UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[x]

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the quarterly period ended June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OR

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[ ]

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the transition period from                                    to                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commission file number 001-14157

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TELEPHONE AND DATA SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

Delaware

 

 

36-2669023

(State or other jurisdiction of incorporation or organization)

 

 

(IRS Employer Identification No.)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

(Address of principal executive offices) (Zip code)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indicate by check mark

Yes

No

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

[x]

[ ]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

[x]

[ ]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Large accelerated filer

[x]

Accelerated filer

[ ]

Non-accelerated filer

[ ]

Smaller reporting company

[ ]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

[ ]

[x]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class

 

 

Outstanding at June 30, 2015

Common Shares, $0.01 par value

 

 

101,363,899 Shares

Series A Common Shares, $0.01 par value

 

 

7,196,018 Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Telephone and Data Systems, Inc.

 

Quarterly Report on Form 10-Q

For the Quarterly Period Ended June 30, 2015

 

Index

 

Page No.

Part I.

Financial Information

 

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

4

 

 

 

 

 

 

Consolidated Statement of Operations

4

 

 

 

Three and Six Months Ended June 30, 2015 and 2014

 

 

 

 

 

 

 

 

Consolidated Statement of Comprehensive Income

5

 

 

 

Three and Six Months Ended June 30, 2015 and 2014

 

 

 

 

 

 

 

 

Consolidated Statement of Cash Flows

6

 

 

 

Six Months Ended June 30, 2015 and 2014

 

 

 

 

 

 

 

 

Consolidated Balance Sheet

7

 

 

 

June 30, 2015 and December 31, 2014

 

 

 

 

 

 

 

 

Consolidated Statement of Changes in Equity

9

 

 

 

Six Months Ended June 30, 2015 and 2014

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

11

 

 

 

 

 

 

Item 2.

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

26

 

 

 

 

 

 

 

Overview

26

 

 

 

 

 

 

 

Regulatory Matters

30

 

 

 

 

 

 

 

Six Months Ended June 30, 2015 and 2014

 

 

 

 

Results of Operations — Consolidated

31

 

 

 

Results of Operations — U.S. Cellular

33

 

 

 

Results of Operations — TDS Telecom

37

 

 

 

 

 

 

 

Three Months Ended June 30, 2015 and 2014

 

 

 

 

Results of Operations — Consolidated

42

 

 

 

Results of Operations — U.S. Cellular

44

 

 

 

Results of Operations — TDS Telecom

46

 

 

 

 

 

 

 

Recent Accounting Pronouncements

48

 

 

 

 

 

 

 

Liquidity and Capital Resources

49

 

 

 

 

 

 

Application of Critical Accounting Policies and Estimates

53

 

 

 

 

 

 

Safe Harbor Cautionary Statement

54

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

56

 

 

 

 

 

 

Item 4.

Controls and Procedures

56

 

 

 

 


Part II. 

Other Information

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

57

 

 

 

 

 

 

Item1A.

Risk Factors

57

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

57

 

 

 

 

 

 

Item 5.

Other Information

58

 

 

 

 

 

 

Item 6.

Exhibits

59

 

 

 

 

Signatures


Part I.  Financial Information

Item 1.  Financial Statements

Telephone and Data Systems, Inc.

Consolidated Statement of Operations

(Unaudited)

 

 

 

 

 

Three months ended

 

Six Months Ended

 

 

 

 

June 30,

 

June 30,

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

2015

 

2014

 

2015

 

2014

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

Service

$

1,070,650 

 

$

1,072,179 

 

$

2,143,741 

 

$

2,152,421 

 

Equipment and product sales

 

205,745 

 

 

164,213 

 

 

384,247 

 

 

279,933 

 

 

Total operating revenues

 

1,276,395 

 

 

1,236,392 

 

 

2,527,988 

 

 

2,432,354 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services (excluding Depreciation,

  amortization and accretion reported below)

 

300,152 

 

 

286,488 

 

 

593,799 

 

 

562,446 

 

Cost of equipment and products

 

298,450 

 

 

313,011 

 

 

570,431 

 

 

619,658 

 

Selling, general and administrative

 

435,430 

 

 

470,902 

 

 

873,470 

 

 

934,571 

 

Depreciation, amortization and accretion

 

211,104 

 

 

204,567 

 

 

417,679 

 

 

429,486 

 

(Gain) loss on asset disposals, net

 

4,752 

 

 

7,903 

 

 

10,129 

 

 

10,333 

 

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

 

(5,589)

 

 

2,611 

 

 

(129,372)

 

 

(4,289)

 

(Gain) loss on license sales and exchanges, net

 

(25)

 

 

 

 

 

(122,898)

 

 

(91,446)

 

 

Total operating expenses

 

1,244,274 

 

 

1,285,482 

 

 

2,213,238 

 

 

2,460,759 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

32,121 

 

 

(49,090)

 

 

314,750 

 

 

(28,405)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment and other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated entities

 

35,412 

 

 

34,790 

 

 

70,053 

 

 

72,117 

 

Interest and dividend income

 

10,117 

 

 

2,751 

 

 

18,502 

 

 

5,237 

 

Interest expense

 

(33,919)

 

 

(27,898)

 

 

(67,749)

 

 

(56,605)

 

Other, net

 

202 

 

 

50 

 

 

198 

 

 

210 

 

 

Total investment and other income

 

11,812 

 

 

9,693 

 

 

21,004 

 

 

20,959 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

43,933 

 

 

(39,397)

 

 

335,754 

 

 

(7,446)

 

Income tax expense (benefit)

 

17,433 

 

 

(13,671)

 

 

133,453 

 

 

(2,014)

Net income (loss)

 

26,500 

 

 

(25,726)

 

 

202,301 

 

 

(5,432)

Less: Net income (loss) attributable to noncontrolling

  interests, net of tax

 

3,454 

 

 

(3,688)

 

 

33,515 

 

 

(1,648)

Net income (loss) attributable to TDS shareholders

 

23,046 

 

 

(22,038)

 

 

168,786 

 

 

(3,784)

TDS Preferred dividend requirement

 

(12)

 

 

(12)

 

 

(25)

 

 

(25)

Net income (loss) available to common shareholders

$

23,034 

 

$

(22,050)

 

$

168,761 

 

$

(3,809)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

108,484 

 

 

108,719 

 

 

108,327 

 

 

108,853 

Basic earnings (loss) per share attributable to TDS

  shareholders

$

0.21 

 

$

(0.20)

 

$

1.56 

 

$

(0.04)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

109,785 

 

 

108,719 

 

 

109,380 

 

 

108,853 

Diluted earnings (loss) per share attributable to TDS

  shareholders

$

0.21 

 

$

(0.20)

 

$

1.53 

 

$

(0.04)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per share to TDS shareholders

$

0.141 

 

$

0.134 

 

$

0.282 

 

$

0.268 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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


 

Telephone and Data Systems, Inc.

Consolidated Statement of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

Three months ended

 

Six Months Ended

 

 

 

 

 

June 30,

 

June 30,

(Dollars in thousands)

2015

 

2014

 

2015

 

2014

Net income (loss)

$

26,500 

 

$

(25,726)

 

$

202,301 

 

$

(5,432)

Net change in accumulated other

 

 

 

 

 

 

 

 

 

 

 

 

comprehensive income (loss)

 

 

Change in net unrealized gain (loss) on equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

investments

 

(353)

 

 

341 

 

 

(353)

 

 

341 

 

 

Change in foreign currency translation adjustment

 

(39)

 

 

(17)

 

 

(3)

 

 

(21)

 

 

Change related to retirement plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts included in net periodic benefit cost for

 

 

 

 

 

 

 

 

 

 

 

 

 

the period

 

 

 

 

Amortization of prior service cost

 

(852)

 

 

(911)

 

 

(1,704)

 

 

(1,822)

 

 

 

 

Amortization of unrecognized net loss

 

64 

 

 

322 

 

 

129 

 

 

644 

 

 

 

 

 

 

(788)

 

 

(589)

 

 

(1,575)

 

 

(1,178)

 

 

 

Changes in deferred income taxes

 

298 

 

 

224 

 

 

609 

 

 

447 

 

 

Change related to retirement plan, net of tax

 

(490)

 

 

(365)

 

 

(966)

 

 

(731)

 

 

Net change in accumulated other comprehensive

 

(882)

 

 

(41)

 

 

(1,322)

 

 

(411)

 

 

income (loss)

Comprehensive income (loss)

 

25,618 

 

 

(25,767)

 

 

200,979 

 

 

(5,843)

 

 

Less: Comprehensive income (loss) attributable to

 

3,454 

 

 

(3,688)

 

 

33,515 

 

 

(1,648)

 

 

noncontrolling interest

Comprehensive income (loss) attributable to

$

22,164 

 

$

(22,079)

 

$

167,464 

 

$

(4,195)

 

TDS shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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


Telephone and Data Systems, Inc.

Consolidated Statement of Cash Flows

(Unaudited)

 

 

 

 

Six Months Ended

 

 

 

 

June 30,

(Dollars in thousands)

2015

 

2014

Cash flows from operating activities

 

 

 

 

 

 

Net income (loss)

$

202,301 

 

$

(5,432)

 

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

 

 

 

 

 

 

  from operating activities

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

417,679 

 

 

429,486 

 

 

 

Bad debts expense

 

54,599 

 

 

52,098 

 

 

 

Stock-based compensation expense

 

17,949 

 

 

15,488 

 

 

 

Deferred income taxes, net

 

(40,640)

 

 

(33,346)

 

 

 

Equity in earnings of unconsolidated entities

 

(70,053)

 

 

(72,117)

 

 

 

Distributions from unconsolidated entities

 

27,226 

 

 

65,569 

 

 

 

(Gain) loss on asset disposals, net

 

10,129 

 

 

10,333 

 

 

 

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

 

(129,372)

 

 

(4,289)

 

 

 

(Gain) loss on license sales and exchanges, net

 

(122,898)

 

 

(91,446)

 

 

 

Noncash interest expense

 

1,363 

 

 

1,014 

 

 

 

Other operating activities

 

(387)

 

 

3 

 

Changes in assets and liabilities from operations

 

 

 

 

 

 

 

 

Accounts receivable

 

(17,935)

 

 

67,136 

 

 

 

Equipment installment plans receivable

 

(65,124)

 

 

(47,971)

 

 

 

Inventory

 

127,021 

 

 

38,674 

 

 

 

Accounts payable

 

29,589 

 

 

(43,132)

 

 

 

Customer deposits and deferred revenues

 

(7,005)

 

 

13,139 

 

 

 

Accrued taxes

 

191,508 

 

 

1,049 

 

 

 

Accrued interest

 

361 

 

 

22 

 

 

 

Other assets and liabilities

 

(87,880)

 

 

(80,636)

 

 

 

 

 

538,431 

 

 

315,642 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

Cash used for additions to property, plant and equipment

 

(359,513)

 

 

(339,907)

 

Cash paid for acquisitions and licenses

 

(280,710)

 

 

(18,681)

 

Cash received from divestitures and exchanges

 

291,888 

 

 

125,905 

 

Cash received for investments

 

 

 

 

10,000 

 

Other investing activities

 

2,328 

 

 

3,720 

 

 

 

 

 

(346,007)

 

 

(218,963)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

Repayment of long-term debt

 

(434)

 

 

(589)

 

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

 

9,831 

 

 

401 

 

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

 

(1,570)

 

 

830 

 

Repurchase of TDS Common Shares

 

 

 

 

(20,090)

 

Repurchase of U.S. Cellular Common Shares

 

(2,302)

 

 

(8,298)

 

Dividends paid to TDS shareholders

 

(30,530)

 

 

(29,107)

 

Payment of debt issuance costs

 

(3,080)

 

 

 

 

Distributions to noncontrolling interests

 

(5,872)

 

 

(482)

 

Other financing activities

 

1,181 

 

 

5,502 

 

 

 

 

 

(32,776)

 

 

(51,833)

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

159,648 

 

 

44,846 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

Beginning of period

 

471,901 

 

 

830,014 

 

End of period

$

631,549 

 

$

874,860 

 

 

 

 

 

 

 

 

 

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

 


 

Telephone and Data Systems, Inc.

Consolidated Balance Sheet — Assets

 (Unaudited)

  

 

 

June 30,

 

December 31,

(Dollars in thousands)

2015

 

2014

Current assets

 

 

 

 

 

 

Cash and cash equivalents

$

631,549 

 

$

471,901 

 

Accounts receivable

 

 

 

 

 

 

 

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

 

588,085 

 

 

548,537 

 

 

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

 

115,807 

 

 

135,144 

 

Inventory, net

 

146,686 

 

 

273,707 

 

Net deferred income tax asset

 

92,881 

 

 

107,686 

 

Prepaid expenses

 

102,975 

 

 

86,506 

 

Income taxes receivable

 

426 

 

 

113,708 

 

Other current assets

 

30,480 

 

 

29,766 

 

 

 

 

 

1,708,889 

 

 

1,766,955 

 

 

 

 

 

 

 

 

 

Assets held for sale

 

22,203 

 

 

103,343 

 

 

 

 

 

 

 

 

 

Investments

 

 

 

 

 

 

Licenses

 

1,837,792 

 

 

1,453,574 

 

Goodwill

 

771,119 

 

 

771,352 

 

Franchise rights

 

244,300 

 

 

244,300 

 

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

 

 

 

 

 

 

 

respectively

 

55,123 

 

 

64,499 

 

Investments in unconsolidated entities

 

364,205 

 

 

321,729 

 

Other investments

 

465 

 

 

508 

 

 

 

 

 

3,273,004 

 

 

2,855,962 

Property, plant and equipment

 

 

 

 

 

 

In service and under construction

 

11,203,446 

 

 

11,194,044 

 

Less: Accumulated depreciation

 

7,476,991 

 

 

7,347,919 

 

 

 

 

 

3,726,455 

 

 

3,846,125 

 

 

 

 

 

 

 

 

 

Other assets and deferred charges

 

255,761 

 

 

334,554 

 

 

 

 

 

 

 

 

 

Total assets

$

8,986,312 

 

$

8,906,939 

 

 

 

 

 

 

 

 

 

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


 

Telephone and Data Systems, Inc.

Consolidated Balance Sheet — Liabilities and Equity

 (Unaudited)

  

 

June 30,

 

December 31,

(Dollars and shares in thousands)

2015

 

2014

Current liabilities

 

 

 

 

 

 

Current portion of long-term debt

$

747 

 

$

808 

 

Accounts payable

 

345,747 

 

 

387,125 

 

Customer deposits and deferred revenues

 

317,759 

 

 

324,318 

 

Accrued interest

 

8,276 

 

 

7,919 

 

Accrued taxes

 

121,144 

 

 

46,734 

 

Accrued compensation

 

92,994 

 

 

114,549 

 

Other current liabilities

 

134,516 

 

 

181,803 

 

 

 

 

 

1,021,183 

 

 

1,063,256 

 

 

 

 

 

 

 

 

 

Liabilities held for sale

 

 

 

 

21,643 

 

 

 

 

 

 

 

 

 

Deferred liabilities and credits

 

 

 

 

 

 

Net deferred income tax liability

 

885,462 

 

 

941,519 

 

Other deferred liabilities and credits

 

436,810 

 

 

430,774 

 

 

 

 

 

 

 

 

 

Long-term debt

 

1,993,429 

 

 

1,993,586 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interests with redemption features

 

1,178 

 

 

1,150 

 

 

 

 

 

 

 

 

 

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 132,766 shares (7,196 Series A Common and 125,570 Common Shares) and 132,749 shares (7,179 Series A Common and 125,570 Common Shares), respectively

 

 

 

 

 

 

 

 

Outstanding 108,559 shares (7,196 Series A Common and 101,363 Common Shares) and 107,899 shares (7,179 Series A Common and 100,720 Common Shares), respectively

 

 

 

 

 

 

 

 

Par Value ($.01 per share) $1,327 ($72 Series A Common and $1,255 Common Shares)

 

1,327 

 

 

1,327 

 

 

Capital in excess of par value

 

2,342,587 

 

 

2,336,511 

 

 

Treasury shares at cost:

 

 

 

 

 

 

 

 

24,207 and 24,850 Common Shares, respectively

 

(735,218)

 

 

(748,199)

 

 

Accumulated other comprehensive income

 

5,130 

 

 

6,452 

 

 

Retained earnings

 

2,468,070 

 

 

2,330,187 

 

 

 

Total TDS shareholders' equity

 

4,081,896 

 

 

3,926,278 

 

 

 

 

 

 

 

 

 

 

Preferred shares

 

824 

 

 

824 

 

Noncontrolling interests

 

565,530 

 

 

527,909 

 

 

 

 

 

 

 

 

 

 

 

Total equity

 

4,648,250 

 

 

4,455,011 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

$

8,986,312 

 

$

8,906,939 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

Series A

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common and

 

Capital in

 

Treasury

 

Other

 

 

 

Total TDS

 

 

 

Non

 

 

 

Common

 

Excess of

 

Common

 

Comprehensive

 

Retained

 

Shareholders'

 

Preferred

 

controlling

 

Total

(Dollars in thousands)

Shares

 

Par Value

 

Shares

 

Income (Loss)

 

Earnings

 

Equity

 

Shares

 

Interests

 

Equity

December 31, 2014

$

1,327 

 

$

2,336,511 

 

$

(748,199)

 

$

6,452 

 

$

2,330,187 

 

$

3,926,278 

 

$

824 

 

$

527,909 

 

$

4,455,011 

Add (Deduct)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to

  TDS shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

168,786 

 

 

168,786 

 

 

 

 

 

 

 

 

168,786 

Net income attributable  

  to noncontrolling interests

  classified as equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27,847 

 

 

27,847 

Net unrealized gain

   (loss) on equity investments

 

 

 

 

 

 

 

 

 

 

(353)

 

 

 

 

 

(353)

 

 

 

 

 

 

 

 

(353)

Change in foreign currency

  translation adjustment

 

 

 

 

 

 

 

 

 

 

(3)

 

 

 

 

 

(3)

 

 

 

 

 

 

 

 

(3)

Change related to retirement 

  plan

 

 

 

 

 

 

 

 

 

 

(966)

 

 

 

 

 

(966)

 

 

 

 

 

 

 

 

(966)

TDS Common and Series A  

  Common Share dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

(30,505)

 

 

(30,505)

 

 

 

 

 

 

 

 

(30,505)

TDS Preferred dividend 

  requirement

 

 

 

 

 

 

 

 

 

 

 

 

 

(25)

 

 

(25)

 

 

 

 

 

 

 

 

(25)

Dividend reinvestment plan

 

 

 

 

1,612 

 

 

3,755 

 

 

 

 

 

 

 

 

5,367 

 

 

 

 

 

 

 

 

5,367 

Incentive and compensation

  plans

 

 

 

 

1,166 

 

 

9,226 

 

 

 

 

 

(373)

 

 

10,019 

 

 

 

 

 

 

 

 

10,019 

Adjust investment in

  subsidiaries for repurchases,

  issuances and other compensation

  plans

 

 

 

 

(2,830)

 

 

 

 

 

 

 

 

 

 

 

(2,830)

 

 

 

 

 

10,007 

 

 

7,177 

Stock-based compensation

  awards

 

 

 

 

6,262 

 

 

 

 

 

 

 

 

 

 

 

6,262 

 

 

 

 

 

 

 

 

6,262 

Tax windfall (shortfall) from

  stock awards

 

 

 

 

(134)

 

 

 

 

 

 

 

 

 

 

 

(134)

 

 

 

 

 

 

 

 

(134)

Distributions to

  noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(233)

 

 

(233)

June 30, 2015

$

1,327 

 

$

2,342,587 

 

$

(735,218)

 

$

5,130 

 

$

2,468,070 

 

$

4,081,896 

 

$

824 

 

$

565,530 

 

$

4,648,250 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

Series A

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common and

 

Capital in

 

Treasury

 

Other

 

 

 

Total TDS

 

 

 

Non

 

 

 

Common

 

Excess of

 

Common

 

Comprehensive

 

Retained

 

Shareholders'

 

Preferred

 

controlling

 

Total

(Dollars in thousands)

Shares

 

Par Value

 

Shares

 

Income (Loss)

 

Earnings

 

Equity

 

Shares

 

Interests

 

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 loss attributable to

  TDS shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,784)

 

 

(3,784)

 

 

 

 

 

 

 

 

(3,784)

Net loss attributable  

  to noncontrolling interests

  classified as equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,045)

 

 

(2,045)

Net unrealized gain

   on equity investments

 

 

 

 

 

 

 

 

 

 

341 

 

 

 

 

 

341 

 

 

 

 

 

 

 

 

341 

Change in foreign currency

  translation adjustment

 

 

 

 

 

 

 

 

 

 

(21)

 

 

 

 

 

(21)

 

 

 

 

 

 

 

 

(21)

Change related to retirement 

  plan

 

 

 

 

 

 

 

 

 

 

(731)

 

 

 

 

 

(731)

 

 

 

 

 

 

 

 

(731)

TDS Common and Series A  

  Common Share dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

(29,082)

 

 

(29,082)

 

 

 

 

 

 

 

 

(29,082)

TDS Preferred dividend 

  requirement

 

 

 

 

 

 

 

 

 

 

 

 

 

(25)

 

 

(25)

 

 

 

 

 

 

 

 

(25)

Repurchase of Common Shares

 

 

 

 

 

 

 

(21,096)

 

 

 

 

 

 

 

 

(21,096)

 

 

 

 

 

 

 

 

(21,096)

Dividend reinvestment plan

 

 

 

 

1,470 

 

 

3,468 

 

 

 

 

 

 

 

 

4,938 

 

 

 

 

 

 

 

 

4,938 

Incentive and compensation

  plans

 

 

 

 

(314)

 

 

1,147 

 

 

 

 

 

 

 

 

833 

 

 

 

 

 

 

 

 

833 

Adjust investment in

  subsidiaries for repurchases,

  issuances and other compensation

  plans

 

 

 

 

(2,224)

 

 

 

 

 

 

 

 

 

 

 

(2,224)

 

 

 

 

 

3,662 

 

 

1,438 

Stock-based compensation

  awards

 

 

 

 

5,354 

 

 

 

 

 

 

 

 

 

 

 

5,354 

 

 

 

 

 

 

 

 

5,354 

Tax windfall (shortfall) from

  stock awards

 

 

 

 

(578)

 

 

 

 

 

 

 

 

 

 

 

(578)

 

 

 

 

 

 

 

 

(578)

Distributions to

  noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(459)

 

 

(459)

June 30, 2014

$

1,327 

 

$

2,312,515 

 

$

(737,835)

 

$

(980)

 

$

2,496,735 

 

$

4,071,762 

 

$

824 

 

$

552,594 

 

$

4,625,180 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 subsidiaries in which it has a controlling financial interest, 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.  Certain prior year amounts have been reclassified to conform to the 2015 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, 2014.

TDS’ business segments reflected in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015 are U.S. Cellular, TDS Telecom’s Wireline, Cable, and Hosted and Managed Services (“HMS”) operations.  TDS’ non-reportable other business activities are presented as “Corporate, Eliminations and Other”, which includes the operations of TDS’ wholly-owned subsidiaries Suttle-Straus, Inc. (“Suttle-Straus”) and  Airadigm Communications, Inc. (“Airadigm”).  Suttle-Straus and Airadigm’s financial results were not significant to TDS’ operations.  All of TDS’ segments operate only in the United States, except for HMS, which includes an insignificant foreign operation.  See Note 12Business 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 June 30, 2015 and December 31, 2014, and the results of operations and changes in comprehensive income for the three and six months ended June 30, 2015 and 2014 and cash flows and changes in equity for the six months ended June 30, 2015 and 2014. These results are not necessarily indicative of the results to be expected for the full year.

Recently Issued Accounting Pronouncements

On May 28, 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”).  ASU 2014-09 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers.  ASU 2014-09 has an effective date of January 1, 2017.  However, on July 9, 2015, the FASB affirmed a proposal to defer the effective date for one year to January 1, 2018.  Under this proposal, early adoption as of January 1, 2017 also would be permissible; however, TDS does not intend to adopt early.  TDS is evaluating the effects that adoption of ASU 2014-09 will have on its financial position, results of operations, and disclosures.

On August 27, 2014, the FASB issued Accounting Standards Update 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).  ASU 2014-15 requires TDS to assess its ability to continue as a going concern each interim and annual reporting period and provide certain disclosures if there is substantial doubt about the entity’s ability to continue as a going concern, including management’s plan to alleviate the substantial doubt.  TDS is required to adopt the provisions of ASU 2014-15 for the annual period ending December 31, 2016, but early adoption is permitted.  The adoption of ASU 2014-15 will not impact TDS’ financial position or results of operations but may impact future disclosures.

On February 18, 2015, the FASB issued Accounting Standards Update 2015-02, Consolidation: Amendments to the Consolidation Analysis (“ASU 2015-02”).  ASU 2015-02 simplifies consolidation accounting by reducing the number of consolidation models. Additionally, ASU 2015-02 changes certain criteria for identifying variable interest entities.  TDS is required to adopt the provisions of ASU 2015-02 effective January 1, 2016.  Early adoption is permitted.  TDS expects that certain consolidated subsidiaries that are not defined as variable interest entities under current accounting guidance will be defined as variable interest entities under the provisions of ASU 2015-02.  However, TDS does not expect the adoption of ASU 2015-02 to change the group of entities which TDS is required to consolidate in its financial statements.  Accordingly, TDS does not expect the adoption of ASU 2015-02 to impact its financial position or results of operations.  However, additional disclosures are expected.

On April 7, 2015, the FASB issued Accounting Standards Update 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires certain debt issuance costs to be presented in the balance sheet as an offset to the related debt obligation.  TDS is required to apply the provisions of this update effective January 1, 2016 on a retrospective basis.  Early adoption is permitted.  As of June 30, 2015, TDS had $54.8 million in debt issuance costs classified as Other assets and deferred charges that, upon adoption of the new standard, would be reclassified as an offset to Long-term debt.

On July 22, 2015, the FASB issued Accounting Standards Update 2015-11, Inventory: Simplifying the Measurement of Inventory (“ASU 2015-11”), which requires inventory to be measured at the lower of cost or net realizable value.  TDS is required to adopt ASU 2015-11 on January 1, 2017.  Early adoption is permitted.  TDS is evaluating the effects that adoption of ASU 2015-11 will have on its financial position and results of operations.

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 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 $25.2 million and $51.5 million for the three and six months ended June 30, 2015, respectively, and $29.1 million and $60.1 million for the three and six months ended June 30, 2014, respectively.

 

 

2.    Fair Value Measurements

As of June 30, 2015 and December 31, 2014, 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.

The provisions of GAAP establish a fair value hierarchy that contains three levels for inputs used in fair value measurements.  Level 1 inputs include quoted market prices for identical assets or liabilities in active markets.  Level 2 inputs include quoted market prices for similar assets and liabilities in active markets or quoted market prices for identical assets and liabilities in inactive markets.  Level 3 inputs are unobservable.  A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  A financial instrument’s level within the fair value hierarchy is not representative of its expected performance or its overall risk profile and, therefore, Level 3 assets are not necessarily higher risk than Level 2 or Level 1 assets.

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

 

 

 

June 30, 2015

 

December 31, 2014

 

 

 

 

 

 

Book Value

 

Fair Value

 

Book Value

 

Fair Value

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

1

 

 

 

$

631,549 

 

$

631,549 

 

$

471,901 

 

$

471,901 

Long-term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

 

2

 

 

 

 

1,453,250 

 

 

1,435,862 

 

 

1,453,250 

 

 

1,414,105 

 

Institutional and other

 

 

2

 

 

 

 

537,315 

 

 

508,127 

 

 

537,471 

 

 

518,322 

 

The fair value of Cash and cash equivalents approximates the book value due to the short-term nature of these financial instruments.  Long-term debt excludes capital lease obligations and the current portion of Long-term debt.  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 and 7.25% Senior Notes.  TDS’ “Institutional” debt consists of 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 7.44% and 0.00% to 7.25% at June 30, 2015 and December 31, 2014, respectively.

3.    Equipment Installment Plans

TDS offers customers the option to purchase certain devices under an equipment installment contract over a period of up to 24 months.  Under certain equipment installment plans, the customer has the right to upgrade to a new device after a specified period of time and have the remaining unpaid equipment installment contract balance waived, subject to certain conditions, including trading in the original device in good working condition and signing a new equipment installment contract.  TDS values this trade-in right as a guarantee liability.  The guarantee liability is initially measured at fair value and is determined based on assumptions including the probability and timing of the customer upgrading to a new device and the fair value of the device being traded-in at the time of trade-in.  As of June 30, 2015 and December 31, 2014, the guarantee liability related to these plans was $80.2 million and $57.5 million, respectively, and is reflected in Customer deposits and deferred revenues in the Consolidated Balance Sheet. 

TDS equipment installment plans do not provide for explicit interest charges.  For equipment installment plans with a duration of greater than twelve months, TDS imputes interest.

The following table summarizes unbilled equipment installment plan receivables as of June 30, 2015 and December 31, 2014.  Such amounts are presented on the Consolidated Balance Sheet as Accounts receivable – customers and agents (short-term portion) and Other assets and deferred charges (long-term portion).

(Dollars in thousands)

June 30, 2015

 

December 31, 2014

Short-term portion of unbilled equipment installment plan receivables, gross

$

208,955 

 

$

127,400 

Short-term portion of unbilled deferred interest

 

(19,488)

 

 

(16,365)

Short-term portion of unbilled allowance for credit losses

 

(7,404)

 

 

(3,686)

      Short-term portion of unbilled equipment installment plan receivables, net

$

182,063 

 

$

107,349 

 

 

 

 

 

 

 

Long-term portion of unbilled equipment installment plan receivables, gross

$

73,548 

 

$

89,435 

Long-term portion of unbilled deferred interest

 

(1,136)

 

 

(2,791)

Long-term portion of unbilled allowance for credit losses

 

(5,176)

 

 

(6,065)

      Long-term portion of unbilled equipment installment plan receivables, net  

$

67,236 

 

$

80,579 

 

TDS assesses the collectability of equipment installment plan receivables based on historical payment experience, account aging and other qualitative factors.  To mitigate credit risk, TDS requires certain customers who desire to purchase equipment under an installment plan to make a down payment.

TDS recorded out-of-period adjustments during the six months ended June 30, 2015 due to errors related to equipment installment plan transactions that were attributable to 2014.  TDS has determined that these adjustments were not material to the prior quarterly or annual periods, and also were not material to the current period or anticipated full year 2015 results.  These equipment installment plan adjustments had the impact of reducing Equipment and product sales revenues by $5.7 million and $6.2 million, and Income before income taxes by $5.3 million and $5.8 million, for the three and six months ended June 30, 2015, respectively.

 

 

4.    Income Taxes

TDS’ overall effective tax rate on Income (loss) before income taxes for the three and six months ended June 30, 2015 was 39.7%, and for the three and six months ended June 30, 2014 was 34.7% and 27.0%, respectively.

The lower effective tax rate for the six months ended June 30, 2014 resulted from the relatively low amount of Income (loss) before income taxes in that period, which magnified the effective rate impact of discrete tax expense items.

 

 

5.    Earnings Per Share

Basic earnings (loss) per share attributable to TDS shareholders is computed by dividing Net income (loss) available to common shareholders of TDS by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share attributable to TDS shareholders is computed by dividing Net income (loss) 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 (loss) per common share and the effects of potentially dilutive securities on the weighted average number of common shares were as follows:

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2015

 

2014

 

2015

 

2014

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

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share attributable to TDS shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to common shareholders of

   TDS used in basic earnings (loss) per share

$

23,034 

 

$

(22,050)

 

$

168,761 

 

$

(3,809)

Adjustments to compute diluted earnings (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interest adjustment

 

(116)

 

 

 

 

 

(1,214)

 

 

(5)

 

Preferred dividend adjustment

 

 

 

 

 

 

 

25 

 

 

 

 

Net income (loss) attributable to common shareholders of

 

 

 

 

 

 

 

 

 

 

 

 

 

TDS used in diluted earnings (loss) per share

$

22,918 

 

$

(22,050)

 

$

167,572 

 

$

(3,814)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares used in basic

 

 

 

 

 

 

 

 

 

 

 

 

earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Shares

 

101,296 

 

 

101,543 

 

 

101,144 

 

 

101,682 

 

 

Series A Common Shares

 

7,188 

 

 

7,176 

 

 

7,183 

 

 

7,171 

 

 

 

Total

 

108,484 

 

 

108,719 

 

 

108,327 

 

 

108,853 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effects of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

896 

 

 

 

 

 

623 

 

 

 

 

Restricted stock units

 

405 

 

 

 

 

 

384 

 

 

 

 

Preferred shares

 

 

 

 

 

 

 

46 

 

 

 

Weighted average number of shares used in diluted

 

 

 

 

 

 

 

 

 

 

 

 

earnings (loss) per share

 

109,785 

 

 

108,719 

 

 

109,380 

 

 

108,853 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share attributable to TDS

 

 

 

 

 

 

 

 

 

 

 

 

shareholders

$

0.21 

 

$

(0.20)

 

$

1.56 

 

$

(0.04)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share attributable to TDS

 

 

 

 

 

 

 

 

 

 

 

 

shareholders

$

0.21 

 

$

(0.20)

 

$

1.53 

 

$

(0.04)

 

Certain Common Shares issuable upon the exercise of stock options, vesting of restricted stock units or conversion of preferred shares were not included in average diluted shares outstanding for the calculation of Diluted earnings (loss) per share attributable to TDS shareholders because their effects were antidilutive. The number of such Common Shares excluded, if any, is shown in the table below.

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2015

 

2014

 

2015

 

2014

(Shares in thousands)

 

 

 

 

 

 

 

Stock options

4,523 

 

8,883 

 

5,304 

 

8,777 

Restricted stock units

204 

 

824 

 

104 

 

737 

Preferred shares

46 

 

56 

 

 

 

56 

 

 

 

6.    Acquisitions, Divestitures and Exchanges

Divestiture Transaction

On May 16, 2013, pursuant to a Purchase and Sale Agreement, U.S. Cellular sold customers and certain PCS license spectrum to subsidiaries of Sprint Corp. fka Sprint Nextel Corporation (“Sprint”) in U.S. Cellular’s Chicago, central Illinois, St. Louis and certain Indiana/Michigan/Ohio markets (“Divestiture Markets”) in consideration for $480 million in cash. The Purchase and Sale Agreement also contemplated certain other agreements, together with the Purchase and Sale Agreement collectively referred to as the “Divestiture Transaction.” 

These agreements require Sprint to reimburse U.S. Cellular up to $200 million (the “Sprint Cost Reimbursement”) for certain network decommissioning costs, network site lease rent and termination costs, network access termination costs, and employee termination benefits for specified engineering employees.  As of June 30, 2015, U.S. Cellular had received a cumulative total of $104.8 million pursuant to the Sprint Cost Reimbursement.  For the six months ended June 30, 2015 and 2014, $23.2 million and $34.1 million, respectively, of the Sprint Cost Reimbursement had been received and recorded in Cash received from divestitures and exchanges in the Consolidated Statement of Cash Flows.

For the six months ended June 30, 2015 and 2014, as a result of the Divestiture Transaction, U.S. Cellular recognized gains of $5.9 million and $17.7 million, respectively, in (Gain) loss on sale of business and other exit costs, net.  For the three months ended June 30, 2015 and 2014, U.S. Cellular recognized gains of $1.5 million and $10.6 million, respectively.

Other Acquisitions, Divestitures and Exchanges

7.    Intangible Assets

 

Changes in Licenses at TDS for the six months ended June 30, 2015 are presented below.  There were no significant changes to Franchise rights, Goodwill or other intangible assets during the six months ended June 30, 2015.

Licenses

 

(Dollars in thousands)

 

 

Balance December 31, 2014

$

1,453,574 

 

Acquisitions (1)

 

339,656 

 

Exchanges (2)

 

43,485 

 

Other

 

1,077 

Balance June 30, 2015

$

1,837,792 

 

(1)

Amount includes payments totaling $338.3 million made by Advantage Spectrum to the FCC for licenses in which it was the provisional winning bidder in Auction 97.  See Note 6 — Acquisitions, Divestitures and Exchanges, and Note 9 — Variable Interest Entities for further information.

(2)

Amount represents licenses received in the March 2015 PCS license exchange. See Note 6 — Acquisitions, Divestitures and Exchanges for further information.  Licenses disposed of in the exchange were previously removed from the Licenses balance and reflected in Assets held for sale in the Consolidated Balance Sheet as of December 31, 2014.

 

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.

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 June 30,

 

Six Months Ended June 30,

 

2015

 

2014

 

2015

 

2014

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Revenues

$ 

1,726,558 

 

$ 

1,635,216 

 

$ 

3,460,818 

 

$ 

3,259,900 

Operating expenses

 

1,281,625 

 

 

1,209,412 

 

 

2,572,643 

 

 

2,343,092 

Operating income

 

444,933 

 

 

425,804 

 

 

888,175 

 

 

916,808 

Other income, net

 

(10,873)

 

 

378 

 

 

(6,508)

 

 

2,403 

Net income

$

434,060 

 

$

426,182 

 

$

881,667 

 

$

919,211 

 

9.    Variable Interest Entities

TDS consolidates variable interest entities (VIEs) in which it has a controlling financial interest and is the primary beneficiary. A controlling financial interest will have both of the following characteristics: (a) the power to direct the VIE activities that most significantly impact economic performance and (b) the obligation to absorb VIE losses and the right to receive benefits that are significant to the VIE.  TDS reviews these criteria initially at the time it enters into agreements and subsequently when reconsideration events occur.

Consolidated VIEs

 As of June 30, 2015, TDS holds a variable interest in and consolidates the following VIEs under GAAP:

The power to direct the activities that most significantly impact the economic performance of Advantage Spectrum, Aquinas Wireless and King Street Wireless (collectively, the “limited partnerships”) is shared. Specifically, the general partner of these VIEs has the exclusive right to manage, operate and control the limited partnerships and make all decisions to carry on the business of the partnerships; however, the general partner of each partnership needs the consent of the limited partner, a TDS subsidiary, to sell or lease certain licenses, to make certain large expenditures, admit other partners or liquidate the limited partnerships. Although the power to direct the activities of the VIEs is shared, TDS has a disproportionate level of exposure to the variability associated with the economic performance of the VIEs, indicating that TDS is the primary beneficiary of the VIEs in accordance with GAAP.  Accordingly, these VIEs are consolidated.

The following table presents the classification of the consolidated VIEs’ assets and liabilities in TDS’ Consolidated Balance Sheet.

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

(Dollars in thousands)

 

 

 

 

 

Assets

 

 

 

 

 

 

Cash and cash equivalents

$

2,069 

 

$

2,588 

 

Other current assets

 

211 

 

 

278 

 

Licenses (1)

 

651,281 

 

 

312,977 

 

Property, plant and equipment, net

 

9,636 

 

 

10,671 

 

Other assets and deferred charges

 

150 

 

 

60,059 

 

 

Total assets

$

663,347 

 

$

386,573 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Current liabilities

$

83 

 

$

110 

 

Deferred liabilities and credits

 

567 

 

 

622 

 

 

Total liabilities

$

650 

 

$

732 

 

 

 

 

 

 

 

 

(1)

Includes payments totaling $338.3 million made by Advantage Spectrum to the FCC as described below.

 

Other Related Matters

In March 2015, King Street Wireless made a $60.0 million distribution to its investors.  Of this distribution, $6.0 million was provided to King Street Wireless, Inc. and $54.0 million was provided to U.S. Cellular. 

An FCC auction of AWS-3 spectrum licenses, referred to as Auction 97, ended in January 2015.  TDS participated in Auction 97 indirectly through its interest in Advantage Spectrum.  A subsidiary of U.S. Cellular is a limited partner in Advantage Spectrum.  Advantage Spectrum qualified as a “designated entity,” and thereby was eligible for bid credits with respect to spectrum purchased in Auction 97.  Advantage Spectrum was the winning bidder for 124 licenses for an aggregate bid of $338.3 million, after its designated entity discount of 25%.  This amount is classified as Licenses in TDS’ Consolidated Balance Sheet.  Advantage Spectrum’s bid amount, less the initial deposit of $60.0 million paid in 2014, plus certain other charges totaling $2.3 million, were paid to the FCC in March 2015.  To help fund this payment, U.S. Cellular made loans and capital contributions to Advantage Spectrum and Frequency Advantage totaling $280.6 million for the six months ended June 30, 2015.  There were no capital contributions, loans or advances made to TDS’ VIEs during the six months ended June 30, 2014.

Advantage Spectrum, Aquinas Wireless and King Street Wireless were formed to participate in FCC auctions of wireless spectrum and to fund, establish, and provide wireless service with respect to any FCC licenses won in the auctions. As such, these entities have risks similar to those described in the “Risk Factors” in TDS’ Form 10-K for the year ended December 31, 2014.

TDS may agree to make additional capital contributions and/or advances to Advantage Spectrum, Aquinas Wireless or King Street Wireless and/or to their general partners to provide additional funding for the development of licenses granted in various auctions.  TDS may finance such amounts with a combination of cash on hand, borrowings under its revolving credit agreement and/or other long-term debt. There is no assurance that TDS will be able to obtain additional financing on commercially reasonable terms or at all to provide such financial support.

10.  Noncontrolling Interests

The following schedule discloses the effects of Net income (loss) attributable to TDS shareholders and changes in TDS’ ownership interest in U.S. Cellular on TDS’ equity:

 

 

 

 

 

Six Months Ended

 

 

 

 

 

June 30,

 

 

 

 

 

2015

 

2014

(Dollars in thousands)

 

 

 

 

 

Net income (loss) attributable to TDS shareholders

$

168,786 

 

$

(3,784)

 

Transfer (to) from the noncontrolling interests

 

 

 

 

 

 

 

Change in TDS' Capital in excess of par value from

   U.S. Cellular's issuance of U.S. Cellular shares

 

(13,096)

 

 

(10,292)

 

 

Change in TDS' Capital in excess of par value from

   U.S. Cellular's repurchases of U.S. Cellular shares

 

372 

 

 

242 

 

 

Purchase of ownership in subsidiaries from noncontrolling interests

 

240 

 

 

 

 

 

Net transfers (to) from noncontrolling interests

 

(12,484)

 

 

(10,050)

 

Change from net income (loss) attributable to TDS and

   transfers (to) from noncontrolling interests

$

156,302 

 

$

(13,834)

 

11.  Common Share Repurchases

On August 2, 2013, the Board of Directors of TDS authorized a $250 million stock repurchase program for the purchase of TDS Common Shares from time to time pursuant to open market purchases, block transactions, private purchases or otherwise, depending on market conditions.  This authorization does not have an expiration date.

On November 17, 2009, the Board of Directors of U.S. Cellular authorized the repurchase of up to 1,300,000 Common Shares on an annual basis beginning in 2009 and continuing each year thereafter, on a cumulative basis.  These purchases will be made pursuant to open market purchases, block purchases, private purchases or otherwise, depending on market conditions.  This authorization does not have an expiration date.

Share repurchases made under these authorizations were as follows:

 

Number of

 

Average Cost

 

 

 

Six Months Ended June 30,

Shares

 

Per Share

 

Amount

(Dollar amounts and shares in thousands, except per share data)

2015

 

 

 

 

 

 

 

 

TDS Common Shares

 

 

$

 

 

$

 

 

U.S. Cellular Common Shares

66 

 

$

34.77 

 

$

2,302 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

TDS Common Shares

809 

 

$

26.09 

 

$

21,096 

 

U.S. Cellular Common Shares

212 

 

$

40.49 

 

$

8,598 

12.  Business Segment Information

 

U.S. Cellular and TDS Telecom are billed for all services they receive from TDS, consisting primarily of information processing, accounting and finance, and general management services.  Such billings are based on expenses specifically identified to U.S. Cellular and TDS Telecom and on allocations of common expenses. Management believes the method used to allocate common expenses is reasonable and that all expenses and costs applicable to U.S. Cellular and TDS Telecom are reflected in the accompanying business segment information on a basis that is representative of what they would have been if U.S. Cellular and TDS Telecom operated on a stand-alone basis.

Financial data for TDS’ reportable segments for the three and six month periods ended, or as of June 30, 2015 and 2014, is as follows.  See Note 1Basis of Presentation for additional information.

 

 

 

 

 

 

 

TDS Telecom

 

 

 

 

 

 

Three Months Ended or as of June 30, 2015

 

U.S. Cellular

 

Wireline

 

Cable

 

HMS

 

TDS Telecom Eliminations

 

TDS Telecom Total

 

Corporate, Eliminations and Other

 

Total

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

824,373 

 

$

175,413 

 

$

44,545 

 

$

29,467 

 

$

(1,358)

 

$

248,067 

 

$

(1,790)

 

$

1,070,650 

 

Equipment and product sales

 

 

151,294 

 

 

557 

 

 

70 

 

 

46,119 

 

 

 

 

 

46,746 

 

 

7,705 

 

 

205,745 

 

 

Total operating revenues

 

 

975,667 

 

 

175,970 

 

 

44,615 

 

 

75,586 

 

 

(1,358)

 

 

294,813 

 

 

5,915 

 

 

1,276,395 

Cost of services (excluding Depreciation, amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and accretion expense reported below)

 

 

196,276 

 

 

62,604 

 

 

19,849 

 

 

21,954 

 

 

(1,293)

 

 

103,114 

 

 

762 

 

 

300,152 

Cost of equipment and products

 

 

253,671 

 

 

597 

 

 

15 

 

 

38,566 

 

 

 

 

 

39,178 

 

 

5,601 

 

 

298,450 

Selling, general and administrative

 

 

362,971 

 

 

49,200 

 

 

13,764 

 

 

10,969 

 

 

(65)

 

 

73,868 

 

 

(1,409)

 

 

435,430 

Depreciation, amortization and accretion

 

 

150,581 

 

 

41,203 

 

 

8,860 

 

 

6,573 

 

 

 

 

 

56,636 

 

 

3,887 

 

 

211,104 

(Gain) loss on asset disposals, net

 

 

5,399 

 

 

1,010 

 

 

(1,668)

 

 

27 

 

 

 

 

 

(631)

 

 

(16)

 

 

4,752 

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

 

 

(1,705)

 

 

(3,054)

 

 

 

 

 

 

 

 

 

 

 

(3,054)

 

 

(830)

 

 

(5,589)

(Gain) loss on license sales and exchanges, net

 

 

(25)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25)

Operating income (loss)

 

 

8,499 

 

 

24,410 

 

 

3,795 

 

 

(2,503)

 

 

 

 

 

25,702 

 

 

(2,080)

 

 

32,121 

Equity in earnings of unconsolidated entities

 

 

35,584 

 

 

9 

 

 

 

 

 

 

 

 

 

 

 

9 

 

 

(181)

 

 

35,412 

Interest and dividend income

 

 

8,969 

 

 

647 

 

 

8 

 

 

9 

 

 

 

 

 

664 

 

 

484 

 

 

10,117 

Interest expense

 

 

(20,154)

 

 

290 

 

 

143 

 

 

(485)

 

 

 

 

 

(52)

 

 

(13,713)

 

 

(33,919)

Other, net

 

 

91 

 

 

(15)

 

 

2 

 

 

107 

 

 

 

 

 

94 

 

 

17 

 

 

202 

Income (loss) before income taxes

 

 

32,989 

 

 

25,341 

 

 

3,948 

 

 

(2,872)

 

 

 

 

 

26,417 

 

 

(15,473)

 

 

43,933 

Income tax expense (benefit) (1)

 

 

13,079 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,625 

 

 

(6,271)

 

 

17,433 

Net income (loss)

 

 

19,910 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,792 

 

 

(9,202)

 

 

26,500 

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

150,581 

 

 

41,203 

 

 

8,860 

 

 

6,573 

 

 

 

 

 

56,636 

 

 

3,887 

 

 

211,104 

(Gain) loss on asset disposals, net

 

 

5,399 

 

 

1,010 

 

 

(1,668)

 

 

27 

 

 

 

 

 

(631)

 

 

(16)

 

 

4,752 

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

 

 

(1,705)

 

 

(3,054)

 

 

 

 

 

 

 

 

 

 

 

(3,054)

 

 

(830)

 

 

(5,589)

(Gain) loss on license sales and exchanges, net

 

 

(25)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25)

Interest expense

 

 

20,154 

 

 

(290)

 

 

(143)

 

 

485 

 

 

 

 

 

52 

 

 

13,713 

 

 

33,919 

Income tax expense (benefit) (1)

 

 

13,079 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,625 

 

 

(6,271)

 

 

17,433 

Adjusted EBITDA (2)

 

$

207,393 

 

$

64,210 

 

$

10,997 

 

$

4,213 

 

$

 

 

$

79,420 

 

$

1,281 

 

$

288,094 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in unconsolidated entities

 

$

325,857 

 

$

3,804 

 

$

 

 

$

 

 

$

 

 

$

3,804 

 

$

34,544 

 

$

364,205 

Total assets

 

$

6,596,619 

 

$

1,351,221 

 

$

568,494 

 

$

284,067 

 

$

 

 

$

2,203,782 

 

$

185,911 

 

$

8,986,312 

Capital expenditures

 

$

133,666 

 

$

31,722 

 

$

11,926 

 

$

9,422 

 

$

 

 

$

53,070 

 

$

1,864 

 

$

188,600 

 

 

 

 

 

 

 

 

 

 

TDS Telecom

 

 

 

 

 

 

Three Months Ended or as of June 30, 2014

 

U.S. Cellular

 

Wireline

 

Cable

 

HMS

 

TDS Telecom Eliminations

 

TDS Telecom Total

 

Corporate, Eliminations and Other

 

Total

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

843,473 

 

$

180,297 

 

$

22,484 

 

$

27,575 

 

$

(298)

 

$

230,058 

 

$

(1,352)

 

$

1,072,179 

 

Equipment and product sales

 

 

114,300 

 

 

431 

 

 

 

 

 

40,361 

 

 

 

 

 

40,792 

 

 

9,121 

 

 

164,213 

 

 

Total operating revenues

 

 

957,773 

 

 

180,728 

 

 

22,484 

 

 

67,936 

 

 

(298)

 

 

270,850 

 

 

7,769 

 

 

1,236,392 

Cost of services (excluding Depreciation, amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and accretion expense reported below)

 

 

187,131 

 

 

64,305 

 

 

11,394 

 

 

21,301 

 

 

(249)

 

 

96,751 

 

 

2,606 

 

 

286,488 

Cost of equipment and products

 

 

271,978 

 

 

481 

 

 

 

 

 

33,875 

 

 

 

 

 

34,356 

 

 

6,677 

 

 

313,011 

Selling, general and administrative

 

 

404,252 

 

 

47,708 

 

 

6,285 

 

 

12,376 

 

 

(49)

 

 

66,320 

 

 

330 

 

 

470,902 

Depreciation, amortization and accretion

 

 

148,337 

 

 

41,827 

 

 

4,557 

 

 

6,791 

 

 

 

 

 

53,175 

 

 

3,055 

 

 

204,567 

(Gain) loss on asset disposals, net

 

 

6,893 

 

 

514 

 

 

425 

 

 

44 

 

 

 

 

 

983 

 

 

27 

 

 

7,903 

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

 

(10,511)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,122 

 

 

2,611 

Operating income (loss)

 

 

(50,307)

 

 

25,893 

 

 

(177)

 

 

(6,451)

 

 

 

 

 

19,265 

 

 

(18,048)

 

 

(49,090)

Equity in earnings of unconsolidated entities

 

 

33,120 

 

 

4 

 

 

 

 

 

 

 

 

 

 

 

4 

 

 

1,666 

 

 

34,790 

Interest and dividend income

 

 

1,573 

 

 

490 

 

 

1 

 

 

22 

 

 

 

 

 

513 

 

 

665 

 

 

2,751 

Interest expense

 

 

(14,336)

 

 

677 

 

 

30 

 

 

(439)

 

 

 

 

 

268 

 

 

(13,830)

 

 

(27,898)

Other, net

 

 

100 

 

 

(95)

 

 

 

 

 

45 

 

 

 

 

 

(50)

 

 

 

 

 

50 

Income (loss) before income taxes

 

 

(29,850)

 

 

26,969 

 

 

(146)

 

 

(6,823)

 

 

 

 

 

20,000 

 

 

(29,547)

 

 

(39,397)

Income tax expense (benefit) (1)

 

 

(10,399)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,962 

 

 

(11,234)

 

 

(13,671)

Net income (loss)

 

 

(19,451)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,038 

 

 

(18,313)

 

 

(25,726)

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

148,337 

 

 

41,827 

 

 

4,557 

 

 

6,791 

 

 

 

 

 

53,175 

 

 

3,055 

 

 

204,567 

(Gain) loss on asset disposals, net

 

 

6,893 

 

 

514 

 

 

425 

 

 

44 

 

 

 

 

 

983 

 

 

27 

 

 

7,903 

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

 

 

(10,511)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,122 

 

 

2,611 

Interest expense

 

 

14,336 

 

 

(677)

 

 

(30)

 

 

439 

 

 

 

 

 

(268)

 

 

13,830 

 

 

27,898 

Income tax expense (benefit) (1)

 

 

(10,399)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,962 

 

 

(11,234)

 

 

(13,671)

Adjusted EBITDA (2)

 

$

129,205 

 

$

68,633 

 

$

4,806 

 

$

451 

 

$

 

 

$

73,890 

 

$

487 

 

$

203,582 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in unconsolidated entities

 

$

270,215 

 

$

3,810 

 

$

 

 

$

 

 

$

 

 

$

3,810 

 

$

34,636 

 

$

308,661 

Total assets

 

$

6,298,967 

 

$

1,408,809 

 

$

287,809 

 

$

335,680 

 

$

 

 

$

2,032,298 

 

$

376,404 

 

$

8,707,669 

Capital expenditures

 

$

143,927 

 

$

27,370 

 

$

7,181 

 

$

10,628 

 

$

 

 

$

45,179 

 

$

1,575 

 

$

190,681 

 

 

 

 

 

 

 

 

 

 

TDS Telecom

 

 

 

 

 

 

Six Months Ended or as of June 30, 2015

 

U.S. Cellular

 

Wireline

 

Cable

 

HMS

 

TDS Telecom Eliminations

 

TDS Telecom Total

 

Corporate, Eliminations and Other

 

Total

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

1,652,584 

 

$

351,104 

 

$

88,026 

 

$

57,883 

 

$

(2,038)

 

$

494,975 

 

$

(3,818)

 

$

2,143,741 

 

Equipment and product sales

 

 

288,328 

 

 

1,001 

 

 

158 

 

 

78,664 

 

 

 

 

 

79,823 

 

 

16,096 

 

 

384,247 

 

 

Total operating revenues

 

 

1,940,912 

 

 

352,105 

 

 

88,184 

 

 

136,547 

 

 

(2,038)

 

 

574,798 

 

 

12,278 

 

 

2,527,988 

Cost of services (excluding Depreciation, amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and accretion expense reported below)

 

 

386,953 

 

 

125,031 

 

 

39,797 

 

 

41,982 

 

 

(1,886)

 

 

204,924 

 

 

1,922 

 

 

593,799 

Cost of equipment and products

 

 

491,972 

 

 

1,160 

 

 

75 

 

 

65,696 

 

 

 

 

 

66,931 

 

 

11,528 

 

 

570,431 

Selling, general and administrative

 

 

731,939 

 

 

94,869 

 

 

26,389 

 

 

23,659 

 

 

(152)

 

 

144,765 

 

 

(3,234)

 

 

873,470 

Depreciation, amortization and accretion

 

 

297,666 

 

 

83,212 

 

 

17,579 

 

 

13,008 

 

 

 

 

 

113,799 

 

 

6,214 

 

 

417,679 

(Gain) loss on asset disposals, net

 

 

9,650 

 

 

1,528 

 

 

(986)

 

 

(43)

 

 

 

 

 

499 

 

 

(20)

 

 

10,129 

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

 

 

(113,182)

 

 

(3,054)

 

 

 

 

 

 

 

 

 

 

 

(3,054)

 

 

(13,136)

 

 

(129,372)

(Gain) loss on license sales and exchanges, net

 

 

(122,898)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(122,898)

Operating income (loss)

 

 

258,812 

 

 

49,359 

 

 

5,330 

 

 

(7,755)

 

 

 

 

 

46,934 

 

 

9,004 

 

 

314,750 

Equity in earnings of unconsolidated entities

 

 

70,055 

 

 

13 

 

 

 

 

 

 

 

 

 

 

 

13 

 

 

(15)

 

 

70,053 

Interest and dividend income

 

 

16,535 

 

 

1,102 

 

 

13 

 

 

23 

 

 

 

 

 

1,138 

 

 

829 

 

 

18,502 

Interest expense

 

 

(40,118)

 

 

591 

 

 

243 

 

 

(985)

 

 

 

 

 

(151)

 

 

(27,480)

 

 

(67,749)

Other, net

 

 

196 

 

 

(33)

 

 

3 

 

 

14 

 

 

 

 

 

(16)

 

 

18 

 

 

198 

Income (loss) before income taxes

 

 

305,480 

 

 

51,032 

 

 

5,589 

 

 

(8,703)

 

 

 

 

 

47,918 

 

 

(17,644)

 

 

335,754 

Income tax expense (benefit) (1)

 

 

120,580 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18,805 

 

 

(5,932)

 

 

133,453 

Net income (loss)

 

 

184,900 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29,113 

 

 

(11,712)

 

 

202,301 

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

297,666 

 

 

83,212 

 

 

17,579 

 

 

13,008 

 

 

 

 

 

113,799 

 

 

6,214 

 

 

417,679 

(Gain) loss on asset disposals, net

 

 

9,650 

 

 

1,528 

 

 

(986)

 

 

(43)

 

 

 

 

 

499 

 

 

(20)

 

 

10,129 

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

 

 

(113,182)

 

 

(3,054)

 

 

 

 

 

 

 

 

 

 

 

(3,054)

 

 

(13,136)

 

 

(129,372)

(Gain) loss on license sales and exchanges, net

 

 

(122,898)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(122,898)

Interest expense

 

 

40,118 

 

 

(591)

 

 

(243)

 

 

985 

 

 

 

 

 

151 

 

 

27,480 

 

 

67,749 

Income tax expense (benefit) (1)

 

 

120,580 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18,805 

 

 

(5,932)

 

 

133,453 

Adjusted EBITDA (2)

 

$

416,834 

 

$

132,127 

 

$

21,939 

 

$

5,247 

 

$

 

 

$

159,313 

 

$

2,894 

 

$

579,041 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in unconsolidated entities

 

$

325,857 

 

$

3,804 

 

$

 

 

$

 

 

$

 

 

$

3,804 

 

$

34,544 

 

$

364,205 

Total assets

 

$

6,596,619 

 

$

1,351,221 

 

$

568,494 

 

$

284,067 

 

$

 

 

$

2,203,782 

 

$

185,911 

 

$

8,986,312 

Capital expenditures

 

$

200,126 

 

$

52,163 

 

$

23,552 

 

$

14,251 

 

$

 

 

$

89,966 

 

$

3,145 

 

$

293,237 

 

 

 

 

 

 

 

 

 

 

TDS Telecom

 

 

 

 

 

 

Six Months Ended or as of June 30, 2014

 

U.S. Cellular

 

Wireline

 

Cable

 

HMS

 

TDS Telecom Eliminations

 

TDS Telecom Total

 

Corporate, Eliminations and Other

 

Total

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

1,697,086 

 

$

357,230 

 

$

44,987 

 

$

54,951 

 

$

(979)

 

$

456,189 

 

$

(854)

 

$

2,152,421 

 

Equipment and product sales

 

 

186,498 

 

 

984 

 

 

 

 

 

76,093 

 

 

 

 

 

77,077 

 

 

16,358 

 

 

279,933 

 

 

Total operating revenues

 

 

1,883,584 

 

 

358,214 

 

 

44,987 

 

 

131,044 

 

 

(979)

 

 

533,266 

 

 

15,504 

 

 

2,432,354 

Cost of services (excluding Depreciation, amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and accretion expense reported below)

 

 

367,738 

 

 

128,705 

 

 

22,349 

 

 

38,247 

 

 

(894)

 

 

188,407 

 

 

6,301 

 

 

562,446 

Cost of equipment and products

 

 

542,452 

 

 

964 

 

 

 

 

 

64,342 

 

 

 

 

 

65,306 

 

 

11,900 

 

 

619,658 

Selling, general and administrative

 

 

799,816 

 

 

94,228 

 

 

12,663 

 

 

27,211 

 

 

(85)

 

 

134,017 

 

 

738 

 

 

934,571 

Depreciation, amortization and accretion

 

 

316,090 

 

 

84,563 

 

 

8,918 

 

 

13,469 

 

 

 

 

 

106,950 

 

 

6,446 

 

 

429,486 

(Gain) loss on asset disposals, net

 

 

8,827 

 

 

759 

 

 

490 

 

 

78 

 

 

 

 

 

1,327 

 

 

179 

 

 

10,333 

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

 

 

(17,411)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,122 

 

 

(4,289)

(Gain) loss on license sales and exchanges, net

 

 

(91,446)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(91,446)

Operating income (loss)

 

 

(42,482)

 

 

48,995 

 

 

567 

 

 

(12,303)

 

 

 

 

 

37,259 

 

 

(23,182)

 

 

(28,405)

Equity in earnings of unconsolidated entities

 

 

70,195 

 

 

4 

 

 

 

 

 

 

 

 

 

 

 

4 

 

 

1,918 

 

 

72,117 

Interest and dividend income

 

 

2,457 

 

 

1,175 

 

 

2 

 

 

42 

 

 

 

 

 

1,219 

 

 

1,561 

 

 

5,237 

Interest expense

 

 

(29,198)

 

 

1,341 

 

 

35 

 

 

(860)

 

 

 

 

 

516 

 

 

(27,923)

 

 

(56,605)

Other, net

 

 

186 

 

 

(149)

 

 

 

 

 

179 

 

 

 

 

 

30 

 

 

(6)

 

 

210 

Income (loss) before income taxes

 

 

1,158 

 

 

51,366 

 

 

604 

 

 

(12,942)

 

 

 

 

 

39,028 

 

 

(47,632)

 

 

(7,446)

Income tax expense (benefit) (1)

 

 

2,205 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,508 

 

 

(19,727)

 

 

(2,014)

Net income (loss)

 

 

(1,047)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23,520 

 

 

(27,905)

 

 

(5,432)

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

316,090 

 

 

84,563 

 

 

8,918 

 

 

13,469 

 

 

 

 

 

106,950 

 

 

6,446 

 

 

429,486 

(Gain) loss on asset disposals, net

 

 

8,827 

 

 

759 

 

 

490 

 

 

78 

 

 

 

 

 

1,327 

 

 

179 

 

 

10,333 

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

 

 

(17,411)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,122 

 

 

(4,289)

(Gain) loss on license sales and exchanges, net

 

 

(91,446)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(91,446)

Interest expense

 

 

29,198 

 

 

(1,341)

 

 

(35)

 

 

860 

 

 

 

 

 

(516)

 

 

27,923 

 

 

56,605 

Income tax expense (benefit) (1)

 

 

2,205 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,508 

 

 

(19,727)

 

 

(2,014)

Adjusted EBITDA (2)

 

$

246,416 

 

$

135,347 

 

$

9,977 

 

$

1,465 

 

$

 

 

$

146,789 

 

$

38 

 

$

393,243 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in unconsolidated entities

 

$

270,215 

 

$

3,810 

 

$

 

 

$

 

 

$

 

 

$

3,810 

 

$

34,636 

 

$

308,661 

Total assets

 

$

6,298,967 

 

$

1,408,809 

 

$

287,809 

 

$

335,680 

 

$

 

 

$

2,032,298 

 

$

376,404 

 

$

8,707,669 

Capital expenditures

 

$

233,508 

 

$

50,268 

 

$

13,400 

 

$

13,379 

 

$

 

 

$

77,047 

 

$

2,724 

 

$

313,279 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Income tax expense (benefit) is not provided at the individual segment level for Wireline, Cable and HMS.  TDS calculates income tax expense for “TDS Telecom Total”.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)

Adjusted earnings before interest, taxes, depreciation, amortization and accretion (“Adjusted EBITDA”) is a segment measure reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing their performance.  Adjusted EBITDA is defined as net income, adjusted for the items set forth in the reconciliation above.  Adjusted EBITDA excludes these items in order to show operating results on a more comparable basis from period to period.  From time to time, TDS may also exclude other items from Adjusted EBITDA if such items help reflect operating results on a more comparable basis.  TDS does not intend to imply that any of such items that are excluded are non-recurring, infrequent or unusual; such items may occur in the future.  TDS believes Adjusted EBITDA is a useful measure of TDS’ operating results before significant recurring non-cash charges, discrete gains and losses, and other items as indicated above.

 

13Subsequent Events

In January 2015, U.S. Cellular entered into a senior term loan credit facility.  In July 2015, U.S. Cellular borrowed the full amount of $225 million available under this facility.  These funds will be used for general corporate purposes, including working capital, spectrum purchases and capital expenditures.  Amounts borrowed will be due and payable in quarterly installments of $2.8 million beginning in March 2016 through December 2021, and the remaining unpaid balance will be due and payable in January 2022.


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

Telephone and Data Systems, Inc. (“TDS”) is a diversified telecommunications company providing high-quality telecommunications services to approximately 4.8 million wireless customers and 1.2 million wireline and cable connections at June 30, 2015. TDS conducts its wireless operations through its 84%owned subsidiary, United States Cellular Corporation (“U.S. Cellular”).  TDS provides wireline services, cable services and hosted and managed services through its wholly-owned subsidiary, TDS Telecommunications Corporation (“TDS Telecom”).

The following discussion and analysis should be read in conjunction with TDS’ interim consolidated financial statements and notes included in Item 1 above, and with the description of TDS’ business, its audited consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in TDS’ Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2014.

OVERVIEW

The following is a summary of certain selected information contained in the comprehensive Management’s Discussion and Analysis of Financial Condition and Results of Operations that follows. The overview does not contain all of the information that may be important. You should carefully read the entire Management’s Discussion and Analysis of Financial Condition and Results of Operations and not rely solely on the overview.

The following provides historical and forward-looking information and analysis about TDS’ existing business segments. TDS’ business segments reflected in this Form 10-Q for the quarter ended June 30, 2015 are U.S. Cellular, TDS Telecom’s Wireline, Cable, and Hosted and Managed Services (“HMS”) operations.  TDS operations also include the wholly-owned subsidiaries Suttle-Straus, Inc. (“Suttle-Straus”) and Airadigm Communications, Inc. (“Airadigm”).  Suttle-Straus and Airadigm’s financial results were not significant to TDS’ operations.  All of TDS’ segments operate only in the United States, except for HMS, which includes an insignificant foreign operation.  See Note 12Business Segment Information for summary financial information on each business segment.

 

U.S. Cellular

In its consolidated operating markets, U.S. Cellular serves approximately 4.8 million customers in 23 states. As of June 30, 2015, U.S. Cellular’s average penetration rate in its consolidated operating markets was 15.0%. U.S. Cellular operates on a customer satisfaction strategy, striving to meet or exceed customer needs by providing a comprehensive range of wireless products and services, excellent customer support, and a high-quality network. U.S. Cellular’s business development strategy is to obtain interests in and access to wireless licenses in its current operating markets and in areas that are adjacent to or in close proximity to its other wireless licenses, thereby building contiguous operating market areas with strong spectrum positions.  U.S. Cellular believes that the acquisition of additional licenses within its current operating markets will enhance its network capacity to meet customers’ network performance expectations.  In addition, U.S. Cellular anticipates that grouping its operations into market areas will continue to provide it with certain economies in its capital and operating costs.

Financial and operating highlights for the six months ended June 30, 2015 included the following:

U.S. Cellular anticipates that its future results may be affected by the following factors:

 

See “Results of Operations—U.S. Cellular.”

TDS Telecom

TDS Telecom provides wireline and cable broadband, video and voice services to approximately 1.2 million connections in 35 states. The overall strategy for the wireline and cable businesses is to own the best pipe in the market in order to capitalize on data growth and the need for higher broadband speeds.  In addition, TDS Telecom provides a wide range of Information Technology (“IT”) services including colocation, dedicated hosting, hosted application management, cloud computing services and planning, engineering, procurement, installation, sales and management of  IT infrastructure hardware solutions.  TDS Telecom operates in three reportable segments: Wireline, Cable and HMS. 

TDS Telecom’s wireline strategy is to focus on broadband offerings and be the preferred communications solutions provider in its markets for both residential and commercial customers by developing and delivering high-quality broadband, video and voice products and services that meet or exceed customers’ needs, and to outperform the competition by delivering superior customer service.

TDS Telecom’s cable strategy is to expand broadband offerings while leveraging the company’s existing processes, procedures, shared support teams, commercial expertise, and customer service focus.

Through its hosted and managed services business, OneNeck IT Solutions, TDS Telecom aims to grow recurring revenues from mid-market businesses by leveraging core competencies in network management, IT, customer service and reliability to take advantage of the growing IT outsourcing marketplace.

On September 1, 2014, TDS acquired substantially all of the assets of a group of companies operating as BendBroadband.  This acquisition impacts the comparability of TDS Telecom’s operating results.

TDS Telecom’s financial results for the six months ended June 30, 2015 included the following:

TDS anticipates that TDS Telecom’s future results will be affected by the following factors:

See “Results of Operations—TDS Telecom.”


REGULATORY MATTERS

The discussion below includes updates related to recent regulatory developments.  These updates should be read in conjunction with the disclosures previously provided under “Regulatory Matters” in TDS’ Form 10-K for the year ended December 31, 2014.

FCC Net Neutrality Order

In February 2015, the FCC adopted an Open Internet Order relating to new net neutrality rules.  The rules became effective in June 2015.  The order reclassified high-speed, or broadband, internet access service as a "telecommunication service," making it subject to common carrier regulation under Title II of the Communications Act of 1934.   The order applies equally to fixed and wireless broadband internet service providers and thus applies to internet broadband services provided by telephone, cable and wireless providers. 

The rules prohibit (i) blocking (broadband providers may not block access to legal content, applications, services, or non-harmful devices); (ii) throttling (broadband providers may not impair or degrade lawful Internet traffic on the basis of content, applications, services, or non-harmful devices); and (iii) paid prioritization (broadband providers may not favor some lawful internet traffic over other lawful traffic in exchange for consideration, i.e., internet “fast lanes” are prohibited).  Also, internet service providers may not prioritize content and services of their affiliates.  In addition, the FCC has now asserted jurisdiction over internet traffic exchange, so interconnection arrangements will now be subject to a statutory requirement that all charges, practices, classifications, and regulations for and in connection with interconnection must be just and reasonable.  The rules also include a general conduct standard that will be applied on a case-by-case basis to address questionable practices as they occur that unreasonably interfere with or unreasonably disadvantage lawful content, applications, services, or devices to be used by end users (individuals or entities that use a broadband internet access service), or made available by edge providers (individuals or entities that provide any content, application, or service over the internet, and any individual or entity that provides a device used for accessing any content, application, or service over the internet).  Although broadband internet access providers will be allowed to engage in reasonable network management practices, it is uncertain what practices will be permitted by the FCC.  The order also expands the FCC’s current internet transparency rules.

All of these requirements will be subject to FCC enforcement and potential third-party claims for damages or equitable relief.  Under Title II, the FCC will have broad regulatory authority over internet services and internet service providers.  Although the FCC indicated that it will forbear from a number of utility-style regulations, such as rate regulation, tariffs, and unbundling requirements, the FCC could determine to apply such regulations and requirements in the future.  Also, it is uncertain if internet services may be subject to the Federal Universal Service Fund (“USF”) contributions or taxation in the future as a result of the reclassification under Title II.  Lawsuits have been filed challenging the net neutrality rules and the FCC’s decision to reclassify broadband internet access service under Title II.  TDS cannot predict the outcome of these proceedings or the impact on its business.

Changes to FCC’s Designated Entity Rules

TDS participated in prior FCC spectrum auctions through limited partnerships that qualified as “designated entities” under FCC rules and, as such were eligible for bid credit discounts of 25% with respect to licenses won in the auctions.  In July 2015, the FCC adopted a Report and Order that amended the FCC’s designated entity rules.  The amended rules include caps on bid credits that designated entities may receive in future auctions and modify the attribution rules.  The amended rules also restrict certain joint bidding agreements but permit certain other arrangements involving more than one party.  Additionally, the amended rules make certain other changes to the FCC’s competitive bidding rules.  TDS will be evaluating how these amended rules may impact future FCC spectrum auctions and its potential participation through a designated entity.


Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

RESULTS OF OPERATIONS — CONSOLIDATED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

Six Months Ended June 30,

 

2015

 

2014

 

Change

 

Change

(Dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Cellular

 

$

1,940,912 

 

$

1,883,584 

 

$

57,328 

 

3%

 

TDS Telecom

 

 

574,798 

 

 

533,266 

 

 

41,532 

 

8%

 

All other (1)

 

 

12,278 

 

 

15,504 

 

 

(3,226)

 

(21)%

 

 

Total operating revenues

 

 

2,527,988 

 

 

2,432,354 

 

 

95,634 

 

4%

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Cellular

 

 

1,682,100 

 

 

1,926,066 

 

 

(243,966)

 

(13)%

 

TDS Telecom

 

 

527,864 

 

 

496,007 

 

 

31,857 

 

6%

 

All other (1) (2)

 

 

3,274 

 

 

38,686 

 

 

(35,412)

 

(92)%

 

 

Total operating expenses

 

 

2,213,238 

 

 

2,460,759 

 

 

(247,521)

 

(10)%

Operating income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Cellular

 

 

258,812 

 

 

(42,482)

 

 

301,294 

 

>100%

 

TDS Telecom

 

 

46,934 

 

 

37,259 

 

 

9,675 

 

26%

 

All other (1) (2)

 

 

9,004 

 

 

(23,182)

 

 

32,186 

 

>100%

 

 

Total operating income (loss)

 

 

314,750 

 

 

(28,405)

 

 

343,155 

 

>100%

Investment and other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated entities

 

 

70,053 

 

 

72,117 

 

 

(2,064)

 

(3)%

 

Interest and dividend income

 

 

18,502 

 

 

5,237 

 

 

13,265 

 

>100%

 

Interest expense

 

 

(67,749)

 

 

(56,605)

 

 

(11,144)

 

(20)%

 

Other, net

 

 

198 

 

 

210 

 

 

(12)

 

(6)%

 

 

Total investment and other income (expense)

 

 

21,004 

 

 

20,959 

 

 

45 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

335,754 

 

 

(7,446)

 

 

343,200 

 

>100%

 

Income tax expense (benefit)

 

 

133,453 

 

 

(2,014)

 

 

135,467 

 

>100%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

202,301 

 

 

(5,432)

 

 

207,733 

 

>100%

 

Less: Net income (loss) attributable to

  noncontrolling interests, net of tax

 

 

33,515 

 

 

(1,648)

 

 

35,163 

 

>100%

Net income (loss) attributable to TDS shareholders

 

 

168,786 

 

 

(3,784)

 

 

172,570 

 

>100%

 

Preferred dividend requirement

 

 

(25)

 

 

(25)

 

 

 

 

-

Net income (loss) available to common shareholders

 

$

168,761 

 

$

(3,809)

 

$

172,570 

 

>100%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Consists of corporate and other operations and intercompany eliminations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)

Compared to U.S. Cellular, TDS recognized an incremental gain of $11.9 million on the tower sale in the six months ended June 30, 2015 as a result of a lower basis in the assets disposed. See Note 6 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.  In 2014, TDS recognized expenses of $13.1 million related to exit and disposal activities due to a License Purchase and Customer Recommendation Agreement between U.S. Cellular and Airadigm.

 

Operating revenues and expenses

See “Results of Operations — U.S. Cellular” and “Results of Operations — TDS Telecom” below for factors that affected consolidated Operating revenues and expenses.

Equity in earnings of unconsolidated entities

TDS’ investment in the Los Angeles SMSA Limited Partnership (“LA Partnership”) contributed $39.3 million and $39.6 million to Equity in earnings of unconsolidated entities in 2015 and 2014, respectively.

Interest and dividend income

Interest and dividend income increased $13.3 million in 2015 to $18.5 million for the six months ended June 30, 2015. This increase is due to imputed interest income recognized on equipment installment plans. See Note 3Equipment Installment Plans in the Notes to the Consolidated Financial Statements for additional information.

Interest expense

The increase in interest expense was due primarily to U.S. Cellular’s issuance of $275 million of 7.25% Senior Notes in December 2014.

Income tax expense (benefit)

See Note 4Income Taxes in the Notes to Consolidated Financial Statements for additional discussion of the overall effective tax rate on Income (loss) before income taxes.

Net income attributable to noncontrolling interests, net of tax

Net income attributable to noncontrolling interests, net of tax includes the noncontrolling public shareholders’ share of U.S. Cellular’s net income and the noncontrolling shareholders’ or partners’ share of certain TDS or U.S. Cellular subsidiaries’ net income.

 

 

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

 

 

2015

 

2014

(Dollars in thousands)

 

 

 

 

 

Net income (loss) attributable to noncontrolling interests, net of tax

 

 

 

 

 

 

U.S. Cellular noncontrolling public shareholders’

$

28,315 

 

$

70 

 

Noncontrolling shareholders’ or partners’

 

5,200 

 

 

(1,718)

 

 

 

 

$

33,515 

 

$

(1,648)


RESULTS OF OPERATIONS — U.S. CELLULAR

TDS provides wireless telephone service through U.S. Cellular, an 84%-owned subsidiary.  U.S. Cellular owns, manages and invests in wireless markets throughout the United States. 

Summary Operating Data for U.S. Cellular Consolidated Markets

As of or for Six Months Ended June 30,

2015

 

2014

Retail Customers

 

 

 

 

 

 

Postpaid

 

 

 

 

 

 

 

Total at end of period

 

4,324,000 

 

 

4,148,000 

 

 

Gross additions

 

391,000 

 

 

387,000 

 

 

Net additions (losses)

 

26,000 

 

 

(119,000)

 

 

ARPU(1)

$

54.24 

 

$

57.18 

 

 

ARPA(2)

$

134.39 

 

$

131.92 

 

 

Churn rate(3)

 

1.4%

 

 

2.0%

 

 

Smartphone penetration(4)

 

69.1%

 

 

58.4%

 

Prepaid

 

 

 

 

 

 

 

Total at end of period

 

368,000 

 

 

352,000 

 

 

Gross additions

 

138,000 

 

 

150,000 

 

 

Net additions

 

20,000 

 

 

9,000 

 

 

ARPU(1)

$

35.90 

 

$

33.18 

 

 

Churn rate(3)

 

5.5%

 

 

6.7%

Total customers at end of period

 

4,779,000 

 

 

4,653,000 

Billed ARPU(1)

$

51.80 

 

$

53.62 

Service revenue ARPU(1)

$

57.79 

 

$

60.23 

Smartphones sold as a percent of total handsets sold

 

86.2%

 

 

78.6%

Total Population

 

 

 

 

 

 

Consolidated markets(5)

 

45,737,000 

 

 

54,817,000 

 

Consolidated operating markets(5)

 

31,814,000 

 

 

31,729,000 

Market penetration at end of period

 

 

 

 

 

 

Consolidated markets(6)

 

10.4%

 

 

8.5%

 

Consolidated operating markets(6)

 

15.0%

 

 

14.7%

Capital expenditures (000s)

$

200,126 

 

$

233,508 

Total cell sites in service

 

6,223 

 

 

6,183 

Owned towers in service

 

3,940 

 

 

4,457 

 

  1. Average Revenue per User (“ARPU”) metrics are calculated by dividing a revenue base by an average number of customers by the number of months in the period.  These revenue bases and customer populations are shown below:
    1. Postpaid ARPU consists of total postpaid service revenues and postpaid customers.
    2. Prepaid ARPU consists of total prepaid service revenues and prepaid customers.
    3. Billed ARPU consists of total postpaid, prepaid and reseller service revenues and postpaid, prepaid and reseller customers.
    4. Service revenue ARPU consists of total postpaid, prepaid and reseller service revenues, inbound roaming and other service revenues and postpaid, prepaid and reseller customers.

 

  1. Average Revenue per Account (“ARPA”) metric is calculated by dividing total postpaid service revenues by the average number of postpaid accounts by the number of months in the period.

 

  1. Churn metrics represent the percentage of the postpaid or prepaid customers that disconnect service each month. These metrics represent the average monthly postpaid or prepaid churn rate for each respective period.

 

  1. Smartphones represent wireless devices which run on an Android, Apple, BlackBerry or Windows Mobile operating system, excluding connected devices.  Smartphone penetration is calculated by dividing postpaid smartphone customers by total postpaid handset customers.

 

  1. The decrease in the population of Consolidated markets is due primarily to the license exchange transactions of certain non-operating licenses in North Carolina in December 2014 and Illinois and Indiana in March 2015.  Total Population is used only to calculate market penetration of consolidated markets and consolidated operating markets, respectively. See footnote (6) below.

 

  1. Market penetration is calculated by dividing the number of wireless customers at the end of the period by the total population of consolidated markets and consolidated operating markets, respectively, as estimated by Claritas.

 

 

 

Components of Operating Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

Six Months Ended June 30,

 

2015

 

2014

 

Change

 

Change

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Retail service

 

$

1,481,228 

 

$

1,510,918 

 

$

(29,690)

 

(2)%

Inbound roaming

 

 

89,373 

 

 

107,706 

 

 

(18,333)

 

(17)%

Other

 

 

81,983 

 

 

78,462 

 

 

3,521 

 

4%

 

Service revenues

 

 

1,652,584 

 

 

1,697,086 

 

 

(44,502)

 

(3)%

Equipment sales

 

 

288,328 

 

 

186,498 

 

 

101,830 

 

55%

 

Total operating revenues

 

 

1,940,912 

 

 

1,883,584 

 

 

57,328 

 

3%

 

 

 

 

 

 

 

 

 

 

 

 

 

System operations (excluding Depreciation, amortization

   and accretion reported below)

 

 

386,953 

 

 

367,738 

 

 

19,215 

 

5%

Cost of equipment sold

 

 

491,972 

 

 

542,452 

 

 

(50,480)

 

(9)%

Selling, general and administrative

 

 

731,939 

 

 

799,816 

 

 

(67,877)

 

(8)%

Depreciation, amortization and accretion

 

 

297,666 

 

 

316,090 

 

 

(18,424)

 

(6)%

(Gain) loss on asset disposals, net

 

 

9,650 

 

 

8,827 

 

 

823 

 

9%

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

 

(113,182)

 

 

(17,411)

 

 

(95,771)

 

>(100)%

(Gain) loss on license sales and exchanges, net

 

 

(122,898)

 

 

(91,446)

 

 

(31,452)

 

(34)%

 

Total operating expenses

 

 

1,682,100 

 

 

1,926,066 

 

 

(243,966)

 

(13)%

 

Operating income (loss)

 

$

258,812 

 

$

(42,482)

 

$

301,294 

 

>100%

 

Operating Revenues

Service revenues

Service revenues consist primarily of: (i) charges for access, airtime, roaming, recovery of regulatory costs and value added services, including data products and services, provided to U.S. Cellular’s retail customers and to end users through third party resellers (“retail service”); (ii) charges to other wireless carriers whose customers use U.S. Cellular’s wireless systems when roaming; and (iii) amounts received from the Federal Universal Service Fund (“USF”), tower rental revenue, and revenue from spectrum leases.

Retail service revenues

Retail service revenues decreased by $29.7 million, or 2%, in 2015 to $1,481.2 million due to a decrease in billed ARPU, partially offset by an increase in U.S. Cellular’s average customer base.

Billed ARPU decreased to $51.80 in 2015 from $53.62 in 2014. This overall decrease is due primarily to a decrease in postpaid ARPU to $54.24 in 2015 from $57.18 in 2014, due to discounts offered on shared data plans for customers on equipment installment plans and those providing their own device at the time of activation or renewal.

U.S. Cellular expects continued pressure on retail service revenues in the foreseeable future due to industry competition for customers and related effects on pricing of service plan offerings offset to some degree by continued adoption of smartphones and data usage. Beginning in the second quarter of 2014, U.S. Cellular expanded its offerings of equipment installment plans.  To the extent that customers adopt these plans, U.S. Cellular expects an increase in equipment sales revenues.  However, certain of the equipment installment plans provide the customer with a reduction in the monthly access charge for the device; thus, to the extent that existing customers adopt such plans, U.S. Cellular expects a reduction in retail service revenues and ARPU.

Inbound roaming revenues

Inbound roaming revenues decreased by $18.3 million, or 17%, in 2015 to $89.4 million. The decrease was due to lower rates for both voice and data and a decline in voice volume.

Other revenues

Other revenues increased by $3.5 million, or 4%, in 2015 compared to 2014 primarily due to increases in revenue from spectrum leases and revenue share from mobile applications.

Pursuant to the FCC's Reform Order (“Reform Order”), U.S. Cellular’s current Federal USF support is being phased down at the rate of 20% per year beginning July 1, 2012.  The Phase II Mobility Fund was not operational as of September 2014.  Therefore, as provided by the Reform Order, the phase down is currently suspended and U.S. Cellular will continue to receive 60% of its baseline support until the Phase II Mobility Fund is operational.  Revenues representing amounts received from the Federal USF for the three and six months ended June 30, 2015 were $23.0 million and $46.1 million, respectively.  At this time, U.S. Cellular cannot predict the net effect of the FCC’s changes to the USF high cost support program in the Reform Order.  Accordingly, U.S. Cellular cannot predict whether such changes will have a material adverse effect on U.S. Cellular’s business, financial condition or results of operations.

Equipment sales revenues

Equipment sales revenues include revenues from sales of wireless devices and related accessories to both new and existing customers, as well as revenues from sales of devices to agents. All Equipment sales revenues are recorded net of estimated rebates.

U.S. Cellular offers a competitive line of quality wireless devices to both new and existing customers. U.S. Cellular's customer acquisition and retention efforts include offering new wireless devices to customers at discounted prices. U.S. Cellular also continues to sell wireless devices to agents including national retailers; this practice enables U.S. Cellular to provide better control over the quality of wireless devices sold to its customers, establish roaming preferences and earn quantity discounts from wireless device manufacturers which are passed along to agents and other retailers.

Equipment sales revenues increased $101.8 million, or 55%, to $288.3 million in 2015.  The increase is due primarily to an increase in average revenue per device sold (including the impact of sales under equipment installment plans and a mix shift to smartphones and connected devices) and an increase in sales of accessories, partially offset by a decrease in total unit sales of 12%.  Equipment sales revenues in 2015 include $136.9 million related to equipment installment plan sales compared to $33.6 million in 2014.  See Note 3Equipment Installment Plans in the Notes to Consolidated Financial Statements for additional information.

Operating Expenses

System operations expenses (excluding Depreciation, amortization and accretion)

System operations expenses (excluding Depreciation, amortization, and accretion) include charges from telecommunications service providers for U.S. Cellular’s customers’ use of their facilities, costs related to local interconnection to the wireline network, charges for cell site rent and maintenance of U.S. Cellular’s network, long-distance charges, outbound roaming expenses and payments to thirdparty data product and platform developers.

System operations expenses increased $19.2 million, or 5%, to $387.0 million.  The primary factor in the overall increase was expenses incurred when U.S. Cellular’s customers used other carriers’ networks while roaming; these expenses increased $19.5 million, or 24%, due primarily to an increase in data roaming usage.  Changes in other key components of System operations expenses were largely offsetting.

U.S. Cellular expects system operations expenses to increase in the future to support the continued growth in cell sites and other network facilities as it continues to add capacity, enhance quality and deploy new technologies as well as to support increases in total customer usage, particularly data usage. However, these increases are expected to be offset to some extent by cost savings generated by shifting data traffic to the 4G LTE network from the 3G network.

Cost of equipment sold

Cost of equipment sold decreased by $50.5 million, or 9%, to $492.0 million in 2015. The decrease was driven primarily by a 12% reduction in the total number of devices sold, partially offset by a slight increase in the average cost per device sold (reflecting the mix shift to smartphones and connected devices) and higher sales of accessories.  Cost of equipment sold in 2015 includes $191.4 million related to equipment installment plan sales compared to $47.4 million in 2014.

U.S. Cellular's loss on equipment, defined as equipment sales revenues less cost of equipment sold, was $203.6 million and $356.0 million for 2015 and 2014, respectively.  The $152.3 million decrease in loss on equipment was driven by higher equipment installment plan sales which have a lower loss per device.  In addition, lower handset sales contributed to the decline in loss on equipment.  U.S. Cellular expects loss on equipment to continue to be a significant cost in the foreseeable future as iconic data-centric wireless devices continue to increase in cost and wireless carriers continue to use pricing as a means of competitive differentiation.  However, U.S. Cellular expects sales of devices under equipment installment plans, and certain devices such as tablets under non-subsidized plans, will offset loss on equipment to some degree.

Selling, general and administrative expenses

Selling, general and administrative expenses include salaries, commissions and expenses of field sales and retail personnel and facilities; telesales department salaries and expenses; agent commissions and related expenses; corporate marketing and merchandise management; and advertising expenses. Selling, general and administrative expenses also include bad debts expense, costs of operating customer care centers and corporate expenses.

Key components of the $67.9 million, or 8%, decrease to $731.9 million were as follows:

Depreciation, amortization and accretion expenses

Depreciation, amortization and accretion decreased $18.4 million, or 6%, in 2015 to $297.7 million due primarily to the cessation of accelerated depreciation, amortization and accretion in the Divestiture Markets, which was completed in the first quarter of 2014.

(Gain) loss on asset disposals, net

(Gain) loss on asset disposals, net was a loss in both 2015 and 2014 due primarily to write-offs and disposals of certain network assets.

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

The net gain of $113.2 million in 2015 was due primarily to a $107.7 million gain recognized from the sale of towers to a third party which closed in January 2015.  The net gain of $17.4 million in 2014 resulted from the continuing impact of the Divestiture Transaction.  See Note 6Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.

(Gain) loss on license sales and exchanges, net

The net gain of $122.9 million in 2015 was due primarily to the license exchange of certain of U.S. Cellular’s PCS licenses for certain other PCS licenses and cash.  The net gain of $91.4 million in 2014 resulted from the sale of the St. Louis area non-operating market license and the license exchange in Milwaukee.  See Note 6Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.


RESULTS OF OPERATIONS — TDS TELECOM

TDS Telecom provides broadband, video and voice telecommunications services and hosted and managed services in three reportable segments: Wireline, Cable and HMS.

On September 1, 2014, TDS acquired substantially all of the assets of BendBroadband, a full-service cable communications company. As part of the agreement, TDS also acquired a cable advertising and broadcast business and a Tier III data center providing colocation and managed services.  The operations of the cable and cable advertising and broadcast businesses are included in the Cable segment.  The operations of the data center are included in the HMS segment.  This acquisition impacts the comparability of TDS Telecom’s operating results.

The following table summarizes customer connections for TDS Telecom’s Wireline and Cable operations:

As of or for the Six Months Ended June 30,

 

2015

 

2014

 

Change

Wireline

 

 

 

 

 

 

 

 

 

 

Residential connections

 

 

 

 

 

 

 

 

 

 

 

Voice (1)

 

 

329,000 

 

 

346,100 

 

 

(17,100)

 

 

Broadband (2)

 

 

231,200 

 

 

232,700 

 

 

(1,500)

 

 

IPTV (3)

 

 

27,900 

 

 

18,200 

 

 

9,700 

 

 

 

Wireline residential connections

 

 

588,100 

 

 

597,000 

 

 

(8,900)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total residential revenue per connection (4)

 

$

42.21 

 

$

40.92 

 

$

1.29 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial connections

 

 

 

 

 

 

 

 

 

 

 

Voice (1)

 

 

181,800 

 

 

206,200 

 

 

(24,400)

 

 

Broadband (2)

 

 

23,700 

 

 

26,000 

 

 

(2,300)

 

 

managedIP (5)

 

 

145,100 

 

 

133,300 

 

 

11,800 

 

 

 

Wireline commercial connections

 

 

350,600 

 

 

365,500 

 

 

(14,900)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Wireline connections

 

 

938,700 

 

 

962,500 

 

 

(23,800)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cable

 

 

 

 

 

 

 

 

 

 

Cable connections

 

 

 

 

 

 

 

 

 

 

 

Video (6)

 

 

109,100 

 

 

69,700 

 

 

39,400 

 

 

Broadband (7)

 

 

112,300 

 

 

63,200 

 

 

49,100 

 

 

Voice (7)

 

 

51,500 

 

 

17,800 

 

 

33,700 

 

 

 

Cable connections

 

 

272,900 

 

 

150,700 

 

 

122,200 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

The individual circuit connecting customers to TDS Telecom’s central office facilities. The divestiture of certain Wireline companies resulted in a reduction of 4,300 residential connections and 1,300 commercial connections.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)

The number of customers provided high-capacity data circuits via various technologies, including DSL and dedicated internet circuit technologies. The divestiture of certain Wireline companies resulted in a reduction of 2,600 residential connections and 200 commercial connections.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3)

The number of customers provided video services using IP networking technology.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4)

Total residential revenue per connection is calculated by dividing the average residential revenue for the period by the average number of residential connections for the period.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5)

The number of telephone handsets, data lines and IP trunks providing communications using IP networking technology.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6)

Generally, a home or business receiving video programming counts as one video connection.  In counting bulk residential or commercial connections, such as an apartment building or a hotel, connections are counted based on the number of units/rooms within the building receiving service.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7)

Broadband and voice connections reflect billable number of lines into a building for high speed data and voice services, respectively.

 

 

TDS Telecom

Components of Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

Six Months Ended June 30,

 

2015

 

2014

 

Change

 

Change

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

Wireline

 

$

352,105 

 

$

358,214 

 

$

(6,109)

 

(2)%

 

Cable

 

 

88,184 

 

 

44,987 

 

 

43,197 

 

96%

 

HMS

 

 

136,547 

 

 

131,044 

 

 

5,503 

 

4%

 

Intra-company elimination

 

 

(2,038)

 

 

(979)

 

 

(1,059)

 

>(100)%

 

 

TDS Telecom operating revenues

 

 

574,798 

 

 

533,266 

 

 

41,532 

 

8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Wireline

 

 

302,746 

 

 

309,219 

 

 

(6,473)

 

(2)%

 

Cable

 

 

82,854 

 

 

44,420 

 

 

38,434 

 

87%

 

HMS

 

 

144,302 

 

 

143,347 

 

 

955 

 

1%

 

Intra-company elimination

 

 

(2,038)

 

 

(979)

 

 

(1,059)

 

>(100)%

 

 

TDS Telecom operating expenses

 

 

527,864 

 

 

496,007 

 

 

31,857 

 

6%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TDS Telecom operating income

 

$

46,934 

 

$

37,259 

 

$

9,675 

 

26%

 

 

The Wireline business has continued to experience expected secular declines in revenues.  Cable and HMS revenues have increased due to acquisitions and organic growth, and have offset the decline in Wireline revenues.  Excluding the impacts of acquisitions and divestitures, revenues, operating expenses and operating income have remained relatively flat.

Wireline Operations

Components of Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

Six Months Ended June 30,

 

 

2015

 

 

2014

 

 

Change

 

Change

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Service revenues

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

148,962 

 

$ 

145,865 

 

$ 

3,097 

 

2%

 

Commercial

 

 

111,158 

 

 

115,452 

 

 

(4,294)

 

(4)%

 

Wholesale

 

 

90,984 

 

 

95,913 

 

 

(4,929)

 

(5)%

 

 

Total service revenues

 

 

351,104 

 

 

357,230 

 

 

(6,126)

 

(2)%

Equipment and product sales

 

 

1,001 

 

 

984 

 

 

17 

 

2%

 

 

 

Total operating revenues

 

 

352,105 

 

 

358,214 

 

 

(6,109)

 

(2)%

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services (excluding Depreciation,

  amortization and accretion reported below)

 

 

125,031 

 

 

128,705 

 

 

(3,674)

 

(3)%

Cost of equipment and products

 

 

1,160 

 

 

964 

 

 

196 

 

20%

Selling, general and administrative

 

 

94,869 

 

 

94,228 

 

 

641 

 

1%

Depreciation, amortization and accretion

 

 

83,212 

 

 

84,563 

 

 

(1,351)

 

(2)%

(Gain) loss on asset disposals, net

 

 

1,528 

 

 

759 

 

 

769 

 

>100%

(Gain) loss on sale of business and other exit

  costs, net

 

 

(3,054)

 

 

 

 

 

(3,054)

 

N/M

 

 

 

Total operating expenses

 

 

302,746 

 

 

309,219 

 

 

(6,473)

 

(2)%

 

 

 

 

Total operating income

 

$

49,359 

 

$ 

48,995 

 

$ 

364 

 

1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

N/M - Not Meaningful

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential revenues, which consist of broadband, video, and voice services to TDS Telecom’s Wireline residential customer base, increased in 2015 as growth in data and IPTV more than offset the decline in legacy voice services.  A 3% increase in average revenue per residential connection driven by price increases for broadband and video services, growth in customers opting for faster broadband speeds and growth in customers selecting higher tier IPTV packages increased revenues $2.2 million. IPTV average connections grew 60% increasing revenues $4.6 million, while legacy voice connections declined by 4% decreasing revenues by $2.7 million.

Commercial revenues, which consist of broadband and voice services and sales and installation of IP-based telecommunication systems to TDS Telecom’s Wireline commercial customer base, decreased in 2015.  Declining legacy voice and data connections reduced revenues $7.3 million, while 9% growth in average managedIP connections increased commercial revenue $3.3 million.

Wholesale revenues, which represent compensation from other carriers for utilizing TDS Telecom’s network infrastructure and regulatory recoveries, decreased in 2015 due primarily to a $2.7 million reduction in revenues received through inter-state and intra-state regulatory mechanisms and $0.8 million due to a 10% reduction in intra-state minutes-of-use.

Cost of services decreased in 2015 due primarily to $6.5 million in reduced costs of provisioning circuits, purchasing unbundled network elements and providing long-distance services, offset by $3.7 million in increased charges related to the growth in IPTV.

In May 2015, the divestiture of certain wireline companies resulted in a $3.1 million Gain on sale of business and other exit costs, net.

Cable Operations

Components of Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

Six Months Ended June 30,

 

 

2015

 

 

2014

 

 

Change

 

Change

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Service revenues

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

69,959 

 

$ 

36,475 

 

$ 

33,484 

 

92%

 

Commercial

 

 

18,067 

 

 

8,512 

 

 

9,555 

 

>100%

 

 

Total service revenues

 

 

88,026 

 

 

44,987 

 

 

43,039 

 

96%

Equipment and product sales

 

 

158 

 

 

 

 

 

158 

 

N/M

 

 

 

Total operating revenues

 

 

88,184 

 

 

44,987 

 

 

43,197 

 

96%

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services (excluding Depreciation,

  amortization and accretion reported below)

 

 

39,797 

 

 

22,349 

 

 

17,448 

 

78%

Cost of equipment and products

 

 

75 

 

 

 

 

 

75 

 

N/M

Selling, general and administrative

 

 

26,389 

 

 

12,663 

 

 

13,726 

 

>100%

Depreciation, amortization and accretion

 

 

17,579 

 

 

8,918 

 

 

8,661 

 

97%

(Gain) loss on asset disposals, net

 

 

(986)

 

 

490 

 

 

(1,476)

 

>(100)%

 

 

 

Total operating expenses

 

 

82,854 

 

 

44,420 

 

 

38,434 

 

87%

 

 

 

 

Total operating income

 

$

5,330 

 

$ 

567 

 

$ 

4,763 

 

>100%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

N/M - Not Meaningful

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in operating revenues and operating expenses in 2015 are due primarily to acquisitions.

HMS Operations

Components of Operating Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

Six Months Ended June 30,

 

 

2015

 

 

2014

 

 

Change

 

Change

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Service revenues

 

$

57,883 

 

$ 

54,951 

 

$ 

2,932 

 

5%

Equipment and product sales

 

 

78,664 

 

 

76,093 

 

 

2,571 

 

3%

 

 

Total operating revenues

 

 

136,547 

 

 

131,044 

 

 

5,503 

 

4%

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services (excluding  Depreciation,

  amortization and accretion reported below)

 

 

41,982 

 

 

38,247 

 

 

3,735 

 

10%

Cost of equipment and products

 

 

65,696 

 

 

64,342 

 

 

1,354 

 

2%

Selling, general and administrative

 

 

23,659 

 

 

27,211 

 

 

(3,552)

 

(13)%

Depreciation, amortization and accretion

 

 

13,008 

 

 

13,469 

 

 

(461)

 

(3)%

(Gain) loss on asset disposals, net

 

 

(43)

 

 

78 

 

 

(121)

 

>(100)%

 

 

Total operating expenses

 

 

144,302 

 

 

143,347 

 

 

955 

 

1%

 

 

 

Total operating income (loss)

 

$

(7,755)

 

$ 

(12,303)

 

$ 

4,548 

 

37%

 

 

Excluding the impact of acquisitions, growth of 3% in recurring services including colocation, dedicated hosting, hosted application management and cloud computing services resulted in an increase in Service revenues in 2015Equipment and product sales revenues from sales of IT infrastructure hardware solutions increased in 2015 due to higher spending by existing customers.  There was a corresponding increase in Cost of equipment and products.


Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

RESULTS OF OPERATIONS — CONSOLIDATED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

Three Months Ended June 30,

 

2015

 

2014

 

Change

 

Change

(Dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Cellular

 

$

975,667 

 

$

957,773 

 

$

17,894 

 

2%

 

TDS Telecom

 

 

294,813 

 

 

270,850 

 

 

23,963 

 

9%

 

All other (1)

 

 

5,915 

 

 

7,769 

 

 

(1,854)

 

(24)%

 

 

Total operating revenues

 

 

1,276,395 

 

 

1,236,392 

 

 

40,003 

 

3%

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Cellular

 

 

967,168 

 

 

1,008,080 

 

 

(40,912)

 

(4)%

 

TDS Telecom

 

 

269,111 

 

 

251,585 

 

 

17,526 

 

7%

 

All other (1) (2)

 

 

7,995 

 

 

25,817 

 

 

(17,822)

 

(69)%

 

 

Total operating expenses

 

 

1,244,274 

 

 

1,285,482 

 

 

(41,208)

 

(3)%

Operating income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Cellular

 

 

8,499 

 

 

(50,307)

 

 

58,806 

 

>100%

 

TDS Telecom

 

 

25,702 

 

 

19,265 

 

 

6,437 

 

33%

 

All other (1) (2)

 

 

(2,080)

 

 

(18,048)

 

 

15,968 

 

88%

 

 

Total operating income (loss)

 

 

32,121 

 

 

(49,090)

 

 

81,211 

 

>100%

Investment and other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated entities

 

 

35,412 

 

 

34,790 

 

 

622 

 

2%

 

Interest and dividend income

 

 

10,117 

 

 

2,751 

 

 

7,366 

 

>100%

 

Interest expense

 

 

(33,919)

 

 

(27,898)

 

 

(6,021)

 

(22)%

 

Other, net

 

 

202 

 

 

50 

 

 

152 

 

>100%

 

 

Total investment and other income (expense)

 

 

11,812 

 

 

9,693 

 

 

2,119 

 

22%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

43,933 

 

 

(39,397)

 

 

83,330 

 

>100%

 

Income tax expense (benefit)

 

 

17,433 

 

 

(13,671)

 

 

31,104 

 

>100%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

26,500 

 

 

(25,726)

 

 

52,226 

 

>100%

 

Less: Net income (loss) attributable to

  noncontrolling interests, net of tax

 

 

3,454 

 

 

(3,688)

 

 

7,142 

 

>100%

Net income (loss) attributable to TDS shareholders

 

 

23,046 

 

 

(22,038)

 

 

45,084 

 

>100%

 

Preferred dividend requirement

 

 

(12)

 

 

(12)

 

 

 

 

-

Net income (loss) available to common shareholders

 

$

23,034 

 

$

(22,050)

 

$

45,084 

 

>100%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Consists of corporate and other operations and intercompany eliminations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)

In 2014, TDS recognized expenses of $13.1 million related to exit and disposal activities due to a License Purchase and Customer Recommendation Agreement between U.S. Cellular and Airadigm.

 

Operating Revenues and Expenses

See “Results of OperationsU.S. Cellular” and “Results of OperationsTDS Telecom” below for factors that affected consolidated Operating Revenues and Expenses.

Equity in earnings of unconsolidated entities

TDS’ investment in the Los Angeles SMSA Limited Partnership (“LA Partnership”) contributed $19.4 million and $18.4 million to Equity in earnings of unconsolidated entities in 2015 and 2014, respectively. 

Interest and dividend income

Interest and dividend income increased $7.4 million in 2015 to $10.1 million for the three months ended June 30, 2015. This increase is due to imputed interest income recognized on equipment installment plans. See Note 3 Equipment Installment Plans in the Notes to the Consolidated Financial Statements for additional information.

Interest expense

The increase in interest expense was due primarily to U.S. Cellular’s issuance of $275 million of 7.25% Senior Notes in December 2014.

Income tax expense (benefit)

See Note 4Income Taxes in the Notes to Consolidated Financial Statements for additional discussion of the overall effective tax rate on Income (loss) before income taxes.

Net income attributable to noncontrolling interests, net of tax

Net income attributable to noncontrolling interests, net of tax includes the noncontrolling public shareholders’ share of U.S. Cellular’s net income and the noncontrolling shareholders’ or partners’ share of certain TDS or U.S. Cellular subsidiaries’ net income.

 

 

 

 

Three Months Ended

 

 

 

 

June 30,

 

 

 

 

2015

 

2014

(Dollars in thousands)

 

 

 

 

 

Net income (loss) attributable to noncontrolling interests, net of tax

 

 

 

 

 

 

U.S. Cellular noncontrolling public shareholders’

$

3,106 

 

$

(3,014)

 

Noncontrolling shareholders’ or partners’

 

348 

 

 

(674)

 

 

 

 

$

3,454 

 

$

(3,688)


RESULTS OF OPERATIONS — U.S. CELLULAR

Components of Operating Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

Three Months Ended June 30,

 

2015

 

2014

 

Change

 

Change

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Retail service

 

$

734,740 

 

$

746,117 

 

$

(11,377)

 

(2)%

Inbound roaming

 

 

49,044 

 

 

57,580 

 

 

(8,536)

 

(15)%

Other

 

 

40,589 

 

 

39,776 

 

 

813 

 

2%

 

Service revenues

 

 

824,373 

 

 

843,473 

 

 

(19,100)

 

(2)%

Equipment sales

 

 

151,294 

 

 

114,300 

 

 

36,994 

 

32%

 

Total operating revenues

 

 

975,667 

 

 

957,773 

 

 

17,894 

 

2%

 

 

 

 

 

 

 

 

 

 

 

 

 

System operations (excluding Depreciation, amortization

   and accretion reported below)

 

 

196,276 

 

 

187,131 

 

 

9,145 

 

5%

Cost of equipment sold

 

 

253,671 

 

 

271,978 

 

 

(18,307)

 

(7)%

Selling, general and administrative

 

 

362,971 

 

 

404,252 

 

 

(41,281)

 

(10)%

Depreciation, amortization and accretion

 

 

150,581 

 

 

148,337 

 

 

2,244 

 

2%

(Gain) loss on asset disposals, net

 

 

5,399 

 

 

6,893 

 

 

(1,494)

 

(22)%

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

 

(1,705)

 

 

(10,511)

 

 

8,806 

 

84%

(Gain) loss on license sales and exchanges, net

 

 

(25)

 

 

 

 

 

(25)

 

N/M

 

Total operating expenses

 

 

967,168 

 

 

1,008,080 

 

 

(40,912)

 

(4)%

 

Operating income (loss)

 

$

8,499 

 

$

(50,307)

 

$

58,806 

 

>100%

N/M - Not meaningful

Operating Revenues

Retail service revenues

Retail service revenues decreased by $11.4 million, or 2%, in 2015 to $734.7 million due to a decrease in billed ARPU, partially offset by an increase in U.S. Cellular’s average customer base.

Billed ARPU decreased to $51.29 in 2015 from $53.36 in 2014 due primarily to a decrease in postpaid ARPU to $53.62 in 2015 from $56.82 in 2014, due to discounts offered on shared data plans for customers on equipment installment plans and those providing their own device at the time of activation or renewal.

Inbound roaming revenues

Inbound roaming revenues decreased by $8.5 million, or 15%, in 2015 to $49.0 million. The decrease was due to lower rates for both voice and data and a decline in voice volume.

Other revenues

Other revenues increased by $0.8 million, or 2%, in 2015 compared to 2014 due to increases in revenue from spectrum leases and revenue share from mobile applications.

Equipment sales revenues

Equipment sales revenues increased $37.0 million, or 32%, to $151.3 million in 2015.  The increase is due primarily to an increase in average revenue per device sold (including the impact of sales under equipment installment plans and a mix shift to smartphones and connected devices) and an increase in sales of accessories, partially offset by a decrease in total unit sales of 10%.  Equipment sales revenues in 2015 include $68.9 million related to equipment installment plan sales compared to $30.5 million in 2014.  See Note 3Equipment Installment Plans in the Notes to Consolidated Financial Statements for additional information.

Operating Expenses

System operations expenses (excluding Depreciation, amortization and accretion)

System operations expenses increased $9.1 million, or 5%, to $196.3 million.  The primary factor in the overall increase was expenses incurred when U.S. Cellular’s customers used other carriers’ networks while roaming; these expenses increased $10.8 million, or 25%,

due primarily to an increase in data roaming usage.  Changes in other key components of System operations expenses were largely offsetting.

Cost of equipment sold

Cost of equipment sold decreased by $18.3 million, or 7%, to $253.7 million in 2015. The decrease was driven primarily by a 10% decrease in the total number of devices sold, partially offset by a slight increase in the average cost per device sold (reflecting the mix shift to smartphones and connected devices) and higher sales of accessories.  Cost of equipment sold in 2015 includes $104.7 million related to equipment installment plan sales compared to $44.1 million in 2014.

U.S. Cellular's loss on equipment, defined as equipment sales revenues less cost of equipment sold, was $102.4 million and $157.7 million for 2015 and 2014, respectively.  The $55.3 million decrease in loss on equipment was driven by higher equipment installment plan sales which have a lower loss per device.  In addition, lower handset sales contributed to the decline in loss on equipment.  

Selling, general and administrative expenses

Key components of the $41.3 million, or 10%, decrease to $363.0 million were as follows:

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

The net gains of $1.7 million in 2015 and $10.5 million in 2014 were due primarily to the continuing impact of the Divestiture Transaction.  See Note 6Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.


RESULTS OF OPERATIONS – TDS TELECOM

TDS Telecom

Components of Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

Three Months Ended June 30,

 

2015

 

2014

 

Change

 

Change

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

Wireline

 

$

175,970 

 

$

180,728 

 

$

(4,758)

 

(3)%

 

Cable

 

 

44,615 

 

 

22,484 

 

 

22,131 

 

98%

 

HMS

 

 

75,586 

 

 

67,936 

 

 

7,650 

 

11%

 

Intra-company elimination

 

 

(1,358)

 

 

(298)

 

 

(1,060)

 

>(100)%

 

 

TDS Telecom operating revenues

 

 

294,813 

 

 

270,850 

 

 

23,963 

 

9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Wireline

 

 

151,560 

 

 

154,835 

 

 

(3,275)

 

(2)%

 

Cable

 

 

40,820 

 

 

22,661 

 

 

18,159 

 

80%

 

HMS

 

 

78,089 

 

 

74,387 

 

 

3,702 

 

5%

 

Intra-company elimination

 

 

(1,358)

 

 

(298)

 

 

(1,060)

 

>(100)%

 

 

TDS Telecom operating expenses

 

 

269,111 

 

 

251,585 

 

 

17,526 

 

7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TDS Telecom operating income

 

$

25,702 

 

$

19,265 

 

$

6,437 

 

33%

 

The Wireline business has continued to experience expected secular declines in revenues.  Cable and HMS revenues have increased due to acquisitions and organic growth, and have offset the decline in Wireline revenues.  Excluding the impacts of acquisitions and divestitures, revenues, operating expenses and operating income have remained relatively flat.

Wireline Operations

Components of Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

Three Months Ended June 30,

 

 

2015

 

 

2014

 

 

Change

 

Change

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Service revenues

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

74,277 

 

$ 

73,360 

 

$ 

917 

 

1%

 

Commercial

 

 

55,395 

 

 

57,472 

 

 

(2,077)

 

(4)%

 

Wholesale

 

 

45,741 

 

 

49,465 

 

 

(3,724)

 

(8)%

 

 

Total service revenues

 

 

175,413 

 

 

180,297 

 

 

(4,884)

 

(3)%

Equipment and product sales

 

 

557 

 

 

431 

 

 

126 

 

29%

 

 

 

Total operating revenues

 

 

175,970 

 

 

180,728 

 

 

(4,758)

 

(3)%

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services (excluding Depreciation,

amortization and accretion reported below)

 

 

62,604 

 

 

64,305 

 

 

(1,701)

 

(3)%

Cost of equipment and products

 

 

597 

 

 

481 

 

 

116 

 

24%

Selling, general and administrative

 

 

49,200 

 

 

47,708 

 

 

1,492 

 

3%

Depreciation, amortization and accretion

 

 

41,203 

 

 

41,827 

 

 

(624)

 

(1)%

(Gain) loss on asset disposals, net

 

 

1,010 

 

 

514 

 

 

496 

 

96%

(Gain) loss on sale of business and other exit

  costs, net

 

 

(3,054)

 

 

 

 

 

(3,054)

 

N/M

 

 

 

Total operating expenses

 

 

151,560 

 

 

154,835 

 

 

(3,275)

 

(2)%

 

 

 

 

Total operating income

 

$

24,410 

 

$ 

25,893 

 

$ 

(1,483)

 

(6)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

N/M - Not Meaningful

 

 

 

 

 

 

 

 

 

 

 

 

Residential revenues increased in 2015 as growth in data and IPTV more than offset the decline in legacy voice services.  IPTV average connections grew 56% increasing revenues $2.3 million, while legacy voice connections declined by 4% decreasing revenues by $1.3 million.

Commercial revenues decreased in 2015 as declining legacy voice and data connections reduced revenues $3.6 million, while 9% growth in average managedIP connections increased commercial revenues $1.6 million.

Wholesale revenues decreased $2.0 million due to a reduction in revenues received through inter-state and intra-state regulatory recovery mechanisms and $0.6 million due to a reduction in intra-state minutes-of-use.

Cost of services decreased in 2015 due primarily to $3.3 million in reduced costs of provisioning circuits, purchasing unbundled network elements and providing long-distance services, offset by $1.8 million in increased charges related to the growth in IPTV.

In May 2015, the divestiture of certain wireline companies resulted in a $3.1 million Gain on sale of business and other exit costs, net.

Cable Operations

Components of Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

Three Months Ended June 30,

 

 

2015

 

 

2014

 

 

Change

 

Change

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Service revenues

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

34,913 

 

$ 

18,222 

 

$ 

16,691 

 

92%

 

Commercial

 

 

9,632 

 

 

4,262 

 

 

5,370 

 

>100%

 

 

Total service revenues

 

 

44,545 

 

 

22,484 

 

 

22,061 

 

98%

Equipment and product sales

 

 

70 

 

 

 

 

 

70 

 

N/M

 

 

 

Total operating revenues

 

 

44,615 

 

 

22,484 

 

 

22,131 

 

98%

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services (excluding Depreciation,

  amortization and accretion reported below)

 

 

19,849 

 

 

11,394 

 

 

8,455 

 

74%

Cost of equipment and products

 

 

15 

 

 

 

 

 

15 

 

N/M

Selling, general and administrative

 

 

13,764 

 

 

6,285 

 

 

7,479 

 

>100%

Depreciation, amortization and accretion

 

 

8,860 

 

 

4,557 

 

 

4,303 

 

94%

(Gain) loss on asset disposals, net

 

 

(1,668)

 

 

425 

 

 

(2,093)

 

>(100)%

 

 

 

Total operating expenses

 

 

40,820 

 

 

22,661 

 

 

18,159 

 

80%

 

 

 

 

Total operating income (loss)

 

$

3,795 

 

$ 

(177)

 

$ 

3,972 

 

>100%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

N/M - Not Meaningful

 

 

 

 

 

 

 

 

 

 

 

 

Changes in operating revenues and operating expenses in 2015 are due primarily to acquisitions.

HMS Operations

Components of Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

Three Months Ended June 30,

 

 

2015

 

 

2014

 

 

Change

 

Change

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Service revenues

 

$

29,467 

 

$ 

27,575 

 

$ 

1,892 

 

7%

Equipment and product sales

 

 

46,119 

 

 

40,361 

 

 

5,758 

 

14%

 

 

Total operating revenues

 

 

75,586 

 

 

67,936 

 

 

7,650 

 

11%

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services (excluding Depreciation,

  amortization and accretion reported below)

 

 

21,954 

 

 

21,301 

 

 

653 

 

3%

Cost of equipment and products

 

 

38,566 

 

 

33,875 

 

 

4,691 

 

14%

Selling, general and administrative

 

 

10,969 

 

 

12,376 

 

 

(1,407)

 

(11)%

Depreciation, amortization and accretion

 

 

6,573 

 

 

6,791 

 

 

(218)

 

(3)%

(Gain) loss on asset disposals, net

 

 

27 

 

 

44 

 

 

(17)

 

(39)%

 

 

Total operating expenses

 

 

78,089 

 

 

74,387 

 

 

3,702 

 

5%

 

 

 

Total operating income (loss)

 

$

(2,503)

 

$ 

(6,451)

 

$ 

3,948 

 

61%

 

Excluding the impact of acquisitions, growth of 3% in recurring services including colocation, dedicated hosting, hosted application management and cloud computing services resulted in an increase in Service revenues in 2015.  Equipment and product sales revenues from sales of IT infrastructure hardware solutions increased in 2015 due to higher spending by existing customers.  There was a corresponding increase in Cost of equipment and products.

 

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1Basis of Presentation in the Notes to Consolidated Financial Statements for information on recent accounting pronouncements.


LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

TDS operates a capital- and marketing-intensive business. TDS utilizes cash on hand, cash from operating activities, cash proceeds from divestitures and dispositions of investments, short-term credit facilities and long-term debt financing to fund its acquisitions (including licenses), construction costs, operating expenses and share repurchases. Cash flows may fluctuate from quarter to quarter and year to year due to seasonality, the timing of acquisitions and divestitures, capital expenditures and other factors. The table below and the following discussion summarize TDS' cash flow activities for the six months ended June 30, 2015 and 2014.

 

 

2015

 

2014

(Dollars in thousands)

 

 

 

 

 

Cash flows from (used in):

 

 

 

 

 

 

Operating activities

$

538,431 

 

$

315,642 

 

Investing activities

 

(346,007)

 

 

(218,963)

 

Financing activities

 

(32,776)

 

 

(51,833)

 

Net increase in cash and cash equivalents

$

159,648 

 

$

44,846 

 

Cash Flows from Operating Activities

An increase in cash flows from operating activities was due primarily to working capital factors.  These factors included a $190.5 million change in accrued taxes attributable to changes in income tax payments and refunds, as well as changes in current tax expense.  With regard to payments and refunds, TDS received income tax refunds, net of payments, of $24.9 million in 2015 whereas TDS paid income taxes, net of refunds, of $27.7 million in 2014.  TDS recorded current income tax expense of $170.1 million and $31.3 million in 2015 and 2014, respectively.  The $138.8 million increase is largely attributable to current tax accrued on the sale and exchange of certain PCS licenses, as well as the sale of towers in 2015.  See Note 6Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.  The working capital factors also included a significant reduction of inventory, which resulted in a cash flow increase of $88.3 million.

U.S. Cellular holds a 5.5% interest in the LA Partnership.  U.S. Cellular has been informed by the general partner of the LA Partnership that, in connection with the acquisition of a spectrum license covering the LA Partnership’s market in FCC Auction 97, the LA Partnership will not make a cash distribution in 2015.  Notwithstanding the lack of a cash distribution, U.S. Cellular will be obligated to make tax payments on its share of any taxable income reported by the LA Partnership in 2015 and beyond.  U.S. Cellular currently expects that it might receive a cash distribution in the latter half of 2016, although the amount of any such distribution is uncertain.  During the six months ended June 30, 2014 and the twelve months ended December 31, 2014, U.S. Cellular received cash distributions of $35.8 million and $60.5 million, respectively, from the LA Partnership.

TDS’ future federal income tax liabilities associated with the benefits realized in prior periods from bonus depreciation are accrued as a component of Net deferred income tax liability (noncurrent) in the Consolidated Balance Sheet.  Currently, there is no federal bonus depreciation deduction allowed for 2015 and future periodsTherefore, depending on TDS’ future pretax income levels, TDS’ federal income tax payments could increase in 2015 and remain at a higher level for several years as the amount of TDS’ federal tax depreciation deductions decrease.  This expectation of potentially higher federal income tax payments in 2015 and subsequent years assumes that federal bonus depreciation provisions are not enacted in 2015 or future periods.  To the extent further federal bonus depreciation provisions are enacted, this expectation would change.

Cash Flows from Investing Activities 

TDS makes substantial investments to acquire wireless licenses and properties and to construct and upgrade telecommunications networks and facilities as a basis for creating long-term value for shareholders. In recent years, rapid changes in technology and new opportunities have required substantial investments in potentially revenueenhancing and cost-reducing upgrades to TDS’ networks.

Cash used for additions to property, plant and equipment totaled $359.5 million in 2015 and $339.9 million in 2014, and is reported in the Consolidated Statement of Cash Flows.

Capital expenditures (i.e., additions to property, plant and equipment and system development expenditures), which include the effects of accruals and capitalized interest, in the six months ended June 30, 2015 and 2014 were as follows:

Capital expenditures

2015

 

2014

(Dollars in thousands)

 

 

 

 

 

U.S. Cellular

$

200,126 

 

$

233,508 

TDS Telecom

 

 

 

 

 

 

Wireline

 

52,163 

 

 

50,268 

 

Cable

 

23,552 

 

 

13,400 

 

HMS

 

14,251 

 

 

13,379 

 

 

TDS Telecom Total

 

89,966 

 

 

77,047 

Corporate and Other

 

3,145 

 

 

2,724 

Total

$

293,237 

 

$

313,279 

 

See “Capital Expenditures” below for additional information on Capital expenditures.

During 2015, a $278.3 million payment was made by Advantage Spectrum L.P. to the FCC for licenses for which it was the provisional winning bidder.  See Note 6Acquisitions, Divestitures and Exchanges and Note 9Variable Interest Entities in the Notes to Consolidated Financial Statements for additional information.

Cash received from Divestitures and Exchanges, which is a component of cash flows from investing activities in the Consolidated Statement of Cash Flows, is shown below.

 

2015

 

2014

(Dollars in thousands)

 

 

 

 

 

U.S. Cellular licenses

$

117,000 

 

$

91,789 

U.S. Cellular businesses (1)

 

164,573 

 

 

34,116 

TDS Telecom wireline businesses

 

10,295 

 

 

 

Other

 

20 

 

 

 

Total

$

291,888 

 

$

125,905 

 

 

 

 

 

 

 

(1)

Amount includes cash proceeds received from the sale of 359 towers and reimbursements related to the Divestiture Transaction.

 

See Note 6Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to these divestitures.

In 2014, TDS realized proceeds of $10.0 million related to the maturities of certain of its investments in U.S. Treasury Notes.

Cash Flows from Financing Activities 

Cash flows from financing activities include proceeds from and repayments of long-term debt, dividends to shareholders, distributions to noncontrolling interests, cash used to repurchase Common Shares and cash proceeds from reissuance of Common Shares pursuant to stock-based compensation plansIn July 2015, U.S. Cellular borrowed $225 million on its Term Loan.  See “Financing” section below for additional discussion.

Adjusted Free Cash Flow

The following table presents Adjusted free cash flow. Adjusted free cash flow is defined as Cash flows from operating activities (which includes cash outflows related to the Sprint decommissioning), as adjusted for cash proceeds from the Sprint Cost Reimbursement (which are included in Cash flows from investing activities in the Consolidated Statement of Cash Flows), less Cash used for additions to property, plant and equipment. Adjusted free cash flow is a non-GAAP financial measure which TDS believes may be useful to investors and other users of its financial information in evaluating the amount of cash generated by business operations (including cash proceeds from the Sprint Cost Reimbursement), after Cash used for additions to property, plant and equipment.

Six Months Ended June 30,

 

 

2015

 

 

2014

(Dollars in thousands)

 

 

 

 

 

 

Cash flows from operating activities

 

$

538,431 

 

$

315,642 

Add: Sprint Cost Reimbursement (1)

 

 

23,174 

 

 

34,116 

Less: Cash used for additions to property, plant and equipment

 

 

359,513 

 

 

339,907 

 

Adjusted free cash flow

 

$

202,092 

 

$

9,851 

 

 

 

 

 

 

 

 

(1)

See Note 6 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to the Sprint Cost Reimbursement.

 

See Cash Flows from Operating Activities and Cash Flows from Investing Activities for additional information related to the components of Adjusted free cash flow.

LIQUIDITY

TDS believes that existing cash and investment balances, funds available under its revolving credit facilities and Term Loan, and expected cash flows from operating and investing activities provide substantial liquidity and financial flexibility for TDS to meet its normal day-to-day operating needs.  However, these resources may not be adequate to fund all future expenditures that the companies could potentially elect to make such as acquisitions of spectrum licenses in FCC auctions and other acquisition, construction and development programs.  It may be necessary from time to time to increase the size of the existing revolving credit facilities, to put in place new credit facilities, or to obtain other forms of financing in order to fund these potential expenditures.  To the extent that sufficient funds are not available to TDS or its subsidiaries on terms or at prices acceptable to TDS, it could require TDS to reduce its acquisition, capital expenditure, business development and share repurchase programs.

TDS cannot provide assurances that circumstances that could have a material adverse effect on its liquidity or capital resources will not occur. Economic conditions, changes in financial markets, TDS financial performance and/or prospects or other factors could restrict TDS’ liquidity and availability of financing on terms and prices acceptable to TDS, which could require TDS to reduce its acquisition, capital expenditure, business development and share repurchase programs. Such reductions could have a material adverse effect on TDS’ business, financial condition or results of operations.

Cash and Cash Equivalents

Cash and cash equivalents include cash and short-term, highly liquid investments with original maturities of three months or less.  The primary objective of TDS’ Cash and cash equivalents investment activities is to preserve principal.  At June 30, 2015, the majority of TDS’ Cash and cash equivalents was held in bank deposit accounts and in money market funds that invest exclusively in U.S. Treasury Notes or in repurchase agreements fully collateralized by such obligations.  TDS monitors the financial viability of the money market funds and direct investments in which it invests and believes that the credit risk associated with these investments is low.  

Financing

As of June 30, 2015, TDS and U.S. Cellular’s unused capacity under their revolving credit facilities was $399.4 million and $282.5 million, respectively.  These agreements mature in December 2017.  Additionally, U.S. Cellular had $225 million in unused capacity under its Term Loan as of June 30, 2015.  In July 2015, U.S. Cellular borrowed $225 million on the Term Loan.  Amounts borrowed under the Term Loan will be due and payable in quarterly installments of $2.8 million beginning in March 2016 through December 2021, and the remaining unpaid balance will be due and payable in January 2022.  TDS and U.S. Cellular believe they were in compliance with all of the financial covenants and requirements set forth in their revolving credit facilities and Term Loan.

TDS and U.S. Cellular have in place effective shelf registration statements on Form S-3 to issue senior or subordinated debt securities.

The proceeds from any of the aforementioned financing facilities are available for general corporate purposes, including spectrum purchases and capital expenditures.

The long-term debt payments due for the remainder of 2015 and the next four years represent less than 1% of TDS’ total long-term debt obligation measured as of June 30, 2015.  Including the $225 million Term Loan drawn in July 2015, the long-term debt payments due for the remainder of 2015 and the next four years represent less than 3% of TDS’ total long-term debt obligation.

Capital Expenditures

U.S. Cellular’s capital expenditures for 2015 are expected to be approximately $600 million. These expenditures are expected to be for the following general purposes: 

TDS Telecom’s capital expenditures for 2015 are expected to be $220 million.  These expenditures are expected to be for the following general purposes:

TDS plans to finance its capital expenditures program for 2015 using primarily Cash flows from operating activities and, as necessary, existing cash balances and borrowings under its revolving credit agreements and/or other long-term debt.

Acquisitions, Divestitures and Exchanges

TDS assesses its business interests on an ongoing basis with a goal of improving the competitiveness of its operations and maximizing its long-term return on investment.  As part of this strategy, TDS reviews attractive opportunities to acquire additional wireless operating markets and wireless spectrum; and telecommunications, cable, HMS or other possible 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.  As a result, TDS may be engaged from time to time in negotiations relating to the acquisition, divestiture or exchange of companies, properties, wireless spectrum and other possible businesses. In general, TDS may not disclose such transactions until there is a definitive agreement.  See Note 6Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to significant transactions, including expected pre-tax cash proceeds from such transactions in 2015.

Variable Interest Entities

TDS consolidates certain entities because they are “variable interest entities” under accounting principles generally accepted in the United States of America (“GAAP”). See Note 9Variable Interest Entities in the Notes to Consolidated Financial Statements for additional information related to these variable interest entities. TDS may elect to make additional capital contributions and/or advances to these variable interest entities in future periods in order to fund their operations.

U.S. Cellular currently provides 4G LTE service in conjunction with King Street Wireless L.P. Aquinas Wireless L.P. has not yet developed long-term business plans.  Advantage Spectrum L.P. will develop its long-term business plans after it is granted licenses by the FCC.  The licenses are expected to be granted by the FCC during the latter half of 2015.

Common Share Repurchase Programs

In the past year, TDS and U.S. Cellular have repurchased and expect to continue to repurchase their Common Shares, in each case subject to any available repurchase program.  For additional information related to the current TDS and U.S. Cellular repurchase authorizations and repurchases made during 2015 and 2014, see Note 11Common Share Repurchases in the Notes to Consolidated Financial Statements and Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Contractual and Other Obligations

There were no material changes outside the ordinary course of business between December 31, 2014 and June 30, 2015 to the Contractual and Other Obligations disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in TDS’ Form 10-K for the year ended December 31, 2014U.S. Cellular borrowed $225 million under the Term Loan in July 2015.  See Note 13Subsequent Events in the Notes to Consolidated Financial Statements for additional information.

Off-Balance Sheet Arrangements

TDS had no transactions, agreements or other contractual arrangements with unconsolidated entities involving “off-balance sheet arrangements,” as defined by SEC rules, that had or are reasonably likely to have a material current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.


APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

TDS prepares its consolidated financial statements in accordance with GAAP.  TDS’ significant accounting policies are discussed in detail in Note 1 — Summary of Significant Accounting Policies and Recent Accounting Pronouncements in the Notes to Consolidated Financial Statements and TDS’ Application of Critical Accounting Policies and Estimates is discussed in detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are included in TDS’ Form 10-K for the year ended December 31, 2014.  There were no material changes to TDS’ application of critical accounting policies and estimates during the six months ended June 30, 2015.

 


PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

SAFE HARBOR CAUTIONARY STATEMENT

 

This Form 10-Q, including exhibits, contains statements that are not based on historical facts and represent forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act of 1995.  All statements, other than statements of historical facts, that address activities, events or developments that TDS intends, expects, projects, believes, estimates, plans or anticipates will or may occur in the future are forward-looking statements.  The words “believes,” “anticipates,” “estimates,” “expects,” “plans,” “intends,” “projects” and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them.  Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward-looking statements.  Such risks, uncertainties and other factors include those set forth below, as more fully described under “Risk Factors” in TDS’ Form 10-K for the year ended December 31, 2014.  However, such factors are not necessarily all of the important factors that could cause actual results, performance or achievements to differ materially from those expressed in, or implied by, the forward-looking statements contained in this document.  Other unknown or unpredictable factors also could have material adverse effects on future results, performance or achievements.  TDS undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.  You should carefully consider the Risk Factors in TDS’ Form 10-K for the year ended December 31, 2014, the following factors and other information contained in, or incorporated by reference into, this Form 10-Q to understand the material risks relating to TDS’ business.

 

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

MARKET RISK

Refer to the disclosure under Market Risk in TDS’ Form 10-K for the year ended December 31, 2014 for additional information, including information regarding required principal payments and the weighted average interest rates related to TDS’ Long-term debt. There have been no material changes to such information since December 31, 2014.  U.S. Cellular borrowed $225 million under the Term Loan in July 2015.

See Note 2Fair Value Measurements in the Notes to Consolidated Financial Statements for additional information related to the fair value of TDS’ Long-term debt as of June 30, 2015.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

TDS maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in its reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms, and that such information is accumulated and communicated to TDS’ management, including its principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

As required by SEC Rule 13a-15(b), TDS carried out an evaluation, under the supervision and with the participation of management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of TDS’ disclosure controls and procedures as of the end of the period covered by this Quarterly Report.  Based on this evaluation, TDS’ principal executive officer and principal financial officer concluded that TDS' disclosure controls and procedures were effective as of June 30, 2015, at the reasonable assurance level. 

Changes in Internal Control Over Financial Reporting

Internal controls over financial reporting continue to be updated as necessary to accommodate modifications to our business processes and accounting procedures.  As previously disclosed in TDS’ Form 10-K for the year ended December 31, 2014, U.S. Cellular entered into certain arrangements in the latter part of the fourth quarter of 2014 pursuant to which U.S. Cellular now outsources certain support functions for its Billing and Operational Support System (“B/OSS”) to a third-party vendor.  In accordance with this change and effective January 1, 2015, U.S. Cellular is placing reliance on certain third-party controls with respect to the B/OSS environment.  There have been no other changes in internal controls over financial reporting that have occurred during the quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, TDS’ internal control over financial reporting.


Part IIOther Information

Item 1.  Legal Proceedings.

Refer to the disclosure under Legal Proceedings in TDS’ Form 10-K for the year ended December 31, 2014.  There have been no material changes to such information since December 31, 2014.

Item 1A.  Risk Factors.

In addition to the information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in TDS’ Annual Report on Form 10-K for the year ended December 31, 2014, which could materially affect TDS’ business, financial condition or future results. The risks described in this Form 10-Q and the Form 10-K for the year ended December 31, 2014, may not be the only risks that could affect TDS.  Additional unidentified or unrecognized risks and uncertainties could materially adversely affect TDS’ business, financial condition and/or operating results.  Subject to the foregoing, TDS has not identified for disclosure any material changes to the risk factors as previously disclosed in TDS’ Annual Report on Form 10-K for the year ended December 31, 2014.

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

On August 2, 2013, the Board of Directors of TDS authorized a $250 million stock repurchase program for TDS Common Shares.  Depending on market conditions, such shares may be repurchased in compliance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended ("Exchange Act"), pursuant to Rule 10b5-1 under the Exchange Act, or pursuant to accelerated share repurchase arrangements, prepaid share repurchases, private transactions or as otherwise authorized.  This authorization does not have an expiration date.

The maximum dollar value of shares that may yet be purchased under the program was $201.2 million as of June 30, 2015.  There were no purchases made by or on behalf of TDS, and no open market purchases made by any “affiliated purchaser” (as defined by the SEC) of TDS, of TDS Common Shares during the quarter covered by this Form 10-Q.

The following is additional information with respect to the Common Share authorization:

  1. The date the program was announced was August 2, 2013 by Form 8-K.
  2. The amount approved was up to $250 million in aggregate purchase price of TDS Common Shares.
  3. The program does not have an expiration date.
  4. The authorization did not expire during the second quarter of 2015.
  5. TDS did not determine to terminate the foregoing Common Share repurchase program, or cease making further purchases thereunder, during the second quarter of 2015.

Item 5.  Other Information.

The following information is being provided to update prior disclosures made pursuant to the requirements of Form 8-K, Item 2.03 — Creation of a Direct Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement of a Registrant.

Neither TDS nor U.S. Cellular borrowed or repaid any amounts under their revolving credit facilities in the second quarter of 2015 or through the filing date of this Form 10-Q, and had no borrowings outstanding under their revolving credit facilities as of June 30, 2015 or as of the filing date of this Form 10-Q. 

A description of TDS’ revolving credit facility is included in TDS’ Current Report on Form 8-K dated December 17, 2010, as such description is amended by Item 1.01 in TDS’ Current Report on Form 8-K dated July 24, 2014, and is incorporated by reference herein. 

A description of U.S. Cellular’s revolving credit facility is included in U.S. Cellular’s Current Report on Form 8-K dated December 17, 2010, as such description is amended by Item 1.01 in U.S. Cellular’s Current Report on Form 8-K dated July 24, 2014, and is incorporated by reference herein. 

U.S. Cellular did not borrow any amounts under its term loan facility and did not have any amounts outstanding under this facility in the second quarter of 2015.  However, during July 2015, U.S. Cellular borrowed $225 million under this facility.

A description of U.S. Cellular’s term loan facility is included in U.S. Cellular’s Current Report on Form 8-K dated January 21, 2015, as amended July 20, 2015, and is incorporated by reference herein. 


Item 6.  Exhibits.

Exhibit 3.1— Restated Bylaws of TDS effective March 19, 2015, are hereby incorporated by reference to Exhibit 3.1 to TDS’ Current Report on Form 8-K dated March 19, 2015.

Exhibit 4.1 — Restated Bylaws of TDS are hereby incorporated by reference to Exhibit 3.1 above.

Exhibit 4.2 — Term Loan Credit Agreement dated as of January 21, 2015 between U.S. Cellular and CoBank ACB, including exhibits, is hereby incorporated by reference to Exhibit 4.1 to U.S. Cellular’s Current Report on Form 8-K dated January 21, 2015.

Exhibit 10.1 — Form of TDS 2011 Long-Term Incentive Plan Stock Option Award Agreement, is hereby incorporated by reference to Exhibit 10.1 to TDS’ Current Report on Form 8-K dated May 1, 2015.

Exhibit 10.2 — Form of TDS 2011 Long-Term Incentive Plan Stock Restricted Stock Unit Award Agreement, is hereby incorporated by reference to Exhibit 10.2 to TDS’ Current Report on Form 8-K dated May 1, 2015.

Exhibit 10.3 — Form of U.S. Cellular 2013 Long-Term Incentive Plan Stock Option Award Agreement for the President and Chief Executive Officer of U.S. Cellular, is hereby incorporated by reference to Exhibit 10.3 to U.S. Cellular’s Current Report on Form 8-K dated February 26, 2015.

Exhibit 10.4 — Form of U.S. Cellular 2013 Long-Term Incentive Plan Stock Restricted Stock Unit Award Agreement for the President and Chief Executive Officer of U.S. Cellular, is hereby incorporated by reference to Exhibit 10.4 to U.S. Cellular’s Current Report on Form 8-K dated February 26, 2015.

Exhibit 11 — Statement regarding computation of per share earnings is included herein as Note 5 — Earnings Per Share in the Notes to Consolidated Financial Statements.

Exhibit 12 — Statement regarding computation of ratio of earnings to fixed charges.

Exhibit 31.1 — Principal executive officer certification pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.

Exhibit 31.2 — Principal financial officer certification pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.

Exhibit 32.1 — Principal executive officer certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.

Exhibit 32.2 — Principal financial officer certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.

Exhibit 101.INS — XBRL Instance Document

Exhibit 101.SCH — XBRL Taxonomy Extension Schema Document

Exhibit 101.PRE — XBRL Taxonomy Presentation Linkbase Document

Exhibit 101.CAL — XBRL Taxonomy Calculation Linkbase Document

Exhibit 101.LAB — XBRL Taxonomy Label Linkbase Document

Exhibit 101.DEF — XBRL Taxonomy Extension Definition Linkbase Document

The foregoing exhibits include only the exhibits that relate specifically to this Form 10-Q or that supplement the exhibits identified in TDS’ Form 10-K for the year ended December 31, 2014.  Reference is made to TDS’ Form 10-K for the year ended December 31, 2014 for a complete list of exhibits, which are incorporated herein except to the extent supplemented or superseded above.


SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

TELEPHONE AND DATA SYSTEMS, INC.

 

 

 

(Registrant)

 

 

 

 

 

 

Date:

July 31, 2015

 

/s/ LeRoy T. Carlson, Jr.

 

 

 

LeRoy T. Carlson, Jr.,

President and Chief Executive Officer

(principal executive officer)

 

 

 

 

 

 

Date:

July 31, 2015

 

/s/ Douglas D. Shuma

 

 

 

Douglas D. Shuma,

Senior Vice President - Finance and Chief Accounting Officer

(principal financial officer and principal accounting officer)

 

 

 

 

 

 

Date:

July 31, 2015

 

/s/ Douglas W. Chambers

 

 

 

Douglas W. Chambers,

Vice President and Controller