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TABLE OF CONTENTS
TELEPHONE AND DATA SYSTEMS, INC.
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 2012
Pursuant to SEC Rule 14a-3
The following audited financial statements and certain other financial information for the year ended December 31, 2012, represent Telephone and Data Systems' annual report to shareholders as required by the rules and regulations of the Securities and Exchange Commission ("SEC").
The following information was filed with the SEC on February 26, 2013 as Exhibit 13 to Telephone and Data Systems' Annual Report on Form 10-K for the year ended December 31, 2012. Such information has not been updated or revised since the date it was originally filed with the SEC. Accordingly, you are encouraged to review such information together with any subsequent information that we have filed with the SEC and other publicly available information.
Telephone and Data Systems, Inc. and Subsidiaries
Telephone and Data Systems, Inc.
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 5.8 million wireless customers and 1.0 million wireline customer connections at December 31, 2012. TDS conducts substantially all of its wireless operations through its 84%-owned subsidiary, United States Cellular Corporation ("U.S. Cellular"). TDS provides wireline services through its incumbent local exchange carrier ("ILEC") and competitive local exchange carrier ("CLEC"), and provides hosted and managed services ("HMS"), under its wholly-owned subsidiary, TDS Telecommunications Corporation ("TDS Telecom"). TDS conducts printing and distribution services through its majority-owned subsidiary, Suttle-Straus, Inc. ("Suttle-Straus") and provides wireless services through its majority-owned subsidiary, Airadigm Communications, Inc. ("Airadigm"), a Wisconsin-based service provider. Airadigm operates independently from U.S. Cellular and at this time there are no plans to combine the operations of these subsidiaries. Suttle-Straus and Airadigm's financial results were not significant to TDS' operations for the year ended December 31, 2012.
The following discussion and analysis should be read in conjunction with TDS' audited consolidated financial statements and the description of TDS' business included in Item 1 of the TDS Annual Report on Form 10-K ("Form 10-K") for the year ended December 31, 2012. The discussion and analysis contained herein refers to consolidated data and results of operations, unless otherwise noted.
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.
Historically, TDS has reported the following business segments: U.S. Cellular, ILEC (which included HMS operations), CLEC, and Non-Reportable Segment which includes Suttle-Straus and, as of September 23, 2011, Airadigm. TDS' Corporate operations and intercompany eliminations have been included in "Other Reconciling Items" for purposes of business segment disclosure. As a result of recent acquisitions and changes in TDS' strategy, operations, personnel and internal reporting, TDS reevaluated and changed its reportable business segments in the quarter ended March 31, 2012. TDS' business segments reflected in this Annual Report on Form 10-K for the annual period ended December 31, 2012 are U.S. Cellular, ILEC, CLEC, HMS, and the Non-Reportable Segment. Periods presented for comparative purposes have been re-presented to conform to this revised presentation.
U.S. Cellular's consolidated operating markets cover approximately 5.8 million customers in five geographic market areas in 26 states. As of December 31, 2012, U.S. Cellular's average penetration rate in its consolidated operating markets was 12.3%. 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 certain spectrum bands in areas overlapping, adjacent to or in proximity to its other wireless licenses, thereby building contiguous operating market areas with strong spectrum positions. 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 in 2012 included the following:
1
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
U.S. Cellular anticipates that future results will be affected by the following factors:
2
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
See "Results of OperationsU.S. Cellular."
TDS Telecom seeks to be the preferred telecommunications solutions provider in its chosen markets for both residential and commercial customers by developing and delivering high-quality products that meet or exceed customers' needs and to outperform the competition by maintaining superior customer service. TDS Telecom provides voice, high-speed data, and video services to residential customers through value-added bundling of products. The commercial focus is to provide advanced IP-based voice and data services to small to medium sized businesses. In addition, TDS Telecom seeks to grow through strategic acquisitions, as demonstrated by recent HMS acquisitions which provide colocation, dedicated hosting, hosted application management, cloud computing services and planning, engineering, procurement, installation, sales and management of Information Technology ("IT") infrastructure hardware solutions. TDS Telecom's strategy encompasses many components, including:
3
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
TDS Telecom is faced with significant challenges, including growing competition from wireless providers, wireline providers (other CLECs and cable providers) and other HMS providers, changes in regulation and technologies such as VoIP. These challenges could have a material adverse effect on the financial condition, results of operations and cash flows of TDS Telecom in the future.
Financial and operating highlights in 2012 included the following:
TDS anticipates that TDS Telecom's future results will be affected by the following factors:
4
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
See "Results of OperationsTDS Telecom."
On November 18, 2011, the FCC released a Report and Order and Further Notice of Proposed Rulemaking ("Reform Order") adopting reforms of its universal service and intercarrier compensation mechanisms, establishing a new, broadband-focused support mechanism, and proposing further rules to advance reform.
U.S. Cellular
The Reform Order substantially revises the current USF high cost program and intercarrier compensation regime. The current USF program, which supports voice services, is to be phased out over time and replaced with the Connect America Fund ("CAF"), a new Mobility Fund and a Remote Area Fund, which will collectively support broadband-capable networks. Mobile wireless carriers such as U.S. Cellular are eligible to receive funds in both the CAF and the Mobility Fund, although some areas that U.S. Cellular currently serves may be declared ineligible for support if they are already served, or are subject to certain rights of first refusal by incumbent carriers.
The terms and rules for participating in the CAF for wireless eligible telecommunications carriers ("ETC") have not been developed yet by the FCC. It is uncertain whether U.S. Cellular will obtain support through these replacement mechanisms to the current USF funding regime. If U.S. Cellular is successful in obtaining support, it will be required to meet certain regulatory conditions to obtain and retain the right to receive support including, for example, allowing other carriers to collocate on U.S. Cellular's towers, allowing voice and data roaming on U.S. Cellular's network, and submitting various reports and certifications to retain eligibility each year. It is possible that additional regulatory requirements will be imposed pursuant to the FCC's Further Notice of Proposed Rulemaking.
U.S. Cellular's current USF support is scheduled to be phased down. Support for 2012 (excluding certain adjustments) was frozen on January 1, 2012 using support for 2011 as a baseline and was reduced by 20% starting in July 2012. The reduction in USF support that U.S. Cellular otherwise would have received in 2012 is approximately $16 million. Support will be further reduced by 20% in July of each subsequent year; however, if the Phase II Mobility Fund is not operational by July 2014, the phase down will halt at that time and U.S. Cellular will receive 60% of its baseline support until the Phase II Mobility Fund is operational.
Multiple appeals and petitions for reconsideration have been filed with respect to the FCC Reform Order, but it has not been stayed.
5
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
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 or whether reductions in support will be fully offset with additional support from the CAF or the Mobility Fund. 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.
On September 27, 2012, the FCC conducted a single round, sealed bid, reverse auction to award up to $300 million in one-time Mobility Fund Phase I support to successful bidders that commit to provide 3G, or better, wireless service in areas designated as unserved by the FCC. This auction was designated by the FCC as Auction 901. As announced on October 3, 2012, U.S. Cellular and several of its wholly-owned subsidiaries participated in Auction 901. U.S. Cellular and its subsidiaries were winning bidders in eligible areas within 10 states and will receive up to $40.1 million in support from the Mobility Fund. As part of the auction rules, winning bidders must complete network build-out projects to provide 3G or 4G service to these areas within two or three years, respectively, and must also make their networks available to other providers for roaming. Winning bidders will receive support funding primarily upon achievement of coverage milestones defined in the auction rules.
TDS Telecom
The Reform Order is intended to modernize the payment framework for intercarrier compensation from one which had carriers recovering their capital and operating costs, in part, from one another to one where carriers will recover their costs first from their end user subscribers and then, if certain criteria are met, through a new federal restructure mechanism. The Reform Order adopted a national framework for switched access rates that brings TDS Telecom's ILECs terminating intrastate and interstate switched access to parity by July 1, 2013, rates for wireless traffic to bill-and-keep by July 1, 2012, and confirmed that VoIP traffic can be billed at access rates. It also mandated the development of a new restructure mechanism effective July 1, 2012 that allows TDS Telecom's ILECs to recover any lost access revenue from these access rate reductions, after first implementing or imputing set rate increases to end user subscribers, and subject to an annual 5% phase down.
The Reform Order also intends to reform the federal USF program by shifting over time the existing high-cost portion of the fund from supporting the voice network to facilitating the development of a broadband network in high-cost areas. While the Reform Order puts off long-term USF reform for rate-of-return carriers like TDS Telecom, it did mandate specific changes to the support these carriers currently receive. Additionally, limits on operating expenses and capital investment levels were established and are being phased-in with the intention to reduce legacy high-cost support.
The Reform Order has been the subject of numerous Petitions for Reconsideration, which asked the FCC to reconsider portions of its decision, and it is also the subject of numerous judicial appeals. In addition, the Reform Order also included a Further Notice of Proposed Rulemaking which primarily addresses longer-term USF reform by seeking comments on a range of follow up proposals. The future proposed rulemaking is especially important to TDS Telecom, as numerous issues relevant to rate of return carriers, such as TDS Telecom, will be addressed in it. TDS Telecom cannot predict the outcome of future rulemaking, reconsideration and legal challenges and as a consequence, the impacts these may have on TDS Telecom's Wholesale revenues.
See "Financial Resources" and "Liquidity and Capital Resources" below for information related to cash flows and investments.
6
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
On November 6, 2012, U.S. Cellular entered into a Purchase and Sale Agreement with subsidiaries of Sprint Nextel Corporation ("Sprint"). The Purchase and Sale Agreement also contemplates certain other agreements, collectively referred to as the "Divestiture Transaction."
As more fully described below, the Purchase and Sale Agreement provides that U.S. Cellular will transfer to Sprint certain rights and assets (collectively, the "Subject Assets"), and Sprint will assume certain liabilities ("Subject Liabilities"), related to U.S. Cellular's Chicago, central Illinois, St. Louis and certain Indiana/Michigan/Ohio markets (the "Divestiture Markets"), in consideration for $480 million in cash at closing ("Purchase Price"), subject to pro-rations of certain assets and liabilities. U.S. Cellular will retain all other assets ("Retained Assets") and liabilities ("Retained Liabilities") related to the Divestiture Markets. U.S. Cellular is not transferring and will continue to operate and provide services in Peoria, Rockford and certain other areas in Illinois, and in Columbia, Joplin, Jefferson City and certain other areas in Missouri.
Management, the U.S. Cellular Board of Directors and the TDS Board of Directors considered various alternatives and approved this transaction as part of a decision to divest low-margin markets and focus U.S. Cellular's efforts and capital on its higher-margin markets. The transaction will better position U.S. Cellular to invest its resources in markets where it is more likely to succeed. U.S. Cellular's strategic priority is to drive growth and profitability in its stronger markets.
The Subject Assets include customers (the "Subject Customers") and most of U.S. Cellular's PCS licenses in the Divestiture Markets. U.S. Cellular will retain its direct and indirect ownership interests in other spectrum in the Divestiture Markets. The transaction does not affect spectrum licenses held by U.S. Cellular or by variable interest entities consolidated by U.S. Cellular, that are not currently used in the operations of the Divestiture Markets. The Subject Liabilities that will be assumed by Sprint include only (i) liabilities as of the closing relating to the Subject Customers and (ii) liabilities arising after the closing relating to the Subject Assets.
The Retained Assets include all assets other than the Subject Assets, including cash, accounts receivable, inventory, naming rights, real estate, 561 owned cell sites including towers, network equipment, stores, retail equipment, furniture and fixtures, and all other assets, including corporate and other facilities located in the Divestiture Markets. The Retained Liabilities include all liabilities other than the Subject Liabilities, including accounts payable, accrued expenses, liabilities to employees, taxes, and obligations under benefit plans, contracts, leases and asset retirement obligations.
The transaction is subject to FCC approval, compliance with the Hart-Scott-Rodino Act and other conditions. Subject to the satisfaction or (if permitted) waiver of all conditions, the transaction is expected to close in mid-2013.
7
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Selected pro forma information related to the Divestiture Transaction is as follows:
(Dollars in millions) |
As Reported | Divestiture Markets(1) |
Core Markets |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
As of or for the Year Ended December 31, 2012 |
||||||||||
Postpaid customers(2) |
5,134,000 | 463,000 | 4,671,000 | |||||||
Prepaid customers(2) |
423,000 | 81,000 | 342,000 | |||||||
Reseller customers(2) |
241,000 | 16,000 | 225,000 | |||||||
Total customers |
5,798,000 | 560,000 | 5,238,000 | |||||||
Market penetration in consolidated operating markets(2) |
12.3 | % | 3.7 | % | 16.4 | % | ||||
Postpaid churn rate(2) |
1.67 | % | 2.95 | % | 1.53 | % | ||||
TDS Operating revenues |
$ | 5,345 | $ | 440 | $ | 4,905 | ||||
U.S. Cellular Service revenues |
$ | 4,099 | $ | 427 | $ | 3,672 | ||||
TDS Capital expenditures |
$ | 1,005 | $ | 68 | $ | 937 | ||||
U.S. Cellular Capital expenditures |
$ | 837 | $ | 68 | $ | 769 | ||||
For the year ended December 31, 2011 |
||||||||||
TDS Operating revenues |
$ | 5,180 | $ | 474 | $ | 4,706 | ||||
U.S. Cellular Service revenues |
$ | 4,054 | $ | 468 | $ | 3,586 | ||||
TDS Capital expenditures |
$ | 987 | $ | 67 | $ | 920 | ||||
U.S. Cellular Capital expenditures |
$ | 783 | $ | 67 | $ | 716 | ||||
For the year ended December 31, 2010 |
||||||||||
TDS Operating revenues |
$ | 4,987 | $ | 515 | $ | 4,472 | ||||
U.S. Cellular Service revenues |
$ | 3,913 | $ | 513 | $ | 3,400 | ||||
TDS Capital expenditures |
$ | 755 | $ | 68 | $ | 687 | ||||
U.S. Cellular Capital expenditures |
$ | 583 | $ | 68 | $ | 515 |
The Divestiture Transaction contemplates that five agreements will be entered into as of the closing: a Customer Transition Services Agreement, a Network Transition Services Agreement, a Spectrum Manager Lease Agreement, a Brand License Agreement, and an amendment to the Sprint/U.S. Cellular Intercarrier Roaming Agreement.
At closing, the Subject Customers will cease to be customers of U.S. Cellular and will become customers of Sprint. Pursuant to the Customer Transition Services Agreement, on and after closing, U.S. Cellular will provide customer service and billing to, and collect accounts receivable from, the Subject Customers on behalf of Sprint for a period of up to 24 months following the closing. Sprint will reimburse U.S. Cellular at an amount equal to U.S. Cellular's cost, including applicable overhead allocations, for providing such services and will provide notice to U.S. Cellular when to discontinue them.
Pursuant to the Network Transition Services Agreement, U.S. Cellular will retain and continue to operate the Retained Assets to provide network services to Sprint in the Divestiture Markets for a period of up to 24 months following the closing. Sprint will reimburse U.S. Cellular at an amount equal to U.S. Cellular's cost, including applicable overhead allocations, for providing such services and for actual cell site rent expenses during the transition period. Sprint will provide notice to U.S. Cellular as to how and when to decommission certain network assets.
8
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Sprint will reimburse U.S. Cellular up to $200 million (the "Sprint Cost Reimbursement") for network-related exit costs in the Divestiture Markets that U.S. Cellular expects to incur as a result of the transaction, including: (i) costs to decommission cell sites and mobile telephone switching office ("MTSO") sites in the Divestiture Markets, (ii) costs to terminate real property leases related to cell sites in the Divestiture Markets, (iii) costs to terminate certain network access arrangements, and (iv) costs for employee termination benefits that are paid to specified engineering employees in the Divestiture Markets.
The Spectrum Manager Lease Agreement provides that Sprint, as lessor, would lease the Subject Licenses to U.S. Cellular, as lessee, to provide U.S. Cellular with FCC authority to operate the network during the transition period. U.S. Cellular is not required to make any lease payments to Sprint under this agreement.
The Brand License Agreement provides that Sprint will have the rights to continue to use U.S. Cellular's trade-names, trademarks and service marks in the Divestiture Markets during the transition period. No additional payments are due by Sprint to U.S. Cellular under this agreement.
Sprint will not purchase or assume any of U.S. Cellular's retail locations, distribution points or agent relationships. The transaction ultimately will result in the closure of approximately 100 company-owned stores and the termination of related retail associates, along with the termination of agent and sub-agent relationships related to approximately 150 stores in these markets. U.S. Cellular also will cease to distribute the U Prepaid product in Walmart stores in these markets.
U.S. Cellular expects to incur costs associated with store closures and agent terminations in the Divestiture Markets, including: (i) costs to terminate leases for company-owned retail stores, (ii) costs for employee termination benefits that are paid to retail and support employees, and (iii) costs to terminate certain agent and sub-agent relationships. Sprint will not reimburse U.S. Cellular for costs associated with company-owned store closures and agent terminations.
Upon the completion of the transaction, U.S. Cellular expects to reduce its workforce by approximately 1,000 employees in these markets, primarily store employees, but also including engineering employees and support staff. Most of these employees will continue to work through the closing and some of the employees will continue to be retained through the completion of the transition services period.
Between the date of the Purchase and Sale Agreement and the closing, the operating results of the Divestiture Markets will continue to be presented in continuing operations. The financial impacts of the Divestiture Transaction are classified in the Consolidated Statement of Operations within Operating income. See Note 7Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information regarding (i) the amounts TDS expects to recognize in the Consolidated Statement of Operations between the date the Purchase and Sale Agreement was signed and the end of the transition services period and (ii) the actual amounts incurred during the year ended December 31, 2012 as a result of the transaction. The net impacts of the Divestiture Transaction resulted in a $44.5 million reduction in U.S. Cellular's Operating income in the quarter ended December 31, 2012.
As a result of the transaction, TDS reviewed the remaining goodwill and intangible assets in these reporting units and units of accounting for impairment in the fourth quarter of 2012 and concluded there was no impairment of Goodwill or Licenses. See Application of Critical Accounting Policies and Estimates, below, for additional information.
As noted above, the Purchase Price is $480 million, net of certain pro-rations, to be received upon the closing of the Purchase and Sale Agreement, and the Sprint Cost Reimbursement is up to $200 million. After the closing, U.S. Cellular intends to invest the Purchase Price in excess of non-reimbursed exit costs and income tax payments in temporary investments and these funds will be available for use for general corporate purposes. This will increase U.S. Cellular's liquidity and capital resources at that time, subject to the below cash expenditures and income taxes.
9
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
As a result of the transaction, U.S. Cellular expects net cash flows of the following:
(Dollars in thousands) |
Cash inflow (outflow) | ||
---|---|---|---|
Proceeds: |
|||
Purchase price |
$ | 480,000 | |
Reimbursement of transition and exit costs |
150,000 - 200,000 | ||
Cash expenditures: |
|||
Employee related costs including severance, retention and outplacement |
(15,000) - (25,000) | ||
Contract termination costs |
(125,000) - (175,000) | ||
Costs of decommissioning cell sites and MTSOs |
(40,000) - (50,000) | ||
Transaction costs |
(3,000) - (5,000) | ||
Income taxes |
(130,000) - (150,000) |
Net cash proceeds from the transaction are expected to be $275 million to $350 million. Such net cash proceeds will be realized over the period from the date of the signing of the Purchase and Sale Agreement on November 6, 2012, to the end of the transition services agreements. Net cash outflows related to the Divestiture Transaction for the quarter ended December 31, 2012 totaled $0.3 million.
Following the closing, TDS will no longer receive Operating revenues in the Divestiture Markets. However, following the closing, TDS will continue to incur Cost of services and products expenses, Selling, general and administrative expenses and Depreciation, amortization and accretion in the Divestiture Markets in order for U.S. Cellular to provide transition services to Sprint. Certain of these costs will be reimbursed by Sprint pursuant to the Customer Transition Service Agreement and the Network Transition Services Agreement described above.
Estimates of full-year 2013 results for U.S. Cellular, TDS Telecom and TDS, are shown below. Such estimates represent management's view as of the date of filing of TDS' Form 10-K for the year ended December 31, 2012. Such forward-looking statements should not be assumed to be current as of any future date. TDS undertakes no duty to update such information whether as a result of new information, future events or otherwise. There can be no assurance that final results will not differ materially from such estimated results.
TDS has changed the measures which it uses to present estimates of operating results. TDS now provides estimates for consolidated revenues and capital expenditures. In addition, TDS previously presented Adjusted OIBDA, defined as operating income excluding the effects of: depreciation, amortization and accretion (OIBDA); the loss on impairment of assets; and the net gain or loss on asset disposals and exchanges. TDS believes Adjusted income before income taxes, as defined below, is a measure which provides a more comprehensive and meaningful view of TDS' recurring results of operations.
|
2013 Estimated Results(1) | |||||
---|---|---|---|---|---|---|
|
U.S. Cellular(2) | TDS Telecom(3) | TDS(2)(3)(7) | |||
(Dollars in millions) |
||||||
Adjusted operating revenues(4) |
$3,765 - $3,885 | $850 - $900 | $4,660 - $4,830 | |||
Adjusted income before income taxes(5) |
$780 - $900 | $220 - $250 | $995 - $1,145 | |||
Capital expenditures |
Approx. $600 | Approx. $155 | Approx. $765 |
10
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
These estimates reflect U.S. Cellular's consolidated results for 2013. Estimated results reflecting U.S. Cellular's Divestiture Markets and Core Markets are shown in the table below:
|
2013 Estimated Results | |||||
---|---|---|---|---|---|---|
|
U.S. Cellular Core Markets(6) |
U.S. Cellular Divestiture Markets(6) |
U.S. Cellular Consolidated(6) |
|||
(Dollars in millions) |
||||||
Adjusted operating revenues(4) |
$3,600 - $3,700 | $165 - $185 | $3,765 - $3,885 | |||
Adjusted income before income taxes(5) |
$765 - $865 | $15 - $35 | $780 - $900 | |||
Capital expenditures |
Approx. $600 | | Approx. $600 |
|
2013 Estimated Results | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
U.S. Cellular Core Markets(6) |
U.S. Cellular Divestiture Markets(2)(6) |
U.S. Cellular Consolidated(6) |
TDS Telecom | TDS(7) | |||||
(Dollars in millions) |
||||||||||
Income before income taxes(8)(9) |
$165 - $265 | ($180) - ($160) | ($15) - $105 | $25 - $55 | ($55) - $95 | |||||
Depreciation, amortization and accretion expense |
Approx. $545 | Approx. $195 | Approx. $740 | Approx. $195 | Approx. $940 | |||||
Interest expense |
Approx. $55 | | Approx. $55 | | Approx. $110 | |||||
Adjusted income before income taxes |
$765 - $865 | $15 - $35 | $780 - $900 | $220 - $250 | $995 - $1,145 | |||||
11
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
|
2012 Actual Results | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
U.S. Cellular Consolidated(6) | TDS Telecom | TDS(7) | |||||||
(Dollars in millions) |
||||||||||
Income before income taxes(9) |
$ | 205.1 | $ | 45.0 | $ | 196.2 | ||||
Depreciation, amortization and accretion expense |
608.6 | 193.1 | 813.6 | |||||||
(Gain) loss on sale of business and other exit costs, net |
21.0 | | 21.1 | |||||||
Interest expense (Capitalized interest) |
42.4 | (1.5 | ) | 86.7 | ||||||
Adjusted income before income taxes |
$ | 877.1 | $ | 236.6 | $ | 1,117.6 | ||||
|
2011 Actual Results | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
U.S. Cellular Consolidated(6) | TDS Telecom | TDS(7) | |||||||
(Dollars in millions) |
||||||||||
Income before income taxes |
$ | 312.8 | $ | 107.5 | $ | 363.7 | ||||
Depreciation, amortization and accretion expense |
573.6 | 180.5 | 765.8 | |||||||
(Gain) loss on sale of business and other exit costs, net |
| | | |||||||
Interest expense (Capitalized interest) |
65.6 | (2.6 | ) | 118.2 | ||||||
Adjusted income before income taxes |
$ | 952.0 | $ | 285.4 | $ | 1,247.7 | ||||
|
2010 Actual Results | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
U.S. Cellular Consolidated(6) | TDS Telecom | TDS(7) | |||||||
(Dollars in millions) |
||||||||||
Income before income taxes |
$ | 241.1 | $ | 101.3 | $ | 285.8 | ||||
Depreciation, amortization and accretion expense |
571.0 | 174.1 | 755.6 | |||||||
(Gain) loss on sale of business and other exit costs, net |
| | | |||||||
Interest expense (Capitalized interest) |
61.6 | (0.8 | ) | 116.8 | ||||||
Adjusted income before income taxes |
$ | 873.7 | $ | 274.6 | $ | 1,158.2 | ||||
TDS' management currently believes that the foregoing estimates represent a reasonable view of what is achievable considering actions that TDS and its subsidiaries have taken and will be taking. However, the
12
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
current competitive conditions in the telecommunications industry have created a challenging environment that could continue to significantly impact actual results.
U.S. Cellular expects to continue its focus on customer satisfaction by delivering a high quality network, attractively priced service plans, a broad line of wireless devices and other products, and outstanding customer service. U.S. Cellular believes that future growth in its revenues will result primarily from selling additional products and services, including data products and services, to its existing customers, increasing the number of multi-device users among its existing customers, and attracting wireless users switching from other wireless carriers. U.S. Cellular is focusing on opportunities to increase revenues, pursuing cost reduction initiatives in various areas and implementing a number of initiatives to enable future growth. The initiatives are intended, among other things, to allow U.S. Cellular to accelerate its introduction of new products and services, better segment its customers for new services and retention, sell additional services such as data, expand its distribution channels, enhance its internet sales and customer service capabilities, improve its prepaid products and services and reduce operational expenses over the long term.
TDS Telecom will continue to focus on revenue growth through new service offerings as well as expense reduction through product and service cost improvement and process efficiencies. In order to achieve these objectives TDS Telecom has allocated capital expenditures for: process and productivity initiatives, increased network and product capabilities for broadband services, the expansion of IPTV, success-based spending to sustain managedIP growth and development of HMS products and services. Additionally, TDS Telecom will fund its share for projects approved under the Recovery Act to increase broadband access in unserved areas. Under the Recovery Act, TDS Telecom will receive $105.1 million in federal grants and will provide $30.9 million ($15.8 million of which is included in 2013 estimated capital expenditures) of its own funds to complete 44 projects. Under the terms of the grants, the projects must be completed by June of 2015. TDS Telecom will also experience financial effects as a result of the Baja acquisition and the operations of Baja after the closing, the effects of which are not included in the above estimates for 2013.
13
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONSCONSOLIDATED
Year Ended December 31,
|
2012 | Increase/ (Decrease) |
Percentage Change |
2011 | Increase/ (Decrease) |
Percentage Change |
2010 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands, except per share amounts) |
||||||||||||||||||||||
Operating revenues |
||||||||||||||||||||||
U.S. Cellular |
$ | 4,452,084 | $ | 108,738 | 3 | % | $ | 4,343,346 | $ | 165,665 | 4 | % | $ | 4,177,681 | ||||||||
TDS Telecom |
854,506 | 39,118 | 5 | % | 815,388 | 19,546 | 2 | % | 795,842 | |||||||||||||
All other(1) |
38,687 | 16,950 | 78 | % | 21,737 | 8,431 | 63 | % | 13,306 | |||||||||||||
Total operating revenues |
5,345,277 | 164,806 | 3 | % | 5,180,471 | 193,642 | 4 | % | 4,986,829 | |||||||||||||
Operating expenses |
||||||||||||||||||||||
U.S. Cellular |
4,295,428 | 232,862 | 6 | % | 4,062,566 | 86,358 | 2 | % | 3,976,208 | |||||||||||||
TDS Telecom |
813,764 | 97,027 | 14 | % | 716,737 | 20,729 | 3 | % | 696,008 | |||||||||||||
All other(1) |
52,222 | 13,556 | 35 | % | 38,666 | 20,144 | >100 | % | 18,522 | |||||||||||||
Total operating expenses |
5,161,414 | 343,445 | 7 | % | 4,817,969 | 127,231 | 3 | % | 4,690,738 | |||||||||||||
Operating income (loss) |
||||||||||||||||||||||
U.S. Cellular |
156,656 | (124,124 | ) | (44 | )% | 280,780 | 79,307 | 39 | % | 201,473 | ||||||||||||
TDS Telecom |
40,742 | (57,909 | ) | (59 | )% | 98,651 | (1,183 | ) | (1 | )% | 99,834 | |||||||||||
All other(1) |
(13,535 | ) | 3,394 | 20 | % | (16,929 | ) | (11,713 | ) | >(100 | )% | (5,216 | ) | |||||||||
Total operating income |
183,863 | (178,639 | ) | (49 | )% | 362,502 | 66,411 | 22 | % | 296,091 | ||||||||||||
Other income (expenses) |
||||||||||||||||||||||
Equity in earnings of unconsolidated entities |
92,867 | 10,329 | 13 | % | 82,538 | (15,536 | ) | (16 | )% | 98,074 | ||||||||||||
Interest and dividend income |
9,248 | 103 | 1 | % | 9,145 | (1,363 | ) | (13 | )% | 10,508 | ||||||||||||
Gain (loss) on investment |
(3,718 | ) | (27,821 | ) | N/M | 24,103 | 24,103 | N/M | | |||||||||||||
Interest expense |
(86,745 | ) | 31,456 | 27 | % | (118,201 | ) | (1,391 | ) | (1 | )% | (116,810 | ) | |||||||||
Other, net |
720 | (2,938 | ) | (80 | )% | 3,658 | 5,747 | N/M | (2,089 | ) | ||||||||||||
Total other income (expenses) |
12,372 | 11,129 | >100 | % | 1,243 | 11,560 | N/M | (10,317 | ) | |||||||||||||
Income before income taxes |
196,235 | (167,510 | ) | (46 | )% | 363,745 | 77,971 | 27 | % | 285,774 | ||||||||||||
Income tax expense |
73,582 | (39,921 | ) | (35 | )% | 113,503 | 18,315 | 19 | % | 95,188 | ||||||||||||
Net income |
122,653 | (127,589 | ) | (51 | )% | 250,242 | 59,656 | 31 | % | 190,586 | ||||||||||||
Less: Net income attributable to noncontrolling interests, net of tax |
(40,792 | ) | 8,884 | 18 | % | (49,676 | ) | (3,939 | ) | (9 | )% | (45,737 | ) | |||||||||
Net income attributable to TDS shareholders |
81,861 | (118,705 | ) | (59 | )% | 200,566 | 55,717 | 38 | % | 144,849 | ||||||||||||
Preferred dividend requirement |
(50 | ) | | | (50 | ) | | | (50 | ) | ||||||||||||
Net income available to common shareholders |
$ | 81,811 | $ | (118,705 | ) | (59 | )% | $ | 200,516 | $ | 55,717 | 38 | % | $ | 144,799 | |||||||
Basic earnings per share attributable to TDS shareholders(2) |
$ | 0.75 | $ | (1.10 | ) | (59 | )% | $ | 1.85 | $ | 0.53 | 40 | % | $ | 1.32 | |||||||
Diluted earnings per share attributable to TDS shareholders(2) |
$ | 0.75 | $ | (1.08 | ) | (59 | )% | $ | 1.83 | $ | 0.52 | 40 | % | $ | 1.31 |
N/MPercentage change not meaningful
Operating Revenues and Expenses
See "Results of OperationsU.S. Cellular" and "Results of OperationsTDS Telecom" below for factors that affected Operating revenues and expenses.
14
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Equity in earnings of unconsolidated entities
Equity in earnings of unconsolidated entities represents TDS' share of net income from entities accounted for by the equity method. TDS' investment in the Los Angeles SMSA Limited Partnership ("LA Partnership") contributed $67.2 million, $55.3 million and $64.8 million to Equity in earnings of unconsolidated entities in 2012, 2011 and 2010, respectively. TDS received cash distributions from the LA Partnership of $66.0 million in each of 2012, 2011 and 2010.
Loss on investment in 2012 includes a provision for loss of $3.7 million related to a note receivable and preferred stock acquired by U.S. Cellular in connection with an acquisition in 1998. Gain on investment in 2011 includes a gain of $12.7 million from TDS' acquisition of 63% of Airadigm in September 2011 and a $13.4 million gain recorded as a result of adjusting the carrying value of a pre-existing noncontrolling interest for which U.S. Cellular purchased the remaining interest in May 2011, as more fully described in Note 7Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements.
TDS recorded $15.4 million in interest expense to write-off unamortized debt issuance costs related to TDS' $282.5 million, 7.6% Senior Notes, and U.S. Cellular's $330 million, 7.5% Senior Notes, redeemed on May 2, 2011 and June 20, 2011, respectively. The impact of these write-offs in 2011, along with lower effective interest rates on long-term debt and an increase in capitalized interest for multi-year projects during 2012, resulted in the year-over-year decrease of $31.5 million expense from 2011 to 2012. The increase of $1.4 million from 2010 to 2011 also reflects the 2011 write-offs, which was partially offset by an increase in capitalized interest during 2011.
The effective tax rates on Income before income taxes for 2012, 2011 and 2010 were 37.5%, 31.2% and 33.3%, respectively. The following significant discrete and other items impacted income tax expense for these years:
2012Includes tax benefits of $11.3 million resulting from state statute of limitation expirations and $6.1 million resulting from corrections relating to prior periods, offset by tax expense of $1.3 million related to state income tax audits and tax expense associated with increases to state deferred tax asset valuation allowances of $5.2 million.
2011Includes tax benefits of $26.9 million resulting from state tax law changes and $9.0 million resulting from state statute of limitation expirations, offset by tax expense of $6.0 million resulting from correction of partnership tax basis relating to a prior period.
2010Includes a tax benefit of $6.5 million resulting from favorable settlement of state income tax audits.
See Note 4Income Taxes in the Notes to Consolidated Financial Statements for further information on the effective tax rate.
15
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
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, the noncontrolling shareholders' or partners' share of certain U.S. Cellular subsidiaries' net income or loss and other TDS noncontrolling interests.
Year Ended December 31,
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|
|||||||||
Net income attributable to noncontrolling interest, net of tax U.S. Cellular |
||||||||||
Noncontrolling public shareholders' |
$ | 18,431 | $ | 28,934 | $ | 24,323 | ||||
Noncontrolling shareholders' or partners' |
22,361 | 20,742 | 21,414 | |||||||
|
$ | 40,792 | $ | 49,676 | $ | 45,737 | ||||
RESULTS OF OPERATIONSU.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.
Following is a table of summarized operating data for U.S. Cellular's consolidated operations.
As of December 31,
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Total population |
||||||||||
Consolidated markets(1) |
93,244,000 | 91,965,000 | 90,468,000 | |||||||
Consolidated operating markets(1) |
46,966,000 | 46,888,000 | 46,546,000 | |||||||
Market penetration at end of period |
||||||||||
Consolidated markets(2) |
6.2 | % | 6.4 | % | 6.7 | % | ||||
Consolidated operating markets(2) |
12.3 | % | 12.6 | % | 13.0 | % | ||||
All Customers |
||||||||||
Total at end of period |
5,798,000 | 5,891,000 | 6,072,000 | |||||||
Gross additions |
1,302,000 | 1,155,000 | 1,372,000 | |||||||
Net additions (losses) |
(88,000 | ) | (186,000 | ) | (69,000 | ) | ||||
Smartphones sold as a percent of total devices sold(3) |
55.8 | % | 44.0 | % | 24.6 | % | ||||
Retail Customers |
||||||||||
Total at end of period |
5,557,000 | 5,608,000 | 5,729,000 | |||||||
Postpaid smartphone penetration(3) (4) |
41.8 | % | 30.5 | % | 16.7 | % | ||||
Gross additions |
1,248,000 | 1,064,000 | 1,205,000 | |||||||
Net retail additions (losses)(5) |
(47,000 | ) | (125,000 | ) | (15,000 | ) | ||||
Net postpaid additions (losses) |
(165,000 | ) | (117,000 | ) | (66,000 | ) | ||||
Net prepaid additions (losses) |
118,000 | (8,000 | ) | 51,000 | ||||||
Service revenue components (000s) |
||||||||||
Retail service |
$ | 3,547,979 | $ | 3,486,522 | $ | 3,459,546 | ||||
Inbound roaming |
348,717 | 348,309 | 253,290 | |||||||
Other |
202,160 | 218,966 | 200,165 | |||||||
Total service revenues (000s) |
$ | 4,098,856 | $ | 4,053,797 | $ | 3,913,001 | ||||
Total ARPU(6) |
$ | 58.70 | $ | 56.54 | $ | 53.27 | ||||
Billed ARPU(7) |
$ | 50.81 | $ | 48.63 | $ | 47.10 | ||||
Postpaid ARPU(8) |
$ | 54.32 | $ | 54.00 | $ | 51.21 | ||||
Postpaid churn rate(9) |
1.7 | % | 1.5 | % | 1.5 | % | ||||
Capital expenditures (000s) |
$ | 836,748 | $ | 782,526 | $ | 583,134 | ||||
Cell sites in service |
8,028 | 7,882 | 7,645 |
16
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Components of Operating Income
Year Ended December 31,
|
2012 | Increase/ (Decrease) |
Percentage Change |
2011 | Increase/ (Decrease) |
Percentage Change |
2010 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|
|||||||||||||||||||||
Retail service |
$ | 3,547,979 | $ | 61,457 | 2 | % | $ | 3,486,522 | $ | 26,976 | 1 | % | $ | 3,459,546 | ||||||||
Inbound roaming |
348,717 | 408 | | 348,309 | 95,019 | 38 | % | 253,290 | ||||||||||||||
Other |
202,160 | (16,806 | ) | (8 | )% | 218,966 | 18,801 | 9 | % | 200,165 | ||||||||||||
Service revenues |
4,098,856 | 45,059 | 1 | % | 4,053,797 | 140,796 | 4 | % | 3,913,001 | |||||||||||||
Equipment sales |
353,228 | 63,679 | 22 | % | 289,549 | 24,869 | 9 | % | 264,680 | |||||||||||||
Total operating revenues |
4,452,084 | 108,738 | 3 | % | 4,343,346 | 165,665 | 4 | % | 4,177,681 | |||||||||||||
System operations (excluding Depreciation, amortization and accretion reported below) |
946,805 | 17,426 | 2 | % | 929,379 | 74,448 | 9 | % | 854,931 | |||||||||||||
Cost of equipment sold |
935,947 | 144,145 | 18 | % | 791,802 | 35,512 | 5 | % | 756,290 | |||||||||||||
Selling, general and administrative |
1,764,933 | (4,768 | ) | | 1,769,701 | (13,614 | ) | (1 | )% | 1,783,315 | ||||||||||||
Depreciation, amortization and accretion |
608,633 | 35,076 | 6 | % | 573,557 | 2,602 | | 570,955 | ||||||||||||||
(Gain) loss on asset disposals and exchanges, net |
18,088 | 19,961 | N/M | (1,873 | ) | (12,590 | ) | N/M | 10,717 | |||||||||||||
(Gain) loss on sale of business and other exit costs, net |
21,022 | 21,022 | N/M | | | N/M | | |||||||||||||||
Total operating expenses |
4,295,428 | 232,862 | 6 | % | 4,062,566 | 86,358 | 2 | % | 3,976,208 | |||||||||||||
Operating income |
$ | 156,656 | $ | (124,124 | ) | (44 | )% | $ | 280,780 | $ | 79,307 | 39 | % | $ | 201,473 | |||||||
N/MPercentage change not meaningful
17
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
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, including long-distance roaming ("inbound roaming"); and (iii) amounts received from the Federal USF.
Retail service revenues
Retail service revenues increased by $61.5 million, or 2%, to $3,548.0 million primarily due to the impact of an increase in the average monthly retail service revenue per customer, partially offset by a decrease in U.S. Cellular's average customer base.
The average number of customers decreased to 5,819,000 in 2012 from 5,975,000 in 2011, driven by reductions in postpaid and reseller customers. The average number of customers in 2011 decreased from 6,121,000 in 2010 driven by reductions in postpaid, prepaid and reseller customers.
Average monthly retail service revenue per customer increased to $50.81 in 2012 from $48.63 in 2011, and in 2011 increased from $47.10 in 2010. The increase in 2012 from 2011 reflects the impact of a larger portion of the customer base using smartphones which drives incremental data access revenue. The average monthly retail service revenue increase in both years also includes the impact of a reduction in the number of reseller customers, who typically generate lower average monthly revenues.
U.S. Cellular expects continued pressure on 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.
U.S. Cellular accounts for loyalty reward points under the deferred revenue method. Under this method, U.S. Cellular allocates a portion of the revenue billed to customers with applicable plans to the loyalty reward points. The revenue allocated to these points is initially deferred in the Consolidated Balance Sheet and is recognized in future periods when the loyalty reward points are redeemed or used. Application of the deferred revenue method of accounting related to loyalty reward points resulted in deferring net revenues of $17.7 million in 2012, $31.8 million in 2011, and $7.1 million in 2010. Deferred revenues related to loyalty reward points are included in the Customer deposits and deferred revenues in the Consolidated Balance Sheet at December 31, 2012 and December 31, 2011.
Inbound roaming revenues
Inbound roaming revenues of $348.7 million were flat in 2012 compared to 2011 as higher data revenues, reflecting significantly higher volumes but lower negotiated rates, were offset by lower voice revenues, reflecting both lower volumes and rates. In 2011, inbound roaming revenues increased $95.0 million, or 38% compared to 2010 as an increase in data roaming revenues was partially offset by a decrease in voice roaming revenues. U.S. Cellular expects continued growth in data roaming volume but also expects that the revenue impact of this growth will be offset by the impacts of decreases in negotiated data roaming rates and voice roaming volumes.
Other revenues
As described below, ETC support was phased down to 80% of 2011 levels beginning July 1, 2012. As a result, Other revenues decreased by $16.8 million, or 8%, in 2012 compared to 2011. In 2011, the increase of $18.8 million, or 9%, was driven primarily by increased ETC revenues due to expanded eligibility in certain states and adjustments by the Universal Service Administrative Company ("USAC") that reduced amounts received in prior years. U.S. Cellular was eligible to receive ETC funds in sixteen states in 2012, 2011 and 2010. ETC revenues recorded in 2012, 2011 and 2010 were $140.8 million, $160.5 million and $143.9 million, respectively.
18
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Pursuant to the FCC's Reform Order (See "OverviewFCC Reform Order" above), U.S. Cellular's ETC support is currently being phased down. Support for 2012 (excluding certain adjustments) was frozen on January 1, 2012 at 2011 levels and was reduced by 20% starting in July 2012. Support will be reduced by 20% in July of each subsequent year; however, if the Phase II Mobility Fund is not operational by July 2014, the phase down will halt at that time and U.S. Cellular will receive 60% of its baseline support until the Phase II Mobility Fund is operational.
See the "OverviewFCC Reform Order" section above for a discussion of alternative sources of funding. 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 or the extent to which reductions in support will be offset with additional support from the CAF or the Mobility Fund. 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 wireless devices and accessories to agents. All equipment sales revenues are recorded net of 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; in addition, customers on currently offered rate plans receive loyalty reward points that may be used to purchase a new wireless device or accelerate the timing of a customer's eligibility for a wireless device upgrade at promotional pricing. 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. U.S. Cellular anticipates that it will continue to sell wireless devices to agents in the future.
The increase in 2012 equipment sales revenues of $63.7 million, or 22%, to $353.2 million was driven primarily by a 17% increase in average revenue per wireless device sold; an increase in equipment activation fees also was a factor. Average revenue per wireless device sold increased due to a shift in customer preference to higher priced smartphones. The increase in 2011 equipment sales revenues of $24.9 million, or 9%, to $289.5 million was driven by a 15% increase in average revenue per wireless device sold offset by a 4% decrease in total wireless devices sold.
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 third-party data product and platform developers.
System operations expenses increased $17.4 million, or 2%, to $946.8 million in 2012 and $74.4 million, or 9%, to $929.4 million in 2011. Key components of the overall increases in System operations expenses were as follows:
19
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
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, containment of roaming expense via lower negotiated rates and initiatives designed to reduce overall customer usage.
Cost of equipment sold
Cost of equipment sold increased $144.1 million, or 18%, in 2012 and $35.5 million, or 5% in 2011. In 2012, total devices sold increased by 1% due to expanded distribution for U Prepaid compared to a decline in total wireless devices sold in 2011. In both years there was an increase in the average cost per wireless device sold (18% in 2012 and 8% in 2011) due to a shift in the mix of sales to smartphones. In 2012, the introduction of 4G LTE devices also was a significant driver to the increase in Cost of equipment sold as these devices are more costly than similar 3G devices. However, 4G LTE technology results in lower system operations expense during a customer's lifecycle.
U.S. Cellular's loss on equipment, defined as equipment sales revenues less cost of equipment sold, was $582.7 million, $502.3 million and $491.6 million for 2012, 2011 and 2010, respectively. U.S. Cellular expects loss on equipment to continue to be a significant cost in the foreseeable future as wireless carriers continue to use device availability and pricing as a means of competitive differentiation. In addition, U.S. Cellular expects increasing sales of data centric wireless devices such as smartphones and tablets to result in higher equipment subsidies over time; these devices generally have higher purchase costs which cannot be recovered through proportionately higher selling prices to customers. Smartphones sold as a percentage of total devices sold was 56%, 44% and 25% in 2012, 2011 and 2010, respectively.
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.
20
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Selling, general and administrative expenses decreased by $4.8 million to $1,764.9 million in 2012 and by $13.6 million to $1,769.7 in 2011. Key components of the net changes in Selling, general and administrative expenses were as follows:
2012
2011
Depreciation, amortization and accretion
Depreciation, amortization and accretion expense increased $35.1 million in 2012, or 6% primarily due to the acceleration of depreciation in the Divestiture Markets and depreciation and amortization on asset additions.
(Gain) loss on asset disposals and exchanges, net
(Gain) loss on asset disposals and exchanges, net was a loss of $18.1 million in 2012 primarily due to losses resulting from the write-off of certain network assets.
(Gain) loss on sale of business and other exit costs, net
(Gain) loss on sale of business and other exit costs, net was a loss of $21.0 million in 2012. This loss is primarily due to employee severance costs and asset write-offs in the Divestiture Markets, partially offset by a $4.2 million gain resulting from the sale of a wireless market in March 2012.
See "Financial Resources" and "Liquidity and Capital Resources" for a discussion of U.S. Cellular's capital expenditures.
21
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONSTDS TELECOM
TDS conducts its wireline operations through TDS Telecom, a wholly-owned subsidiary. The following table summarizes operating data for TDS Telecom's ILEC and CLEC operations:
As of December 31,
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
ILEC |
||||||||||
Residential Connections |
||||||||||
Physical access lines(1) |
350,100 | 367,500 | 386,600 | |||||||
Broadband connections(2) |
221,700 | 219,600 | 210,300 | |||||||
IPTV customers |
7,900 | 4,600 | 3,900 | |||||||
ILEC residential connections |
579,700 | 591,700 | 600,800 | |||||||
Commercial Connections |
||||||||||
Physical access lines(1) |
107,600 | 114,400 | 121,100 | |||||||
Broadband connections(2) |
18,500 | 18,200 | 17,000 | |||||||
managedIP connections(3) |
17,200 | 8,600 | 4,000 | |||||||
ILEC commercial connections |
143,300 | 141,200 | 142,100 | |||||||
CLEC |
||||||||||
Residential Connections |
||||||||||
Physical access lines(1) |
24,600 | 31,800 | 42,200 | |||||||
Broadband connections(2) |
8,200 | 11,000 | 14,500 | |||||||
CLEC residential connections |
32,800 | 42,800 | 56,700 | |||||||
Commercial Connections |
||||||||||
Physical access lines(1) |
135,500 | 157,300 | 174,800 | |||||||
Broadband connections(2) |
11,200 | 14,600 | 16,400 | |||||||
managedIP connections(3) |
77,400 | 44,900 | 26,000 | |||||||
CLEC commercial connections |
224,100 | 216,800 | 217,200 | |||||||
Total ILEC and CLEC Customer Connections |
979,900 | 992,500 | 1,016,800 | |||||||
22
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
TDS Telecom Total (ILEC, CLEC, and HMS Operations)
Components of Operating Income
Year Ended December 31,
|
2012 | Increase/ (Decrease) |
Percentage Change |
2011 | Increase/ (Decrease) |
Percentage Change |
2010 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|
|||||||||||||||||||||
Operating revenues |
||||||||||||||||||||||
ILEC revenues |
$ | 578,412 | $ | (19,399 | ) | (3 | )% | $ | 597,811 | $ | (9,033 | ) | (1 | )% | $ | 606,844 | ||||||
CLEC revenues |
173,397 | (6,935 | ) | (4 | )% | 180,332 | (7,652 | ) | (4 | )% | 187,984 | |||||||||||
HMS revenues |
113,010 | 65,830 | >100 | % | 47,180 | 36,630 | >100 | % | 10,550 | |||||||||||||
Intra-company elimination |
(10,313 | ) | (378 | ) | (4 | )% | (9,935 | ) | (399 | ) | (4 | )% | (9,536 | ) | ||||||||
TDS Telecom operating revenues |
854,506 | 39,118 | 5 | % | 815,388 | 19,546 | 2 | % | 795,842 | |||||||||||||
Operating expenses |
||||||||||||||||||||||
ILEC expenses |
514,138 | 17,515 | 4 | % | 496,623 | (11,782 | ) | (2 | )% | 508,405 | ||||||||||||
CLEC expenses |
179,289 | 1,371 | 1 | % | 177,918 | (8,164 | ) | (4 | )% | 186,082 | ||||||||||||
HMS expenses |
130,650 | 78,519 | >100 | % | 52,131 | 41,074 | >100 | % | 11,057 | |||||||||||||
Intra-company elimination |
(10,313 | ) | (378 | ) | (4 | )% | (9,935 | ) | (399 | ) | (4 | )% | (9,536 | ) | ||||||||
TDS Telecom operating expenses |
813,764 | 97,027 | 14 | % | 716,737 | 20,729 | 3 | % | 696,008 | |||||||||||||
TDS Telecom operating income |
$ | 40,742 | $ | (57,909 | ) | (59 | )% | $ | 98,651 | $ | (1,183 | ) | (1 | )% | $ | 99,834 | ||||||
Components of Operating Income
Year Ended December 31,
|
2012 | Increase/ (Decrease) |
Percentage Change |
2011 | Increase/ (Decrease) |
Percentage Change |
2010 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|
|||||||||||||||||||||
Operating revenues |
||||||||||||||||||||||
Residential |
$ | 279,400 | $ | (458 | ) | | $ | 279,858 | $ | 455 | | $ | 279,403 | |||||||||
Commercial |
97,382 | (1,199 | ) | (1 | )% | 98,581 | (6,263 | ) | (6 | )% | 104,844 | |||||||||||
Wholesale |
201,630 | (17,742 | ) | (8 | )% | 219,372 | (3,225 | ) | (1 | )% | 222,597 | |||||||||||
Total operating revenues |
578,412 | (19,399 | ) | (3 | )% | 597,811 | (9,033 | ) | (1 | )% | 606,844 | |||||||||||
Operating expenses |
||||||||||||||||||||||
Cost of services and products (excluding depreciation, amortization and accretion reported below) |
192,514 | 923 | | 191,591 | (1,108 | ) | (1 | )% | 192,699 | |||||||||||||
Selling, general and administrative expenses |
170,493 | 12,191 | 8 | % | 158,302 | (10,481 | ) | (6 | )% | 168,783 | ||||||||||||
Depreciation, amortization and accretion |
150,557 | 4,870 | 3 | % | 145,687 | (664 | ) | | 146,351 | |||||||||||||
Loss on asset disposals, net |
535 | (508 | ) | (49 | )% | 1,043 | 471 | 82 | % | 572 | ||||||||||||
Loss on sale of business and other exit |
39 | 39 | N/M | | | N/M | | |||||||||||||||
Total operating expenses |
514,138 | 17,515 | 4 | % | 496,623 | (11,782 | ) | (2 | )% | 508,405 | ||||||||||||
Total operating income |
$ | 64,274 | $ | (36,914 | ) | (36 | )% | $ | 101,188 | $ | 2,749 | 3 | % | $ | 98,439 | |||||||
N/MPercentage change not meaningful
Residential revenues consist of voice, data and video services to our residential customer base.
Residential revenues of $279.4 million in 2012 were essentially the same compared to 2011 and 2010. Reductions in the number of residential connections of 2% and 1% in 2012 and 2011, respectively, negatively impacted residential revenues by $4.7 million and $2.1 million. Customers choosing higher speed data plans drove a 2% increase in average revenue per residential connection in 2012, which increased residential revenues $6.0 million. Reductions in discounts attributed to bundled offerings increased revenues $2.7 million in 2011 compared to 2010.
23
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Commercial revenues consist of data and voice services and sales and installation of business telephone systems to our commercial customer base.
The decrease in Commercial revenues of $1.2 million or 1% to $97.4 million in 2012 was primarily due to a $1.9 million decline in business systems sales and charges for directory assistance. A $1.9 million increase in revenue resulting from an increase in commercial connections was partially offset by a $1.3 million decrease in the average revenue per commercial connection.
The decrease in Commercial revenues of $6.3 million or 6% to $98.6 million in 2011 was primarily due to a $3.2 million decline in business systems sales. A decrease in commercial connections resulted in a $1.5 million decrease in revenue and a decrease in the average revenue per commercial connection reduced revenue by $1.3 million.
Wholesale revenues consist of compensation from other carriers for utilizing TDS Telecom's network infrastructure and regulatory recoveries.
Wholesale revenues decreased $17.7 million or 8% to $201.6 million in 2012. Wholesale revenues decreased $7.8 million in 2012 as a result of changes in support mechanisms and in intercarrier compensation resulting from the Reform Order released by the FCC in November 2011, as described in the OverviewFCC Reform Order section above. Revenues received through interstate and intrastate regulatory recovery mechanisms also decreased $5.7 million due to changes in eligible expense recovery thresholds and reductions in the pool earnings. Additionally, Wholesale revenues declined $4.9 million due to a 12% decline in intrastate minutes of use. TDS Telecom expects Wholesale revenues to continue to decline in 2013.
Wholesale revenues decreased by $3.2 million or 1% to $219.4 million in 2011. Wholesale revenues decreased $4.2 million due to a 9% decline in intrastate minutes of use and $2.4 million due to declines in revenues received through interstate regulatory recovery mechanisms. Partially offsetting these decreases was an increase of $1.2 million in revenues received from state USF programs.
Cost of services and products (excluding Depreciation, amortization and accretion)
Cost of services and products of $192.5 million in 2012 were flat compared to 2011. Increases in employee related costs, increased charges related to IPTV expansion and network maintenance costs were nearly offset by decreased costs of goods sold, lower circuit charges and a decrease in reciprocal compensation expense related to the FCC Reform Order which mandated rate reductions that became effective in July of 2012.
Cost of services and products of $191.6 million in 2011 were flat compared to 2010. Reduced network costs primarily resulting from improved circuit infrastructure and traffic routing and decreased costs of goods sold, were nearly offset by increased expense associated with promotions.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $12.2 million or 8% to $170.5 million in 2012. Discrete benefits recorded in 2011 including receipt of insurance proceeds, the refund of certain prior year regulatory contributions and the settlement of a legal dispute decreased 2011 Selling, general and administrative expenses by $7.7 million. These discrete benefits in 2011 were the primary cause of the overall expense decrease from 2010 to 2011, and expense increase from 2011 to 2012. Additionally, higher employee related and contractor costs, and contributions to the USF contributed to the increase in 2012.
24
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Depreciation, amortization and accretion expense
Depreciation, amortization and accretion expense increased $4.9 million or 3% to $150.6 million in 2012 due to increased capital additions.
Depreciation, amortization and accretion expense of $145.7 million in 2011 was flat compared to 2010.
Components of Operating Income
Year Ended December 31,
|
2012 | Increase/ (Decrease) |
Percentage Change |
2011 | Increase/ (Decrease) |
Percentage Change |
2010 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|
|
|
|
|
|
|
|||||||||||||||
Operating revenues |
||||||||||||||||||||||
Residential |
$ | 17,192 | $ | (4,814 | ) | (22 | )% | $ | 22,006 | $ | (8,545 | ) | (28 | )% | $ | 30,551 | ||||||
Commercial |
138,637 | 407 | | 138,230 | 2,018 | 1 | % | 136,212 | ||||||||||||||
Wholesale |
17,568 | (2,528 | ) | (13 | )% | 20,096 | (1,125 | ) | (5 | )% | 21,221 | |||||||||||
Total operating revenues |
173,397 | (6,935 | ) | (4 | )% | 180,332 | (7,652 | ) | (4 | )% | 187,984 | |||||||||||
Operating expenses |
||||||||||||||||||||||
Cost of services and products (excluding depreciation, amortization and accretion reported below) |
89,949 | (1,399 | ) | (2 | )% | 91,348 | (5,586 | ) | (6 | )% | 96,934 | |||||||||||
Selling, general and |
66,886 | 2,377 | 4 | % | 64,509 | 402 | 1 | % | 64,107 | |||||||||||||
Depreciation, amortization and accretion |
21,969 | (7 | ) | | 21,976 | (2,703 | ) | (11 | )% | 24,679 | ||||||||||||
Loss on asset disposals, net |
485 | 400 | >100 | % | 85 | (277 | ) | (77 | )% | 362 | ||||||||||||
Total operating expenses |
179,289 | 1,371 | 1 | % | 177,918 | (8,164 | ) | (4 | )% | 186,082 | ||||||||||||
Total operating income |
$ | (5,892 | ) | $ | (8,306 | ) | N/M | $ | 2,414 | $ | 512 | 27 | % | $ | 1,902 | |||||||
N/MPercentage change not meaningful
Residential revenues consist of data and voice services to our residential customer base.
Residential revenues decreased $4.8 million or 22% to $17.2 million in 2012, and decreased $8.5 million or 28% to $22.0 million in 2011. Average residential connections decreased 24% in 2012 and 2011, respectively, as the CLEC operations continue to implement a strategic shift towards serving primarily a commercial subscriber base.
Commercial revenues consist of data and voice services to our commercial customer base.
Commercial revenues of $138.6 million in 2012 were essentially unchanged compared to 2011 and 2010. The revenue increase from the growth in managedIP connections was partially offset by a decrease in revenue from the decline in legacy voice and data services in both 2012 and 2011.
Wholesale revenues represent charges to other carriers for utilizing TDS Telecom's network infrastructure.
25
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Wholesale revenues decreased $2.5 million or 13% to $17.6 million in 2012 primarily due to lower average rates due to the FCC Reform Order which mandated rate reductions that became effective July 2012. Wholesale revenues decreased $1.1 million or 5% to $20.1 million in 2011 due to an 11% reduction in minutes of use, which resulted in a $3.1 million decrease to Wholesale revenues which was partially offset by a $1.8 million increase in special access revenues.
Cost of services and products (excluding Depreciation, amortization and accretion)
Cost of services decreased $1.4 million or 2% to $89.9 million in 2012, and decreased $5.6 million or 6% to $91.3 million in 2011. Reductions in purchased network services of $2.7 million and $5.5 million in 2012 and 2011, respectively, have been realized as a result of the decline in the residential customer base. Reciprocal compensation expense decreased $0.9 million in 2012 due to the FCC Reform Order.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $2.4 million or 4% to $66.9 million in 2012 primarily due to an increase in contributions to the USF.
Selling, general and administrative expenses were relatively unchanged in 2011 as increases in payroll related expense of $1.5 million were mostly offset by decreases in USF charges and bad debt expense.
Depreciation, amortization and accretion expense
Depreciation, amortization and accretion expense of $22.0 million was unchanged at 2012.
Depreciation, amortization and accretion expense decreased $2.7 million or 11% to $22.0 million in 2011 primarily due to accelerated depreciation recorded in 2010 on certain equipment due to technological obsolescence as well as certain assets becoming fully depreciated in 2011.
Components of Operating Income
Year Ended December 31,
|
2012 | Increase/ (Decrease) |
Percentage Change |
2011 | Increase/ (Decrease) |
Percentage Change |
2010 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|
|
|
|
|
|
|
|||||||||||||||
Total operating revenues |
$ | 113,010 | $ | 65,830 | >100 | % | $ | 47,180 | $ | 36,630 | >100 | % | $ | 10,550 | ||||||||
Operating expenses |
||||||||||||||||||||||
Cost of services and products (excluding depreciation, amortization and accretion reported below) |
75,781 | 52,279 | >100 | % | 23,502 | 19,903 | >100 | % | 3,599 | |||||||||||||
Selling, general and administrative expenses |
34,193 | 18,546 | >100 | % | 15,647 | 11,410 | >100 | % | 4,237 | |||||||||||||
Depreciation, amortization and accretion |
20,568 | 7,701 | 60 | % | 12,867 | 9,843 | >100 | % | 3,024 | |||||||||||||
Loss on asset disposals, net |
108 | (7 | ) | (6 | )% | 115 | (82 | ) | (42 | )% | 197 | |||||||||||
Total operating expenses |
130,650 | 78,519 | >100 | % | 52,131 | 41,074 | >100 | % | 11,057 | |||||||||||||
Total operating income |
$ | (17,640 | ) | $ | (12,689 | ) | >(100 | )% | $ | (4,951 | ) | $ | (4,444 | ) | >(100 | )% | $ | (507 | ) | |||
26
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
HMS operating revenues consist of colocation, dedicated hosting, hosted application management, cloud computing services, and planning, engineering, procurement, installation, sales and management of IT infrastructure hardware solutions.
HMS revenues increased $65.8 million to $113.0 million in 2012. The acquisitions of OneNeck in June of 2011 and Vital in June of 2012 contributed $64.1 million of incremental 2012 revenues.
HMS revenues increased $36.6 million to $47.2 million in 2011. The acquisitions of VISI and TEAM in March and December of 2010, respectively and OneNeck in June of 2011 contributed $34.9 million of the increase in 2011 revenues compared to 2010.
Cost of services and products (excluding Depreciation, amortization and accretion)
Cost of services and products increased $52.3 million to $75.8 million in 2012 and increased $19.9 million to $23.5 million in 2011. Acquisitions increased Cost of services and products $47.7 million and $19.1 million in 2012 and 2011, respectively.
Selling, general and administrative expense
Selling, general and administrative expense increased $18.5 million to $34.2 million in 2012 and increased $11.4 million to $15.6 million in 2011. Acquisitions increased Selling, general and administrative expense $15.1 million and $9.9 million in 2012 and 2011, respectively. Additional expenses were incurred in both 2012 and 2011 as TDS Telecom develops the infrastructure and products and services to grow the HMS operations.
Depreciation, amortization and accretion expense
Depreciation, amortization and accretion expense increased $7.7 million to $20.6 million in 2012 and increased $9.8 million to $12.9 million in 2011 primarily due to acquisitions. Customer list and trade name amortization contributed $4.4 million and $3.6 million of the increase in 2012 and 2011, respectively.
Management believes that inflation affects TDS' business to no greater or lesser extent than the general economy.
RECENT ACCOUNTING PRONOUNCEMENTS
In general, recent accounting pronouncements did not have and are not expected to have a significant effect on TDS' financial condition and results of operations.
See Note 1Summary of Significant Accounting Policies and Recent Accounting Pronouncements in the Notes to Consolidated Financial Statements for information on recent accounting pronouncements.
27
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
TDS operates a capital- and marketing-intensive business. TDS utilizes cash on hand, cash from operating activities, cash proceeds from divestitures and disposition 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, capital expenditures and other factors. The table below and the following discussion in this Financial Resources section summarize TDS' cash flow activities in 2012, 2011 and 2010.
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|
|
|
|||||||
Cash flows from (used in) |
||||||||||
Operating activities |
$ | 1,105,172 | $ | 1,255,711 | $ | 1,076,207 | ||||
Investing activities |
(998,078 | ) | (866,089 | ) | (1,208,038 | ) | ||||
Financing activities |
70,112 | (168,030 | ) | (200,955 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
$ | 177,206 | $ | 221,592 | $ | (332,786 | ) | |||
The Divestiture Transaction, as described above, resulted in net Cash used in operating activities of $0.3 million during the year ended December 31, 2012. Cash flows from operating and financing activities in future periods will be impacted by the Divestiture Transaction, as described in the Divestiture Transaction section.
Cash Flows from Operating Activities
The following table presents Adjusted OIBDA and is included for purposes of analyzing changes in operating activities. Adjusted OIBDA is defined as operating income excluding the effects of: depreciation, amortization and accretion (OIBDA); the loss on impairment of assets (if any); the net gain or loss on asset disposals and exchanges (if any); and the net gain or loss on sale of business and other exit costs (if any). A more detailed description of Adjusted OIBDA is presented with Note 17Business Segment Information in the Notes to Consolidated Financial Statements.
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|
|
|
|||||||
Operating income |
$ | 183,863 | $ | 362,502 | $ | 296,091 | ||||
Add back: |
||||||||||
Depreciation, amortization and accretion |
813,626 | 765,776 | 755,649 | |||||||
Loss on impairment of assets |
515 | | | |||||||
(Gain) loss on asset disposals and exchanges, net |
19,741 | (810 | ) | 11,763 | ||||||
(Gain) loss on sale of business and other exit costs, net |
21,061 | | | |||||||
Adjusted OIBDA |
$ | 1,038,806 | $ | 1,127,468 | $ | 1,063,503 | ||||
Cash flows from operating activities in 2012 were $1,105.2 million, a decrease of $150.5 million from 2011. Significant changes included the following:
28
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
depreciation applicable to qualified capital expenditures. TDS' future federal income tax liabilities associated with the current benefits being realized from bonus depreciation are accrued as a component of Net deferred income tax liability (noncurrent) in the Consolidated Balance Sheet. TDS expects federal income tax payments to substantially increase beginning in 2014 and remain at a higher level for several years as the amount of TDS' federal tax depreciation deduction substantially decreases as a result of having accelerated depreciation in earlier years. This expectation considers the bonus depreciation provisions enacted in January 2013, which includes 50% federal tax bonus depreciation on qualified capital expenditures in the 2013 tax year and assumes that federal bonus depreciation provisions are not enacted in future periods. To the extent further federal bonus depreciation provisions are enacted, this expectation will change.
Cash flows from operating activities in 2011 were $1,255.7 million, an increase of $179.5 million from 2010. Significant changes included the following:
29
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
rebates were the primary cause of the remaining $59.9 million year-over-year change in Other assets and liabilities.
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 revenue-enhancing and cost-reducing upgrades to TDS' networks.
Capital expenditures (i.e. additions to property, plant and equipment and system development expenditures) totaled $1,004.6 million in 2012, $987.2 million in 2011 and $755.0 million in 2010. Cash used for additions to property, plant and equipment is reported in the Consolidated Statement of Cash Flows and excludes amounts accrued in Accounts payable for capital expenditures at December 31 of the current year, and includes amounts paid in the current period that were accrued at December 31 of the prior year. Cash used for additions to property, plant and equipment totaled $995.5 million, $971.8 million and $739.2 million in 2012, 2011 and 2010, respectively. These expenditures were made to provide for customer and usage growth (in recent periods, particularly with respect to data usage), to upgrade service and to take advantage of service-enhancing and cost-reducing technological developments in order to maintain competitive services.
Cash payments for acquisitions in 2012, 2011 and 2010 were as follows:
Cash Payments for Acquisitions(1)
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|
|
|
|||||||
U.S. Cellular licenses |
$ | 122,690 | $ | 4,406 | $ | 17,101 | ||||
U.S. Cellular businesses |
| 19,367 | | |||||||
HMS businesses |
40,692 | 95,865 | 64,590 | |||||||
Non-Reportable Segment(2) |
| (14,130 | ) | | ||||||
Total |
$ | 163,382 | $ | 105,508 | $ | 81,691 | ||||
In March 2012, U.S. Cellular sold the majority of the assets and liabilities of a wireless market for $49.8 million in cash. See Note 7Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to this sale.
30
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
TDS invested $120.0 million, $180.9 million and $493.8 million in 2012, 2011 and 2010, respectively, in U.S. Treasury securities and corporate notes with maturities greater than three months from the acquisition date. TDS realized cash proceeds of $243.4 million, $393.2 million and $106.3 million in 2012, 2011 and 2010, respectively, related to the maturities of its investments in U.S. Treasury securities, corporate notes and certificates of deposit.
Cash Flows from Financing Activities
Cash flows from financing activities primarily reflect repayment of and proceeds from short-term and long-term debt balances, 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 plans.
In September 2011, Airadigm paid $32.7 million to the FCC in satisfaction of amounts due pursuant to Airadigm's plan of reorganization. See Note 7Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to this acquisition.
In November 2012, TDS issued $195.0 million of 5.875% Senior Notes due 2061, and paid related debt issuance costs of $7.1 million.
In May 2011, U.S. Cellular issued $342.0 million of 6.95% Senior Notes due 2060, and paid related debt issuance costs of $11.0 million. The net proceeds from the 6.95% Senior Notes were used primarily to redeem $330.0 million of U.S. Cellular's 7.5% Senior Notes in June 2011. The redemption price of the 7.5% Senior Notes was equal to 100% of the principal amount plus accrued and unpaid interest thereon to the redemption date.
In March 2011, TDS issued $300.0 million of 7% Senior Notes due 2060, and paid related debt issuance costs of $9.7 million. The net proceeds from the 7% Senior Notes were primarily used to redeem $282.5 million of TDS' 7.6% Series A Notes in May 2011. The redemption price of the 7.6% Series A Notes was equal to 100% of the outstanding aggregate principal amount, plus accrued and unpaid interest thereon to the redemption date.
In November 2010, TDS issued $225.0 million aggregate principal amount of 6.875% Senior Notes due in 2059, and paid related debt issuance costs of $7.6 million. In December 2010, TDS redeemed $217.5 million aggregate principal amount of the outstanding $500.0 million aggregate principal amount of its 7.6% Series A Senior Notes due 2041. The redemption price of $222.0 million was 100% of the outstanding aggregate principal amount, plus accrued and unpaid interest thereon until the redemption date. The redemption was financed with the net proceeds from the issuance of $225.0 million in aggregate principal amount of TDS' 6.875% Senior Notes.
The following table presents Free cash flow. Free cash flow is defined as Cash flows from operating activities less Cash used for additions to property, plant and equipment. Free cash flow is a non-GAAP financial measure. TDS believes that Free cash flow as reported by TDS may be useful to investors and other users of its financial information in evaluating the amount of cash generated by business operations, after Cash used for additions to property, plant and equipment.
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|
|
|
|||||||
Cash flows from operating activities |
$ | 1,105,172 | $ | 1,255,711 | $ | 1,076,207 | ||||
Cash used for additions to property, plant and equipment |
(995,517 | ) | (971,759 | ) | (739,222 | ) | ||||
Free cash flow |
$ | 109,655 | $ | 283,952 | $ | 336,985 | ||||
See Cash flows from Operating Activities and Cash flows from Investing Activities for details on the changes to the components of Free cash flow.
31
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
TDS believes that existing cash and investment balances, funds available under its revolving credit facilities and expected cash flows from operating and investing activities provide substantial liquidity and financial flexibility for TDS to meet its normal financing needs (including working capital, construction and development expenditures and share repurchases under approved programs) for the foreseeable future. In addition, TDS and its subsidiaries may access public and private capital markets to help meet their financing needs.
U.S. Cellular's profitability historically has been lower in the fourth quarter as a result of significant promotional spending during the holiday season. Changes in these or other economic factors could have a material adverse effect on demand for TDS' products and services and on TDS' financial condition and results of operations.
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 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 construction, development, acquisition or share repurchase programs. Such reductions could have a material adverse effect on TDS' business, financial condition or results of operations.
At December 31, 2012, TDS had $740.5 million in Cash and cash equivalents. Of this amount, $378.4 million consisted of Cash and cash equivalents held by U.S. Cellular. 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 December 31, 2012, the majority of TDS' Cash and cash equivalents was held in money market funds that invest exclusively in U.S. Treasury securities 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.
Short-term and Long-term Investments
At December 31, 2012, TDS had $115.7 million in Short-term investments and $50.3 million in Long-term investments. Of this amount, $100.7 million and $50.3 million consisted of Short-term investments and Long-term investments, respectively, held by U.S. Cellular. Short-term and Long-term investments consist primarily of U.S. Treasury securities which are designated as held-to-maturity investments and recorded at amortized cost in the Consolidated Balance Sheet. For these investments, TDS' objective is to earn a higher rate of return on funds that are not anticipated to be required to meet liquidity needs in the near term, while maintaining a low level of investment risk. See Note 3Fair Value Measurements in the Notes to Consolidated Financial Statements for additional details on Short-term and Long-term investments.
TDS and U.S. Cellular have revolving credit facilities available for general corporate purposes.
In connection with U.S. Cellular's revolving credit facility, TDS and U.S. Cellular entered into a subordination agreement dated December 17, 2010 together with the administrative agent for the lenders under U.S. Cellular's revolving credit facility. At December 31, 2012, no U.S. Cellular debt was subordinated pursuant to this subordination agreement.
TDS' and U.S. Cellular's interest cost on their revolving credit facilities is subject to increase if their current credit ratings from nationally recognized credit rating agencies are lowered, and is subject to decrease if the ratings are raised. The credit facilities would not cease to be available nor would the maturity date accelerate solely as a result of a downgrade in TDS' or U.S. Cellular's credit rating.
32
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
However, a downgrade in TDS' or U.S. Cellular's credit rating could adversely affect their ability to renew the credit facilities or obtain access to other credit facilities in the future.
As of December 31, 2012, TDS' and U.S. Cellular's credit ratings from the nationally recognized credit rating agencies remained at investment grade.
The following table summarizes the terms of such revolving credit facilities as of December 31, 2012:
|
TDS | U.S. Cellular | |||||
---|---|---|---|---|---|---|---|
(Dollars in millions) |
|
|
|||||
Maximum borrowing capacity |
$ | 400.0 | $ | 300.0 | |||
Letter of credit outstanding |
$ | 0.2 | $ | 0.2 | |||
Amount available for use |
$ | 399.8 | $ | 299.8 | |||
Agreement date |
December 2010 | December 2010 | |||||
Maturity date |
December 2017 | December 2017 |
TDS and U.S. Cellular may seek to extend the maturity date from time to time. In 2012, each of the TDS and U.S. Cellular revolving credit facilities were amended to extend the maturity date from December 2015 to December 2017.
The continued availability of the revolving credit facilities requires TDS and U.S. Cellular to comply with certain negative and affirmative covenants, maintain certain financial ratios and make representations regarding certain matters at the time of each borrowing. TDS and U.S. Cellular believe they were in compliance as of December 31, 2012 with all of the covenants and requirements set forth in their revolving credit facilities.
TDS and its subsidiaries had the following debt outstanding as of December 31, 2012:
|
Issuance Date | Maturity Date | Call Date(1) | Aggregate Principal Amount |
||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|
|
|
|
||||||
TDS: |
||||||||||
Unsecured Senior Notes |
||||||||||
6.625% |
March 2005 | March 2045 | March 2010 | $ | 116,250 | |||||
6.875% |
November 2010 | November 2059 | November 2015 | 225,000 | ||||||
7.0% |
March 2011 | March 2060 | March 2016 | 300,000 | ||||||
5.875% |
November 2012 | December 2061 | December 2017 | 195,000 | ||||||
U.S. Cellular: |
||||||||||
Unsecured Senior Notes |
||||||||||
6.7% |
December 2003 and June 2004 | December 2033 | December 2003 | $ | 544,000 | |||||
6.95% |
May 2011 | May 2060 | May 2016 | 342,000 |
33
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
TDS and its subsidiaries' long-term debt and indentures do not contain any provisions resulting in acceleration of the maturities of outstanding debt in the event of a change in TDS' credit rating. However, a downgrade in TDS' credit rating could adversely affect its ability to obtain long-term debt financing in the future. TDS believes it and its subsidiaries were in compliance as of December 31, 2012 with all covenants and other requirements set forth in long-term debt indentures. TDS and U.S. Cellular have not failed to make nor do they expect to fail to make any scheduled payment of principal or interest under such indentures.
The long-term debt principal payments due for the next five years represent less than 1% of the total long-term debt obligation at December 31, 2012. Refer to Market RiskLong-Term Debt for additional information regarding required principal payments and the weighted average interest rates related to TDS' long-term debt.
TDS, at its discretion, may from time to time seek to retire or purchase its outstanding debt through cash purchases and/or exchanges for other securities, in open market purchases, privately negotiated transactions, tender offers, exchange offers or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
TDS and U.S. Cellular each have effective shelf registration statements on Form S-3 that may be used to issue senior debt securities. The proceeds from any such issuances may be used for general corporate purposes, including to finance the redemption of any of the above existing debt. The TDS shelf registration statement is an automatic shelf registration that permits TDS to issue at any time and from time to time senior debt securities in one or more offerings in an indeterminate amount. The U.S. Cellular shelf registration statement permits U.S. Cellular to issue at any time and from time to time senior debt securities in one or more offerings up to an aggregate principal amount of $500 million. The ability of TDS or U.S. Cellular to complete an offering pursuant to such shelf registration statements is subject to market conditions and other factors at the time.
U.S. Cellular's capital expenditures for 2013 are expected to be approximately $600 million. These expenditures are expected to be for the following general purposes:
TDS Telecom's anticipated capital expenditures for 2013 are expected to be approximately $155 million. These expenditures are expected to be for the following general purposes:
34
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
TDS plans to finance its capital expenditure programs for 2013 using primarily cash flows from operating activities, and as necessary, existing cash balances and short-term investments.
Acquisitions, Divestitures and Exchanges
TDS assesses 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, telecommunications companies, wireless spectrum, HMS businesses, cable businesses and other possible lines of business. 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.
TDS also may be engaged from time to time in negotiations relating to the acquisition, divestiture or exchange of companies, strategic properties, wireless spectrum and other possible businesses. In general, TDS may not disclose such transactions until there is a definitive agreement. See "Divestiture Transaction" above in this Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 7Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for details on significant transactions in 2012 and 2011.
TDS consolidates certain entities because they are "variable interest entities" under accounting principles generally accepted in the United States of America ("GAAP"). See Note 5Variable Interest Entities in the Notes to Consolidated Financial Statements for the details of 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.
TDS and U.S. Cellular have repurchased their Common Shares, subject to their repurchase programs. U.S. Cellular expects to continue to repurchase its Common Shares, subject to the repurchase program. The TDS repurchase program expired in November 2012. TDS determines whether to repurchase shares from time to time based on many considerations, including cash needed for other known or possible requirements, the stock price, market conditions, debt rating considerations, business forecasts, business plans, macroeconomic conditions, share issuances under compensation plans, provisions in governing and legal documents and other legal requirements and other facts and circumstances. Subject to these considerations, TDS may approve the repurchase of its shares from time to time when circumstances warrant. For additional information related to repurchases made during 2012, 2011 and 2010 and to the U.S. Cellular repurchase authorization, see Note 15Common Shareholders' Equity in the Notes to Consolidated Financial Statements.
On January 13, 2012, TDS shareholders approved a Share Consolidation Amendment to the Restated Certificate of Incorporation of TDS. See Note 15Common Shareholders' Equity in the Notes to Consolidated Financial Statements for additional information.
35
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Contractual and Other Obligations
At December 31, 2012, the resources required for contractual obligations were as follows:
|
Payments Due by Period |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) |
Total | Less Than 1 Year |
1 - 3 Years | 3 - 5 Years | More Than 5 Years |
|||||||||||
Long-term debt obligations(1) |
$ | 1,729.8 | $ | 1.1 | $ | 2.6 | $ | 2.8 | $ | 1,723.3 | ||||||
Interest payments on long-term debt obligations |
4,452.2 | 116.1 | 232.1 | 231.9 | 3,872.1 | |||||||||||
Operating leases(2) |
1,427.5 | 171.4 | 266.3 | 179.1 | 810.7 | |||||||||||
Capital leases |
9.4 | 0.6 | 1.2 | 1.2 | 6.4 | |||||||||||
Purchase obligations(3)(4) |
1,040.3 | 564.6 | 290.2 | 120.7 | 64.8 | |||||||||||
|
$ | 8,659.2 | $ | 853.8 | $ | 792.4 | $ | 535.7 | $ | 6,477.3 | ||||||
The table above excludes liabilities related to "unrecognized tax benefits" as defined by GAAP because TDS is unable to predict the period of settlement of such liabilities. Such unrecognized tax benefits were $28.4 million at December 31, 2012. See Note 4Income Taxes in the Notes to Consolidated Financial Statements for additional information on unrecognized tax benefits.
Agreements
See Agreements in Note 14Commitments and Contingencies in the Notes to Consolidated Financial Statements.
Off-Balance Sheet Arrangements
TDS had no transactions, agreements or other contractual arrangements with unconsolidated entities involving "off-balance sheet arrangements," as defined by Securities and Exchange Commission ("SEC") rules, that had or are reasonably likely to have a material current or future effect on its financial
36
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
TDS paid quarterly dividends per outstanding share of $0.1225 in 2012, $0.1175 in 2011 and $0.1125 in 2010. These dividends per share amounts for 2011 and 2010 have not been retroactively adjusted to reflect the impact of the Share Consolidation Amendment. See Note 15Common Shareholders' Equity in the Notes to Consolidated Financial Statements for additional information. TDS has no current plans to change its policy of paying dividends.
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 1Summary of Significant Accounting Policies and Recent Accounting Pronouncements in the Notes to Consolidated Financial Statements.
Management believes the application of the following critical accounting policies and the estimates required by such application reflect its most significant judgments and estimates used in the preparation of TDS' consolidated financial statements. Management has discussed the development and selection of each of the following accounting policies and related estimates and disclosures with the Audit Committee of TDS' Board of Directors.
See the Goodwill and Licenses Impairment Assessment section of Note 1Summary of Significant Accounting Policies and Recent Accounting Pronouncements in the Notes to Consolidated Financial Statements for information on Goodwill and Licenses impairment testing policies and methods.
See Note 8Intangible Assets in the Notes to Consolidated Financial Statements for additional information related to Goodwill and Licenses activity in 2012 and 2011.
During the second quarter of 2012, a sustained decrease in TDS' stock price resulted in a triggering event, as defined by GAAP, requiring an interim impairment test of Licenses and Goodwill as of June 30, 2012. Based on this test, TDS concluded that the entire amount of Goodwill related to Airadigm was impaired resulting in an impairment loss of $0.5 million and no impairment of Licenses.
Goodwill
U.S. Cellular
U.S. Cellular tests Goodwill for impairment at the level of reporting referred to as a "reporting unit." For purposes of impairment testing of Goodwill in 2012, U.S. Cellular identified five reporting units based on geographic service areas (all of which are included in TDS' wireless reportable operating segment). There were no changes to U.S. Cellular's reporting units or to U.S. Cellular's overall Goodwill impairment testing methodology between November 1, 2012 and November 1, 2011.
A discounted cash flow approach was used to value each reporting unit, using value drivers and risks specific to the industry and current economic factors. The cash flow estimates incorporated assumptions that market participants would use in their estimates of fair value and may not be indicative of U.S. Cellular specific assumptions. The most significant assumptions made in this process were the revenue growth rate, the long-term and terminal revenue growth rate, discount rate and projected capital expenditures. Also, discounted cash flows related to the Central Region exclude projected cash flows associated with the Divestiture Markets, as the assets associated with such markets, including Goodwill, were excluded from the carrying value of the Central Region reporting unit for purposes of conducting
37
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
the Goodwill impairment test as of November 1, 2012. These assumptions were as follows for November 1, 2012 and 2011:
Key Assumptions
|
November 1, 2012 |
November 1, 2011 |
|||||
---|---|---|---|---|---|---|---|
Weighted-average expected revenue growth rate (next five years) |
2.4 | % | 3.6 | % | |||
Weighted-average long-term and terminal revenue growth rate (after year five) |
2.0 | % | 2.0 | % | |||
Discount rate |
11.0 | % | 10.5 | % | |||
Average annual capital expenditures (millions) |
$ | 559 | $ | 609 |
The decrease in the weighted-average expected revenue growth rate for the next five years was due to a decrease in projected customer penetration growth rate of market participants. In spite of lower overall market interest rates, the discount rate used to estimate cash flows increased from 10.5% in November 2011 to 11.0% in November 2012 due to a shift toward more equity in the representative capital structure of market participants.
The carrying value of each U.S. Cellular reporting unit at TDS as of November 1, 2012, as impacted for the Divestiture Transaction, was as follows:
Reporting Unit
|
Carrying Value at TDS(1) |
|||
---|---|---|---|---|
(Dollars in millions) |
|
|||
Central Region(2) |
$ | 215 | ||
Mid-Atlantic Region |
788 | |||
New England Region |
268 | |||
New York Region(3) |
172 | |||
Northwest Region |
344 | |||
Total |
$ | 1,787 | ||
As of November 1, 2012, the fair values of the reporting units exceeded their respective carrying values by amounts ranging from 19% to 166% of the respective carrying values. Therefore, no impairment of Goodwill existed. Given that the fair values of the respective reporting units exceed their respective carrying values, provided all other assumptions remained the same, the discount rate would have to increase to a range of 12.4% to 14.2% to yield estimated fair values of reporting units that equal their respective carrying values at November 1, 2012. Further, assuming all other assumptions remained the same, the terminal growth rate assumptions would need to decrease to negative amounts, ranging from negative 9.0% to negative 1.3%, to yield estimates of fair value equal to the carrying values of the respective reporting units at November 1, 2012.
38
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
TDS Telecom
TDS Telecom has recorded Goodwill as a result of the acquisition of ILEC companies and HMS companies. For purposes of the annual impairment testing, TDS Telecom has four reporting units: one reporting unit within its ILEC reportable operating segment and three reporting units within its HMS reportable operating segment. For purposes of its annual impairment testing of Goodwill, as of November 1, 2011, TDS Telecom identified two reporting units within its ILEC reportable operating segment. TDS Telecom's change in reporting units resulted from additional acquisitions and TDS' reevaluation of its reportable business segments, more fully described in Note 1Summary of Significant Accounting Policies and Recent Accounting Pronouncements. TDS Telecom's overall Goodwill impairment testing methodology changed between November 1, 2012 and November 1, 2011. Over time, the historical companies used by TDS ILEC as peers have added additional lines of business to their traditional wireline activities, predominately either HMS or CLEC operations. As TDS Telecom has separated their HMS and CLEC operations into different segments and therefore different reporting units, the peer group operations are not as comparable to TDS ILEC operations as they were in prior years. In the fourth quarter of 2012, management added the discounted cash flow approach as an additional method to address this development.
In 2012, the discounted cash flow approach and publicly-traded guideline company method were used to value the ILEC and each of the HMS reporting units. The discounted cash flow approach uses value drivers and risks specific to the industry and current economic factors. The cash flow estimates incorporated assumptions that market participants would use in their estimates of fair value and may not be indicative of TDS Telecom specific assumptions. The most significant assumptions made in this process were the revenue growth rate, the long-term and terminal revenue growth rate, discount rate and projected capital expenditures. These assumptions were as follows for November 1, 2012:
Key Assumptions
|
ILEC | HMS | |||||
---|---|---|---|---|---|---|---|
Average expected revenue growth rate (next five years) |
(0.4 | )% | 8.5-23.0 | % | |||
Average long-term and terminal revenue growth rate |
| % | 1.5-3.0 | % | |||
Discount rate |
7.0 | % | 11.0-13.0 | % | |||
Capital expenditures as a percentage of revenue |
12.5-16.9 | % | 0.4-44.9 | % |
The publicly-traded guideline company method develops an indication of fair value by calculating average market pricing multiples for selected publicly-traded companies using multiples of: Revenue, Earnings before Interest, Taxes, and Depreciation and Amortization, and Earnings before Interest and Taxes. The developed multiples were applied to applicable financial measures of the respective reporting unit to determine fair value. The discounted cash flow approach and publicly-traded guideline company method were weighted to arrive at the total fair value used for impairment testing.
In 2011, the publicly-traded guideline company method and recent transaction method were used to value the ILEC and HMS reporting units tested. The recent transaction method calculates market pricing multiples based upon recent acquisitions of similar businesses. In both the publicly-traded guideline company method and the recent transaction method, the developed multiples were applied to applicable financial measures of the respective reporting unit to determine fair value. Given the nature of this methodology, no specific consideration of the economic environment was considered since those factors would be inherent in the multiples used.
As of November 1, 2012, the fair value of the ILEC reporting unit exceeded its carrying value by 34% of its value. Therefore, no impairment of goodwill existed. Given that the fair value of the ILEC reporting unit exceeded its carrying value, provided all other assumptions remained the same, the discount rate would have to increase to 10.0% for the discounted cash flow approach to yield an estimated fair value of the ILEC reporting unit that equals its carrying value at November 1, 2012. Further, assuming all other assumptions remained the same, the long-term and terminal revenue growth rate assumption would
39
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
need to decrease to negative 6.2%, for the discounted cash flow approach to yield an estimate of fair value equal to the carrying value of the ILEC reporting unit at November 1, 2012.
As of November 1, 2012 the fair values of the HMS reporting units exceeded their respective carrying values by amounts ranging from 5% to 76% of the respective carrying values. Therefore, no impairment of Goodwill existed. Given that the fair values of the respective reporting units exceed their respective carrying values, provided all other assumptions remained the same, the discount rate would have to increase to a range of 11.8% to 15.3% for the discounted cash flow approach to yield estimated fair values of the HMS reporting units that equal their respective carrying values at November 1, 2012. Further, assuming all other assumptions remained the same, the long-term and terminal revenue growth rate assumptions would need to decrease to amounts ranging from positive 0.6% to negative 2.8%, for the discounted cash flow approach to yield estimates of fair value equal to the carrying values of the respective HMS reporting units at November 1, 2012.
Licenses
U.S. Cellular tests licenses for impairment at the level of reporting referred to as a "unit of accounting." For purposes of its impairment testing of licenses as of November 1, 2012, U.S. Cellular separated its FCC licenses into thirteen units of accounting based on geographic service areas. As of November 1, 2011, U.S. Cellular separated its FCC licenses into twelve units of accounting based on geographic service areas. In both 2012 and 2011 testing, seven of the units of accounting represented geographic groupings of licenses which, because they were not being utilized and, therefore, were not expected to generate cash flows from operating activities in the foreseeable future, were considered separate units of accounting for purposes of impairment testing.
Developed operating market licenses ("built licenses")
U.S. Cellular applies the build-out method to estimate the fair values of built licenses. The most significant assumptions applied for purposes of the November 1, 2012 and 2011 licenses impairment assessments were as follows:
Key Assumptions
|
November 1, 2012 |
November 1, 2011 |
|||||
---|---|---|---|---|---|---|---|
Build-out period |
7 years | 7 years | |||||
Discount rate |
8.5 | % | 9.0 | % | |||
Long-term EBITDA margin |
33.9 | % | 32.2 | % | |||
Long-term capital expenditure requirement (as a % of service revenue) |
14.5 | % | 13.0 | % | |||
Long-term service revenue growth rate |
2.0 | % | 2.0 | % | |||
Customer penetration rates |
13-17 | % | 11-16 | % |
The discount rate used to estimate the fair value of built licenses was based on market participant capital structures, participant risk profiles, market conditions and risk premium assumptions. The decline from 9.0% in November 2011 to 8.5% in November 2012 primarily reflects the general decline in market interest rates during that period as well as revised cash flow assumptions based on forecasts of market participants.
The discount rate used in the valuation of licenses is less than the discount rate used in the valuation of reporting units for purposes of goodwill impairment testing. That is primarily because the discount rate used for licenses does not include a company-specific risk premium as a wireless license would not be subject to such risk.
The discount rate is the most significant assumption used in the build-out method. The discount rate is estimated based on the overall risk-free interest rate adjusted for industry participant information, such as a typical capital structure (i.e., debt-equity ratio), the after-tax cost of debt and the cost of equity. The cost of equity takes into consideration the average risk specific to individual market participants.
40
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The results of the licenses impairment test at November 1, 2012 did not result in the recognition of a loss on impairment. Given that the fair values of the licenses exceed their respective carrying values, the discount rate would have to increase to a range of 8.6% to 9.1% to yield estimated fair values of licenses in the respective units of accounting that equal their respective carrying values at November 1, 2012. An increase of 10 basis points to the assumed discount rate would cause less than a $6 million impairment whereas an increase of 50 basis points would cause an impairment of approximately $36 million.
Non-operating market licenses ("unbuilt licenses")
For purposes of performing impairment testing of unbuilt licenses, U.S. Cellular prepares estimates of fair value by reference to prices paid in recent auctions and market transactions where available. If such information is not available, the fair value of the unbuilt licenses is assumed to have changed by the same percentage, and in the same direction, that the fair value of built licenses measured using the build-out method changed during the period. There was no impairment loss recognized related to unbuilt licenses as a result of the November 1, 2012 licenses impairment test.
Carrying Value of Licenses
The carrying value of licenses at November 1, 2012 was as follows:
Unit of Accounting(1)
|
Carrying Value | |||
---|---|---|---|---|
(Dollars in millions) |
|
|||
U.S. CellularDeveloped Operating markets (6 units of accounting) |
||||
Central Region |
$ | 693 | ||
Licenses to be transferred to Assets held for sale as a result of the Divestiture Transaction |
141 | |||
Mid-Atlantic Region |
228 | |||
New England Region |
108 | |||
Northwest Region |
67 | |||
New York Region(2) |
1 | |||
U.S. CellularNon-operating markets (7 units of accounting) |
||||
North Northwest (2 states) |
3 | |||
South Northwest (2 states) |
2 | |||
North Central (5 states) |
51 | |||
South Central (5 states) |
24 | |||
East Central (5 states) |
127 | |||
Mid-Atlantic (8 states) |
50 | |||
Mississippi Valley (13 states) |
43 | |||
Total(3) |
$ | 1,538 | ||
TDS Telecom |
3 | |||
Airadigm(4) |
15 | |||
Total(5) |
$ | 1,556 | ||
41
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Licenses with an aggregate carrying value of $70.2 million were in units of accounting where the fair value exceeded the carrying value by amounts less than 10% of the carrying value. Any further declines in the fair value of such licenses in future periods could result in the recognition of impairment losses on such licenses and any such impairment losses would have a negative impact on future results of operations. The impairment losses on licenses are not expected to have a future impact on liquidity. TDS is unable to predict the amount, if any, of future impairment losses attributable to licenses. Further, historical operating results, particularly amounts related to impairment losses, are not indicative of future operating results.
The amounts of income tax assets and liabilities, the related income tax provision and the amount of unrecognized tax benefits are critical accounting estimates because such amounts are significant to TDS' financial condition and results of operations.
The preparation of the consolidated financial statements requires TDS to calculate a provision for income taxes. This process involves estimating the actual current income tax liability together with assessing temporary differences resulting from the different treatment of items for tax purposes. These temporary differences result in deferred income tax assets and liabilities, which are included in TDS' Consolidated Balance Sheet. TDS must then assess the likelihood that deferred income tax assets will be realized based on future taxable income and, to the extent management believes that realization is not likely, establish a valuation allowance. Management's judgment is required in determining the provision for income taxes, deferred income tax assets and liabilities and any valuation allowance that is established for deferred income tax assets.
TDS recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.
See Note 4Income Taxes in the Notes to Consolidated Financial Statements for details regarding TDS' income tax provision, deferred income taxes and liabilities, valuation allowances and unrecognized tax benefits, including information regarding estimates that impact income taxes.
See the Revenue RecognitionU.S. Cellular section of Note 1Summary of Significant Accounting Policies and Recent Accounting Pronouncements in the Notes to Consolidated Financial Statements for a description of this program and the related accounting.
U.S. Cellular follows the deferred revenue method of accounting for its loyalty reward program. Under this method, revenue allocated to loyalty reward points is fully deferred as U.S. Cellular does not yet have sufficient historical data in which to estimate any portion of loyalty reward points that will not be
42
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
redeemed. Revenue is recognized at the time of customer redemption or when such points have been depleted via a maintenance charge. U.S. Cellular periodically reviews and will revise the redemption and depletion rates as appropriate based on history and related future expectations.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Note 19Certain Relationships and Related Transactions in the Notes to Consolidated Financial Statements.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR CAUTIONARY STATEMENT
This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Annual Report contain statements that are not based on historical facts, including the words "believes," "anticipates," "intends," "expects" and similar words. These statements constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. 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 factors include, but are not limited to, the following risks:
43
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
44
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
and Exchange Commission ("SEC"). Such amendments or restatements and related matters, including resulting delays in filing periodic reports with the SEC, could have an adverse effect on TDS' business, financial condition or results of operations.
See "Risk Factors" in TDS' Annual Report on Form 10-K for the year ended December 31, 2012 for a further discussion of these risks. TDS undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Readers should evaluate any statements in light of these important factors.
45
Telephone and Data Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
As of December 31, 2012, the majority of TDS' long-term debt was in the form of fixed-rate notes with original maturities ranging up to 49 years. Fluctuations in market interest rates can lead to significant fluctuations in the fair value of these fixed-rate notes.
The following table presents the scheduled principal payments on long-term debt and capital lease obligations, and the related weighted average interest rates by maturity dates at December 31, 2012:
|
Principal Payments Due by Period | ||||||
---|---|---|---|---|---|---|---|
(Dollars in millions) |
Long-Term Debt Obligations(1) |
Weighted-Avg. Interest Rates on Long-Term Debt Obligations(2) |
|||||
2013 |
$ | 1.2 | 4.4 | % | |||
2014 |
1.6 | 4.6 | % | ||||
2015 |
1.2 | 2.5 | % | ||||
2016 |
3.0 | 4.6 | % | ||||
2017 |
0.2 | 9.7 | % | ||||
After 5 years |
1,727.4 | 6.7 | % | ||||
Total |
$ | 1,734.6 | 6.7 | % | |||
At December 31, 2012 and 2011, the estimated fair value of long-term debt obligations, excluding capital lease obligations and the current portion of such long-term debt, was $1,827.6 million and $1,586.9 million, respectively. The fair value of long-term debt, excluding capital lease obligations and the current portion of such long-term debt, was estimated using market prices for TDS' 7.0% Senior Notes, 6.875% Senior Notes, 6.625% Senior Notes, and 5.875% Senior Notes, and U.S. Cellular's 6.95% Senior Notes at December 31, 2012 and TDS' 7.0% Senior Notes, 6.875% Senior Notes, and 6.625% Senior Notes, and U.S. Cellular's 6.95% Senior Notes at December 31, 2011 and discounted cash flow analysis for U.S. Cellular's 6.7% Senior Notes and the remaining debt at December 31, 2012 and 2011.
Other Market Risk Sensitive Instruments
The substantial majority of TDS' other market risk sensitive instruments (as defined in item 305 of SEC Regulation S-K) are short-term, including Cash and cash equivalents and Short-term investments. The fair value of such instruments is less sensitive to market fluctuations than longer term instruments. Accordingly, TDS believes that a significant change in interest rates would not have a material effect on such other market risk sensitive instruments.
46
Telephone and Data Systems, Inc.
Consolidated Statement of Operations
Year Ended December 31,
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars and shares in thousands, except per share amounts) |
|
|
|
|||||||
Operating revenues |
$ | 5,345,277 | $ | 5,180,471 | $ | 4,986,829 | ||||
Operating expenses |
||||||||||
Cost of services and products (excluding Depreciation, amortization and accretion expense reported below) |
2,272,570 | 2,050,644 | 1,924,863 | |||||||
Selling, general and administrative expense |
2,033,901 | 2,002,359 | 1,998,463 | |||||||
Depreciation, amortization and accretion expense |
813,626 | 765,776 | 755,649 | |||||||
Loss on impairment of assets |
515 | | | |||||||
(Gain) loss on asset disposals and exchanges, net |
19,741 | (810 | ) | 11,763 | ||||||
(Gain) loss on sale of business and other exit costs, net |
21,061 | | | |||||||
Total operating expenses |
5,161,414 | 4,817,969 | 4,690,738 | |||||||
Operating income |
183,863 | 362,502 | 296,091 | |||||||
Investment and other income (expense) |
||||||||||
Equity in earnings of unconsolidated entities |
92,867 | 82,538 | 98,074 | |||||||
Interest and dividend income |
9,248 | 9,145 | 10,508 | |||||||
Gain (loss) on investment |
(3,718 | ) | 24,103 | | ||||||
Interest expense |
(86,745 | ) | (118,201 | ) | (116,810 | ) | ||||
Other, net |
720 | 3,658 | (2,089 | ) | ||||||
Total investment and other income (expense) |
12,372 | 1,243 | (10,317 | ) | ||||||
Income before income taxes |
196,235 | 363,745 | 285,774 | |||||||
Income tax expense |
73,582 | 113,503 | 95,188 | |||||||
Net income |
122,653 | 250,242 | 190,586 | |||||||
Less: Net income attributable to noncontrolling interests, net of tax |
(40,792 | ) | (49,676 | ) | (45,737 | ) | ||||
Net income attributable to TDS shareholders |
81,861 | 200,566 | 144,849 | |||||||
Preferred dividend requirement |
(50 | ) | (50 | ) | (50 | ) | ||||
Net income available to common |
$ | 81,811 | $ | 200,516 | $ | 144,799 | ||||
Basic weighted average shares outstanding |
108,671 | 108,562 | 110,016 | |||||||
Basic earnings per share attributable to TDS shareholders |
$ | 0.75 | $ | 1.85 | $ | 1.32 | ||||
Diluted weighted average shares outstanding |
108,937 |
109,098 |
110,488 |
|||||||
Diluted earnings per share attributable to TDS shareholders |
$ | 0.75 | $ | 1.83 | $ | 1.31 | ||||
Dividends per share |
$ |
0.49 |
$ |
0.47 |
$ |
0.45 |
||||
The accompanying notes are an integral part of these consolidated financial statements.
47
Telephone and Data Systems, Inc.
Consolidated Statement of Comprehensive Income
Year Ended December 31,
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|
|
|
|||||||
Net income |
$ | 122,653 | $ | 250,242 | $ | 190,586 | ||||
Net change in accumulated other comprehensive income |
||||||||||
Change in net unrealized gain (loss) on equity investments |
49 | 138 | 84 | |||||||
Change in foreign currency translation adjustment |
4 | | | |||||||
Change related to retirement plan |
||||||||||
Amounts included in net periodic benefit cost for the period |
||||||||||
Net actuarial gains (losses) |
90 | (9,625 | ) | 1,180 | ||||||
Amortization of prior service cost |
(3,735 | ) | (3,815 | ) | (3,815 | ) | ||||
Amortization of unrecognized net loss |
2,517 | 1,934 | 2,158 | |||||||
|
(1,128 | ) | (11,506 | ) | (477 | ) | ||||
Change in deferred income taxes |
1,797 | 5,722 | (105 | ) | ||||||
Change related to retirement plan, net of tax |
669 | (5,784 | ) | (582 | ) | |||||
Net change in accumulated other comprehensive income |
722 | (5,646 | ) | (498 | ) | |||||
Comprehensive income |
123,375 | 244,596 | 190,088 | |||||||
Less: Comprehensive income attributable to noncontrolling interest |
(40,792 | ) | (49,676 | ) | (45,737 | ) | ||||
Comprehensive income attributable to TDS shareholders |
$ | 82,583 | $ | 194,920 | $ | 144,351 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
48
Telephone and Data Systems, Inc.
Consolidated Statement of Cash Flows
Year Ended December 31,
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|
|
|
|||||||
Cash flows from operating activities |
||||||||||
Net income |
$ | 122,653 | $ | 250,242 | $ | 190,586 | ||||
Add (deduct) adjustments to reconcile net income to net cash flows from operating activities |
||||||||||
Depreciation, amortization and accretion |
813,626 | 765,776 | 755,649 | |||||||
Bad debts expense |
74,695 | 68,611 | 83,098 | |||||||
Stock-based compensation expense |
41,871 | 36,837 | 35,128 | |||||||
Deferred income taxes, net |
58,785 | 202,547 | 76,391 | |||||||
Equity in earnings of unconsolidated entities |
(92,867 | ) | (82,538 | ) | (98,074 | ) | ||||
Distributions from unconsolidated entities |
84,884 | 92,231 | 100,845 | |||||||
Loss on impairment of assets |
515 | | | |||||||
(Gain) loss on asset disposals and exchanges, net |
19,741 | (810 | ) | 11,763 | ||||||
(Gain) loss on sale of business and other exit costs, net |
21,061 | | | |||||||
(Gain) loss on investment |
3,718 | (24,103 | ) | | ||||||
Noncash interest expense |
(572 | ) | 18,849 | 9,733 | ||||||
Other operating activities |
1,393 | 1,067 | 383 | |||||||
Changes in assets and liabilities from operations |
||||||||||
Accounts receivable |
(81,107 | ) | (95,426 | ) | (79,182 | ) | ||||
Inventory |
(29,917 | ) | (13,382 | ) | 40,657 | |||||
Accounts payable |
(12,332 | ) | 29,291 | (47,759 | ) | |||||
Customer deposits and deferred revenues |
32,981 | 35,457 | 6,478 | |||||||
Accrued taxes |
77,458 | (27,871 | ) | (95,284 | ) | |||||
Accrued interest |
(891 | ) | 3,351 | (7,680 | ) | |||||
Other assets and liabilities |
(30,523 | ) | (4,418 | ) | 93,475 | |||||
|
1,105,172 | 1,255,711 | 1,076,207 | |||||||
Cash flows from investing activities |
||||||||||
Cash used for additions to property, plant and equipment |
(995,517 | ) | (971,759 | ) | (739,222 | ) | ||||
Cash paid for acquisitions and licenses |
(163,382 | ) | (105,508 | ) | (81,691 | ) | ||||
Cash paid for investments |
(120,000 | ) | (180,920 | ) | (493,750 | ) | ||||
Cash received for divestitures |
50,182 | | | |||||||
Cash received for investments |
243,444 | 393,246 | 106,255 | |||||||
Other investing activities |
(12,796 | ) | (1,148 | ) | 370 | |||||
|
(998,069 | ) | (866,089 | ) | (1,208,038 | ) | ||||
Cash flows from financing activities |
||||||||||
Repayment of short-term debt |
| (32,671 | ) | | ||||||
Repayment of long-term debt |
(2,566 | ) | (614,639 | ) | (220,249 | ) | ||||
Issuance of long-term debt |
195,358 | 643,700 | 225,648 | |||||||
TDS Common Shares and Special Common Shares reissued for benefit |
(1,119 | ) | 32 | 309 | ||||||
U.S. Cellular Common Shares reissued for benefit plans, net of tax payments |
(2,205 | ) | 1,935 | 509 | ||||||
Repurchase of TDS Common and Special Common Shares |
(20,026 | ) | (21,500 | ) | (68,053 | ) | ||||
Repurchase of U.S. Cellular Common Shares |
(20,045 | ) | (62,294 | ) | (52,827 | ) | ||||
Dividends paid |
(53,165 | ) | (48,670 | ) | (47,202 | ) | ||||
Payment of debt issuance costs |
(8,242 | ) | (21,657 | ) | (12,533 | ) | ||||
Distributions to noncontrolling interests |
(20,856 | ) | (16,236 | ) | (19,630 | ) | ||||
Payments to acquire additional interest in subsidiaries |
(3,167 | ) | | (9,248 | ) | |||||
Other financing activities |
6,136 | 3,970 | 2,321 | |||||||
|
70,103 | (168,030 | ) | (200,955 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
177,206 | 221,592 | (332,786 | ) | ||||||
Cash and cash equivalents |
||||||||||
Beginning of period |
563,275 | 341,683 | 674,469 | |||||||
End of period |
$ | 740,481 | $ | 563,275 | $ | 341,683 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
49
Telephone and Data Systems, Inc.
Consolidated Balance SheetAssets
December 31,
|
2012 | 2011 | |||||
---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|
|
|||||
Current assets |
|||||||
Cash and cash equivalents |
$ | 740,481 | $ | 563,275 | |||
Short-term investments |
115,700 | 246,273 | |||||
Accounts receivable |
|||||||
Due from customers, less allowances of $28,152 and $25,738, respectively |
409,720 | 393,978 | |||||
Other, less allowances of $5,263 and $5,333, respectively |
164,608 | 148,599 | |||||
Inventory |
160,692 | 130,044 | |||||
Net deferred income tax asset |
43,411 | 40,898 | |||||
Prepaid expenses |
86,385 | 80,628 | |||||
Income taxes receivable |
9,625 | 85,636 | |||||
Other current assets |
32,815 | 16,349 | |||||
|
1,763,437 | 1,705,680 | |||||
Assets held for sale |
163,242 |
49,647 |
|||||
Investments |
|||||||
Licenses |
1,480,039 | 1,494,014 | |||||
Goodwill |
797,194 | 797,077 | |||||
Other intangible assets, net of accumulated amortization of $143,613 and $131,101, respectively |
58,522 | 50,734 | |||||
Investments in unconsolidated entities |
179,921 | 173,710 | |||||
Long-term investments |
50,305 | 45,138 | |||||
Other investments |
824 | 3,072 | |||||
|
2,566,805 | 2,563,745 | |||||
Property, plant and equipment |
|||||||
In service and under construction |
10,808,499 | 10,197,596 | |||||
Less: Accumulated depreciation |
6,811,233 | 6,413,061 | |||||
|
3,997,266 | 3,784,535 | |||||
Other assets and deferred charges |
133,150 | 97,398 | |||||
Total assets |
$ |
8,623,900 |
$ |
8,201,005 |
|||
The accompanying notes are an integral part of these consolidated financial statements.
50
Telephone and Data Systems, Inc.
Consolidated Balance SheetLiabilities and Equity
December 31,
|
2012 | 2011 | |||||
---|---|---|---|---|---|---|---|
(Dollars and shares in thousands) |
|
|
|||||
Current liabilities |
|||||||
Current portion of long-term debt |
$ | 1,233 | $ | 1,509 | |||
Accounts payable |
377,291 | 364,746 | |||||
Customer deposits and deferred revenues |
222,345 | 207,633 | |||||
Accrued interest |
6,565 | 7,456 | |||||
Accrued taxes |
48,237 | 41,069 | |||||
Accrued compensation |
134,932 | 107,719 | |||||
Other current liabilities |
134,005 | 144,001 | |||||
|
924,608 | 874,133 | |||||
Liabilities held for sale |
19,594 |
1,051 |
|||||
Deferred liabilities and credits |
|||||||
Net deferred income tax liability |
862,580 | 808,713 | |||||
Other deferred liabilities and credits |
438,727 | 383,567 | |||||
Long-term debt |
1,721,571 |
1,529,857 |
|||||
Commitments and contingencies |
|||||||
Noncontrolling interests with redemption features |
493 |
1,005 |
|||||
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 132,672 shares (7,160 Series A Common and 125,512 Common Shares) and 132,621 shares (7,119 Series A Common, and 125,502 Common Shares), respectively |
|||||||
Outstanding 108,031 shares (7,160 Series A Common and 100,871 Common Shares) and 108,456 shares (7,119 Series A Common, and 101,337 Common Shares), respectively |
|||||||
Par Value ($.01 per share) of $1,327 ($72 Series A Common and $1,255 Common Shares) and of $1,326 ($71 Series A Common, and $1,255 Common Shares), respectively |
1,327 | 1,326 | |||||
Capital in excess of par value |
2,304,122 | 2,268,711 | |||||
Treasury shares at cost: |
|||||||
24,641 and 24,165 Common Shares, respectively |
(750,099 | ) | (750,921 | ) | |||
Accumulated other comprehensive loss |
(8,132 | ) | (8,854 | ) | |||
Retained earnings |
2,464,318 | 2,451,899 | |||||
Total TDS shareholders' equity |
4,011,536 | 3,962,161 | |||||
Preferred shares |
825 | 830 | |||||
Noncontrolling interests |
643,966 | 639,688 | |||||
Total equity |
4,656,327 | 4,602,679 | |||||
Total liabilities and equity |
$ | 8,623,900 | $ | 8,201,005 | |||
The accompanying notes are an integral part of these consolidated financial statements
51
Telephone and Data Systems, Inc.
Consolidated Statement of Changes in Equity
|
TDS Shareholders | |
|
|
||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Series A Common and Common Shares |
Capital in Excess of Par Value |
Treasury Common Shares |
Accumulated Other Comprehensive Income (Loss) |
Retained Earnings |
Total TDS Shareholders' Equity |
Preferred Shares |
Non controlling Interests |
Total Equity |
|||||||||||||||||||
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
December 31, 2011 |
$ | 1,326 | $ | 2,268,711 | $ | (750,921 | ) | $ | (8,854 | ) | $ | 2,451,899 | $ | 3,962,161 | $ | 830 | $ | 639,688 | $ | 4,602,679 | ||||||||
Add (Deduct) |
||||||||||||||||||||||||||||
Net income attributable to TDS shareholders |
| | | | 81,861 | 81,861 | | | 81,861 | |||||||||||||||||||
Net income attributable to noncontrolling interests classified as equity |
| | | | | | | 40,739 | 40,739 | |||||||||||||||||||
Net unrealized gain (loss) on equity investments |
| | | 49 | | 49 | | | 49 | |||||||||||||||||||
Change in foreign currency translation adjustment |
4 | | 4 | | | 4 | ||||||||||||||||||||||
Changes related to retirement plan |
| | | 669 | | 669 | | | 669 | |||||||||||||||||||
Common and Series A Common Shares dividends |
| | | | (53,115 | ) | (53,115 | ) | | | (53,115 | ) | ||||||||||||||||
Preferred dividend requirement |
| | | | (50 | ) | (50 | ) | | | (50 | ) | ||||||||||||||||
Repurchase of Preferred Shares |
| | | | (17 | ) | (17 | ) | (5 | ) | | (22 | ) | |||||||||||||||
Repurchase of shares |
| | (20,026 | ) | | | (20,026 | ) | (20,026 | ) | ||||||||||||||||||
Dividend reinvestment plan |
1 | 1,148 | 14,123 | | (8,349 | ) | 6,923 | | | 6,923 | ||||||||||||||||||
Incentive and compensation plans |
| 444 | 6,725 | | (7,911 | ) | (742 | ) | | | (742 | ) | ||||||||||||||||
Adjust investment in subsidiaries for repurchases, issuances, other compensation plans and noncontrolling interest purchases |
| 16,968 | | | | 16,968 | | (15,662 | ) | 1,306 | ||||||||||||||||||
Stock-based compensation awards(1) |
| 20,030 | | | | 20,030 | | | 20,030 | |||||||||||||||||||
Tax windfall (shortfall) from stock awards(2) |
| (3,179 | ) | | | | (3,179 | ) | | | (3,179 | ) | ||||||||||||||||
Distributions to noncontrolling interests |
| | | | | | | (20,856 | ) | (20,856 | ) | |||||||||||||||||
Other |
| | | | | | | 57 | 57 | |||||||||||||||||||
December 31, 2012 |
$ | 1,327 | $ | 2,304,122 | $ | (750,099 | ) | $ | (8,132 | ) | $ | 2,464,318 | $ | 4,011,536 | $ | 825 | $ | 643,966 | $ | 4,656,327 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
52
Telephone and Data Systems, Inc.
Consolidated Statement of Changes in Equity
|
TDS Shareholders | |
|
|
||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Series A Common, Special Common and Common Shares |
Capital in Excess of Par Value |
Special Common and Common Treasury Shares |
Accumulated Other Comprehensive Income (Loss) |
Retained Earnings |
Total TDS Shareholders' Equity |
Preferred Shares |
Non controlling Interests |
Total Equity |
|||||||||||||||||||
(Dollars in thousands) |
|
|
|
|
|
|
|
|