement

51

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

53

Item 4.

Controls and Procedures

53

Part II. 

Other Information

Item 1.

Legal Proceedings

54

Item1A.

Risk Factors

54

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

54

Item 5.

Other Information

55

Item 6.

Exhibits

56

Signatures

Three Months Ended

Nine Months Ended

September 30,

September 30,

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

2015

2014

2015

2014

Operating revenues

Service

$

1,137,767 

$

1,081,472 

$

3,281,508 

$

3,233,893 

Equipment and product sales

236,031 

198,551 

620,278 

478,484 

Total operating revenues

1,373,798 

1,280,023 

3,901,786 

3,712,377 

Operating expenses

Cost of services (excluding Depreciation,

  amortization and accretion reported below)

303,091 

297,183 

896,890 

859,629 

Cost of equipment and products

337,051 

349,209 

907,482 

968,867 

Selling, general and administrative

449,084 

465,014 

1,322,554 

1,399,585 

Depreciation, amortization and accretion

210,764 

205,529 

628,443 

635,015 

Loss on impairment of assets

– 

84,000 

– 

84,000 

(Gain) loss on asset disposals, net

4,919 

9,293 

15,048 

19,626 

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

(559)

(4,790)

(129,931)

(9,079)

(Gain) loss on license sales and exchanges, net

(23,986)

– 

(146,884)

(91,446)

Total operating expenses

1,280,364 

1,405,438 

3,493,602 

3,866,197 

Operating income (loss)

93,434 

(125,415)

408,184 

(153,820)

Investment and other income (expense)

Equity in earnings of unconsolidated entities

39,770 

36,081 

109,823 

108,198 

Interest and dividend income

9,617 

4,526 

28,119 

9,763 

Interest expense

(35,043)

(27,170)

(102,792)

(83,775)

Other, net

(56)

69 

142 

279 

Total investment and other income

14,288 

13,506 

35,292 

34,465 

Income (loss) before income taxes

107,722 

(111,909)

443,476 

(119,355)

Income tax expense

45,327 

9,290 

178,780 

7,276 

Net income (loss)

62,395 

(121,199)

264,696 

(126,631)

Less: Net income (loss) attributable to noncontrolling

  interests, net of tax

11,312 

(5,169)

44,827 

(6,817)

Net income (loss) attributable to TDS shareholders

51,083 

(116,030)

219,869 

(119,814)

TDS Preferred dividend requirement

(12)

(12)

(37)

(37)

Net income (loss) available to common shareholders

$

51,071 

$

(116,042)

$

219,832 

$

(119,851)

Basic weighted average shares outstanding

108,848 

108,252 

108,503 

108,650 

Basic earnings (loss) per share attributable to TDS

  shareholders

$

0.47 

$

(1.07)

$

2.03 

$

(1.10)

Diluted weighted average shares outstanding

110,214 

108,252 

109,737 

108,650 

Diluted earnings (loss) per share attributable to TDS

  shareholders

$

0.46 

$

(1.07)

$

1.99 

$

(1.10)

Dividends per share to TDS shareholders

$

0.141 

$

0.134 

$

0.423 

$

0.402 

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

Three Months Ended

Nine Months Ended

September 30,

September 30,

(Dollars in thousands)

2015

2014

2015

2014

Net income (loss)

$

62,395 

$

(121,199)

$

264,696 

$

(126,631)

Net change in accumulated other

comprehensive income (loss)

Change in net unrealized gain (loss) on equity

investments

– 

– 

(353)

341 

Change in foreign currency translation adjustment

23 

38 

20 

17 

Change related to retirement plan

Amounts included in net periodic benefit cost for

the period

Change in prior service cost

(8,263)

(911)

(9,967)

(2,733)

Change in unrecognized net loss

(1,124)

322 

(994)

966 

(9,387)

(589)

(10,961)

(1,767)

Changes in deferred income taxes

3,550 

224 

4,158 

671 

Change related to retirement plan, net of tax

(5,837)

(365)

(6,803)

(1,096)

Net change in accumulated other comprehensive

(5,814)

(327)

(7,136)

(738)

income (loss)

Comprehensive income (loss)

56,581 

(121,526)

257,560 

(127,369)

Less: Comprehensive income (loss) attributable to

11,312 

(5,169)

44,827 

(6,817)

noncontrolling interest

Comprehensive income (loss) attributable to

$

45,269 

$

(116,357)

$

212,733 

$

(120,552)

TDS shareholders

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

Nine Months Ended

September 30,

(Dollars in thousands)

2015

2014

Cash flows from operating activities

Net income (loss)

$

264,696 

$

(126,631)

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

  from operating activities

Depreciation, amortization and accretion

628,443 

635,015 

Bad debts expense

83,368 

79,218 

Stock-based compensation expense

28,961 

25,715 

Deferred income taxes, net

(39,516)

(33,242)

Equity in earnings of unconsolidated entities

(109,823)

(108,198)

Distributions from unconsolidated entities

45,047 

74,864 

Loss on impairment of assets

– 

84,000 

(Gain) loss on asset disposals, net

15,048 

19,626 

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

(129,931)

(9,079)

(Gain) loss on license sales and exchanges, net

(146,884)

(91,446)

Noncash interest expense

2,058 

1,584 

Other operating activities

(701)

13 

Changes in assets and liabilities from operations

Accounts receivable

(93,540)

70,653 

Equipment installment plans receivable

(95,799)

(131,520)

Inventory

89,821 

52,078 

Accounts payable

125,123 

11,034 

Customer deposits and deferred revenues

(49,970)

28,684 

Accrued taxes

211,803 

14,307 

Accrued interest

10,798 

9,105 

Other assets and liabilities

(112,084)

(109,569)

726,918 

496,211 

Cash flows from investing activities

Cash used for additions to property, plant and equipment

(558,112)

(553,718)

Cash paid for acquisitions and licenses

(286,710)

(284,089)

Cash received from divestitures and exchanges

324,772 

151,369 

Cash received for investments

– 

10,000 

Other investing activities

6,338 

5,598 

(513,712)

(670,840)

Cash flows from financing activities

Issuance of long-term debt

225,000 

– 

Repayment of long-term debt

(615)

(819)

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

11,409 

486 

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

(868)

1,150 

Repurchase of TDS Common Shares

– 

(31,293)

Repurchase of U.S. Cellular Common Shares

(4,070)

(14,698)

Dividends paid to TDS shareholders

(45,859)

(43,575)

Payment of debt issuance costs

(3,101)

(1,019)

Distributions to noncontrolling interests

(6,097)

(439)

Other financing activities

4,519 

7,889 

180,318 

(82,318)

Net increase (decrease) in cash and cash equivalents

393,524 

(256,947)

Cash and cash equivalents

Beginning of period

471,901 

830,014 

End of period

$

865,425 

$

573,067 

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

September 30,

December 31,

(Dollars in thousands)

2015

2014

Current assets

Cash and cash equivalents

$

865,425 

$

471,901 

Accounts receivable

Due from customers and agents, less allowances of $45,565 and $41,431, respectively

672,845 

548,537 

Other, less allowances of $1,268 and $1,141, respectively

102,684 

135,144 

Inventory, net

183,884 

273,707 

Net deferred income tax asset

98,343 

107,686 

Prepaid expenses

119,453 

86,506 

Income taxes receivable

– 

113,708 

Other current assets

30,425 

29,766 

2,073,059 

1,766,955 

Assets held for sale

9,018 

103,343 

Investments

Licenses

1,844,197 

1,453,574 

Goodwill

765,773 

771,352 

Franchise rights

244,300 

244,300 

Other intangible assets, net of accumulated amortization of $143,286 and $133,823,

respectively

50,923 

64,499 

Investments in unconsolidated entities

386,153 

321,729 

Other investments

445 

508