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UNITED STATES
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SECURITIES AND EXCHANGE COMMISSION |
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Washington, D.C. 20549 |
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FORM 10-Q |
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(Mark One) |
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[x] |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2016 |
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OR |
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[ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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Commission file number 001-14157 |
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(Exact name of Registrant as specified in its charter) |
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Delaware |
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36-2669023 |
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(State or other jurisdiction of incorporation or organization) |
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(IRS Employer Identification No.) |
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30 North LaSalle Street, Suite 4000, Chicago, Illinois 60602 |
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(Address of principal executive offices) (Zip code) |
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Registrant’s telephone number, including area code: (312) 630-1900 |
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Yes |
No |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |
[x] |
[ ] |
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). |
[x] |
[ ] |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. |
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Large accelerated filer |
[x] |
Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). |
[ ] |
[x] |
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Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. |
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Class |
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Outstanding at June 30, 2016 |
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Common Shares, $0.01 par value |
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102,232,074 Shares |
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Series A Common Shares, $0.01 par value |
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7,224,148 Shares |
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Quarterly Report on Form 10-Q |
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For the Quarterly Period Ended June 30, 2016 |
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Index |
Page No. |
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Management Discussion and Analysis of Financial Condition and Results of Operations |
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Supplemental Information Relating to Non-GAAP Financial Measures |
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Private Securit ies Litigation Reform Act of 199 5 Safe Harbor Cautionary Statement |
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Telephone and Data Systems, Inc. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis should be read in conjunction with Telephone and Data Systems, Inc.’s (“TDS”) interim consolidated financial statements an d notes included within , and with the description of TDS’ business, its audited consolidated fin ancial statements and Management's Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations included in TDS’ Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2015 . Analysis of TDS’ financial results compares the three and six months ended June 30, 2016 to the three and six months ended June 30, 2015 . Calculated amounts and percenta ges are based on the underlying actual numbers rather than the numbers rounded to millions as presented.
This report contains statements that are not based on historical facts, including the words “believes,” “anticipates,” “intends,” “expects” and similar words. These statements constitute and represent “forward looking statements” as this term is defined in the Private Securities Litigation Reform Act of 1995. Such forward looking statements involve known and unknown risks, uncertainties and other facto rs 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. See Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement for additional information.
TDS uses certain “non-GAAP financial measures” throughout the MD&A. A discussion of the reason TDS determines these metrics to be useful and a reconciliation of these measures to their most directly compa rable measures determined in accordance with accounting principles generally accepted in the Unit ed States of America (“GAAP”) are included in the Supplemental Information Relating to Non-GAAP Financial Measures section w ithin the MD&A of this Form 10-Q Re port.
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General TDS is a diversified telecommunications company that provides high-quality communications services to approximately 6 million customers nationwide. TDS provides wireless services through its 83% -owned subsidiary, Unit ed States Cellular Corporation (“U.S. Cellular”). TDS also provides wireline services, cable services and hosted and managed services (“HMS”), through its wholly-owned subsidiary, TDS Telecommunications Corporation (“TDS Telecom”). TDS’ segments operate almost entirely in the United States. See Note 11 — Business Segment Information in the Notes to Consolidated Financial Statements for summary financial information on each business segment. |
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TDS Mission and Strategy
TDS’ mission is to provide outstanding communications services to its customers and meet the needs of its shareholders, its people, and its communities. In pursuing this mission, TDS seeks to profitably grow its businesses, create opportunities for its associates and employees, and steadily build value over the long - term for its shareholders. Across all of its businesses, TDS is focused on providing exceptional customer experiences through best-in-class services and products and superior customer service.
TDS’ long-term strategy calls for the majority of its capital to be reinvested in its operating businesses to strengthen their competitive positions, while still returning value to TDS shareholders through the p ayment of a regular quarterly cash dividend and share repurchases.
In 2016, TDS is working to build shareholder value by continuing to execute on its strategies to build strong, competitive businesses providing high-quality, data-focused services and products. Strategic efforts include:
- U.S. Cellular deployed 4G LTE as a result of U.S. Cellular’s strategic initiative to enhance its network. 4G LTE reaches 99% of postpaid c onnections and 98% of cell sites. The adoption of data-centric smartphones and connected devices is driving significant growth in data t raffic. At t he end of the second quarter of 2016 , 76% of postpaid connections had 4G capable devices, with the LTE network handling 89% of data traffic. U.S. Cellular continues to devote efforts to enhance its network capabilities with the deployment of VoLTE technol ogy and plans a multi-year roll out beginning with one market in 2017. VoLTE, w hen deployed commercially, will enable customers to utilize t he LTE network for both voice and data services, and will enable enhanced services such as high definition voice, v ideo calling and simultaneous voice and data sessions. The deployment of VoLTE also will expand U.S. Cellular’s ability to offer roaming services to additional carriers.
- U.S. Cellular continued to enhance its spectrum position and monetize non-strategic a ssets by ent ering into multiple agreements with third parties . Certain of these agreements involve the purchase of licenses for cash, while others involve the exchange of licenses in non-operating markets for other licenses in operating markets and cash. The first closing of one of the exchange agreements occurred in June 2016 at which time U.S. Cellul ar received $13 million of cash and recognized a gain of $9 million. The remaining license purchase and exchange transaction s are expected to close in the s econd half of 2016, at which point U.S. Cellular expects to recognize additional gains. See Note 5 — Acquisitions, Divestitures and Exchanges for additional information related to these transactions.
- U.S. Cellular is focused on expanding its solutions available to business and government customers, including a growing suite of machine-to-machine solutions across various categories. U.S. Cellular will continue to enhance its advanced wireless services and connected solutions for consumer, business and government customers.
- TDS Telecom’s Wireline business is completing its planne d deployment of fiber technology to provide internet speeds of up to 1 Gigabit per second (“Gbps”). In non-fiber markets, TDS Telecom offers speeds reaching up to 50 Megabits per second (“Mbps”) using bonded copper lines. By leveraging its high-speed net work, Wireline continues to drive growth in its IPTV, broadband, and managedIP services.
- TDS Telecom’s Cable business has continued to make network capacity investments and offer more advanced services in its markets in line with its strategy to increase c onnections and grow broadband penetration.
- TDS Telecom’s HMS business is focused on growing recurring service revenues through increased sales of IT solutions including hosted and managed services, colocation services, and cloud computing, and through incr easing the utilization of its service delivery platform and data center assets.
All defined terms in this MD&A are used as defined in the Notes to Consolidated Financial Statements, and additional terms are defined below:
- 4G LTE – fourth generation Long-Term Evolution which is a wireless broadband technology.
- Account – represents an individual or business financially responsible for one or multiple associated connections. A n account may include a variety of types of connections such as handsets and connected devices.
- Auction 97 – An FCC auction of AWS-3 spectrum licenses that ended in January 2015.
- Auction 1002 – Auction 1002 is part of Auction 1000. Auction 1000 is an FCC auction of 600 MHz spectrum licenses being held in 2016 involving: (1) a “reverse auction” in which broadcast television licensees submit bids to voluntarily relinquish spectrum usage rights in exchange for payments (referred to as Auction 1001); (2) a “repacking” of the broadcast television bands in order to f ree up certain broadcast spectrum for other uses; and (3) a “forward auction” of licenses for spectrum cleared through this process to be used for wireless communications (referred to as Auction 1002).
- Broadband Connections – refers to the number of Wirel ine customers provided high-capacity data circuits via various technologies, including DSL and dedicated internet circuit technologies or the Cable billable number of lines into a building for high-speed data services.
- Churn Rate – represents the percentag e of the connections that disconnect service each month. These rates represent the average monthly churn rate for each respective period.
- FCC – Federal Communications Commission.
- Gross Additions – represents the total number of new connections added duri ng the period, without regard to connections that were terminated during that period.
- Machine- to-Machin e or M2M – technology that involves the transmission of data between networked devices, as well as the performance of actions by devices without human intervention. U.S. Cellular sells and supports M2M solutions to customers, provides connectivity for M2M solutions via the U.S. Cellular network, and has partnerships with device manufacturers and software developers who offer M2 M solutions.
- IPTV Connections – represents the number of Wireline customers provided video services using IP networking technology.
- ManagedIP Connections – refers to the number of telephone handsets, data lines and IP trunks providing communications using IP networking technology.
- Net Additions – represents the total number of new connections added during the period, net of connections that were terminated during that period.
- Postpaid Average Billings per Account (“Postpaid ABPA ”) – non-GAAP metric is cal culated by dividing total postpaid service revenues plus equipment installment plan billings by the average number of postpaid accounts and by the number of months in the period.
- Postpaid Average Billings per User (“Postpaid ABPU”) – non-GAAP metric is cal culated by dividing total postpaid service revenues plus equipment installment plan billings by the average number of postpaid connections and by the number of months in the period.
- Postpaid Average Revenue per Account (“Postpaid ARPA”) – metric is calcula ted by dividing total postpaid service revenues by the average number of postpaid accounts and by the number of months in the period.
- Postpaid Average Revenue per User (“Postpaid ARPU”) – metric is calculated by dividing total postpaid service revenues by the average number of postpaid connections and by the number of months in the period.
- Retail Connections – the sum of postpaid connections and prepaid connections.
- Smartphone Penetration – is calculated by dividing postpaid smartphone connections by postpa id handset connections.
- Universal Service Fund (“USF”) – A system of telecommunications collected fees and support payments managed by the FCC intended to promote universal access to telecommunications services in the United States.
- U.S. Cellular Connectio ns - individual line s of service associated with each device activated by a customer . This includes smartphones, feature phones, tablets, modems, and machine-to-machine devices.
- Video Connections – generally, a home or business receiving video programming counts as one video connection. In counting bulk residential or commercial connections, such as an apartment building or a hotel, connections are counted based on the number of units/rooms within the building receiving service.
- Voice Connections – refers to the individual circuits connecting a customer to Wireline’s central office facilities or the Cable billable number of lines into a building for voice services.
- VoLTE – Voice over Long-Term Evolution is a technology specification that defines the stand ards and procedures for delivering voice communications and related services over 4G LTE networks.
- Wireline Residential Revenue per Connection – is calculated by dividing total Wireline residential revenue by the average number of total Wireline residential connections and by the number of months in the period.
Results of Operations — TDS Consolidated
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2016 |
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2015 |
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2016 vs. 2015 |
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2016 |
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2015 |
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2016 vs. 2015 |
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(Dollars in millions) |
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Operating revenues |
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U.S. Cellular |
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TDS Telecom |
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2% |
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1% |
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All other 1 |
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(40)% |
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(45)% |
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Total operating revenues |
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1% |
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- |
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Operating expenses |
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U.S. Cellular |
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(1)% |
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14% |
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TDS Telecom |
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2% |
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2% |
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All other 1 2 |
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(45)% |
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>100% |
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Total operating expenses |
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12% |
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Operating income |
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U.S. Cellular |
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>100% |
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(93)% |
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TDS Telecom |
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(5)% |
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(12)% |
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All other 1 2 |
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61% |
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>(100)% |
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Total operating income |
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28% |
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(82)% |
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Other income (expenses) |
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Equity in earnings of unconsolidated entities |
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3% |
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2% |
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Interest and dividend income |
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52% |
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58% |
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Interest expense |
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(26)% |
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(25)% |
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Other, net |
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>(100)% |
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>(100)% |
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Total investment and other income (expense) |
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(25)% |
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(24)% |
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Income before income taxes |
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14% |
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(78)% |
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Income tax expense |
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4% |
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(77)% |
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Net income |
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20% |
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(79)% |
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Less: Net income attributable to noncontrolling interests, net of tax |
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18% |
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(82)% |
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Net income attributable to TDS shareholders |
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21% |
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(79)% |
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Capital expenditures |
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(25)% |
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(9)% |
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1 |
Consists of corporate and other operations and intercompany eliminations. |
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2 |
In 2015, TDS recognized an incremental gain compared to U.S. Cellular of $12 million on a tower sale as a result of lower asset basis in the assets disposed. |
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Overall, TDS’ 2016 Operating revenues were relatively flat compared to 2015. |
The increase in operating expenses in the six months ended June 30, 2016 was due primarily to the absence of significant offsetting gains recognized from sales and exchanges of businesses and licenses. Such gains were $252 million in 2015 compared to $9 million in 2016. |
Refer to individ ual segment discussions in this MD&A for additional details on operating revenues and expenses at the segment level.
Equity in earnings of unconsolidated entities
Equity in earnings of unconsolidated entities represents TDS’ share of net income from entiti es in which it has a noncontrolling interest and that are accounted for by the equity method. TDS’ investment in the Los Angeles SMSA Limited Partnership (“LA Partnership”) contributed $ 20 million and $ 19 million in the three months ended June 30, 2016 and 2015 , respectively, and $ 40 million and $ 39 million in the six months ended June 30, 2016 and 2015 , respectively, to Equity in earnings of unconsolidated en ti ties. See Note 7 — Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.
Interest and dividend income
Interest and dividend income increased due to imputed interest income recognized on equipment installment plans of $ 12 million and $ 8 million in the three months ended June 30 , 2016 and 2015 , respectively, and $ 24 million and $ 15 million in the six months ended June 30, 2016 and 2015 , respectively.
Interest expense
Interest expense increased due primarily to U.S. Cellular’s issuance of $300 million of 7.25% Sen ior Notes due 2064 in November 2015 and borrowing of $225 million on U.S. Cellular’s senior term loan facility that was drawn in July 2015.
Income tax expense
TDS’ effective tax rate on Income before income taxes for the three and six months ended June 30, 2016 was 36.3% and 42.3% , respectively, and for both the three and six months ended June 30, 2015 was 39.7% . The lower effective tax rate for the three months ended June 30, 2016 resulted from a decrease in unrecognized tax benefits resulting from the expiration of statutes of limitation during the period in certain states.
Net income attributable to noncontrol ling interests, net of tax
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2016 |
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2015 |
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2016 |
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2015 |
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(Dollars in millions) |
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Net income attributable to noncontrolling interests, net of tax |
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U.S. Cellular noncontrolling public shareholders’ |
$ |
$ |
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$ |
$ |
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Noncontrolling shareholders’ or partners’ |
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$ |
$ |
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$ |
$ |
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Net income attributable to noncontrolling interests, net of tax includes the noncontrolling public shareholders’ share of U.S. Cellular’s net income and the noncontrolling shareholders’ or partners’ share of certain U.S. Cellular subsidiaries’ net income (loss). The decrease from 2015 to 2016 for the six month period is due to lower income from U.S. Cellular and certain other partnerships in 2016.
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Three Months Ended
Net income increased due primarily to improved Operating income levels within the U.S. Cellular segment partially offset by an increase in interest expense associated with debt issuances completed in the latter half of 2015. Six Months Ended
Net income decreased due primarily to a lesser amount of gains from sales and exchanges of businesses and licenses recognized in 2016 compared to 2015. |
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*Represents a non-GAAP financial measure. Refer to Supplemental Information Relating to Non-GAAP Financial Measures within thi s MD&A for a reconciliation of this measure. |
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Business Overview
U.S. Cellular owns, operates, and invests in wireless markets throughout the United States. U.S. Cellular is an 83% -owned subsidiary of TDS. U.S. Cellular’s strategy is to attract and retain wireless customers through a value proposition compr ised of a high-quality network, outstanding customer service, and competitive devices, plans, and pricing, all provided with a local focus.
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OPERATIONS |
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|
||||||
|
|
|
YTD 2015 |
YTD 2016 |
|
|||
|
|
Postpaid Connections |
|
|
|
|||
|
|
|
Gross Additions |
391,000 |
412,000 |
|
||
|
|
|
Net Additions |
26,000 |
81,000 |
|
||
|
|
|
Churn |
1.41% |
1.24% |
|
||
|
|
|
Handsets |
1.32% |
1.14% |
|
||
|
|
|
Connected Devices |
2.38% |
1.92% |
|
||
|
|
|
Connections – end of period |
4,324,000 |
4,490,000 |
|
||
|
|
Retail C onnections – end of period |
4,692,000 |
4,903,000 |
|
|||
|
U.S. Cellular believes the increase in n et additions in 2016 is a result of competitive services and products priced to offer the best value to customers and expanded equipment installment plan offerings. Postpaid churn continued to decline due to enhancements in the customer experience, targeted retention programs and improvement in the ove rall credit mix of gross additions. |
|||||||
|
Smartphones represented 92% and 86% of total postpaid handset sales for the six months ended June 30, 2016 and 2015, respectively. As a result, s m artphone penetration increased to 77% of the post paid handset base as of June 30, 2016, up from 69% a year ago. Smartphone customers generally use more data than feature phone customers, thereby driv ing growth in service revenues. Continued growth in customer usage related to data services and products may result in increased operating expenses and the need for additional investment in spectrum, network capacity and network enhancements. |
|
|
|
|
* Postpaid ABPU and ABPA are non-GAAP financial measure s . Refer to Supplementa l Information Relating to Non- GAAP Financial Measures within this MD&A for a reconciliation of this measure. |
|
Postpaid ARPU and Postpaid ARPA decreased for the three and six mont hs ended June 30, 2016 due to industry-wide price competition, together with discounts on shared data plans provided to customers on equipment installment plans and those providing their own device at the time of activation or renewal. Postpaid ARPU also decreased due to net additions of connected devices, which on a per unit basis contribute less revenue than handsets. These factors were partially offset by the impacts of continued adoption of smartphones and the related increase in service revenues from data usage.
Equipment installment plans increase equipment sales revenue as customers pay for their wireless devices in installments at a total device price that is generally higher than the device price offered to customers in conjunction with alternativ e plans that are subject to a service contract. Equipment installment plans also have the impact of reducing service revenues as many equipment installment plans provide for reduced monthly access charges. In order to show the trends in total service and equipment revenues received, U.S. Cellular has presented Postpaid ABPU and Postpaid ABPA, which are calculated as Postpaid ARPU and Postpaid ARPA plus average monthly equipment installment plan billings per connection and account, respectively.
Equipment installment plan billings increased for the three and six months ended June 30, 2016 due to increased adoption of equipment installment plans by postpaid customers. Postpaid ABPU decreased in 2016 as the increase in equipment installment plan bi llings was more than offset by the Postpaid ARPU drivers discussed above. Postpaid ABPA, however, increased in 2016 due to the increase in equipment installment plan billings and an increase in device connections per account, partially offset by the Postpa id ARPU and Postpaid ARPA drivers discussed above.
Financial Overview — U.S. Cellular
|
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|
|
|
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|
|
|
|||||||||||||||||||||||||||||||
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|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
||||||||||||||||||||||||||||||||
|
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|
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|
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|
|
2016 vs. |
|
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|
|
2016 vs. |
|||||||||||||||||||||||||
|
|
|
|
|
|
2016 |
|
2015 |
|
2015 |
|
2016 |
|
2015 |
|
2015 |
||||||||||||||||||||||||
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
|
Retail service |
|
$ |
|
$ |
|
(8)% |
|
$ |
|
$ |
|
(8)% |
|||||||||||||||||||||||||||
|
Inbound roaming |
|
|
|
|
|
(23)% |
|
|
|
|
|
(17)% |
|||||||||||||||||||||||||||
|
Other |
|
|
|
|
|
10% |
|
|
|
|
|
5% |
|||||||||||||||||||||||||||
|
|
Service revenues |
|
|
|
|
|
(8)% |
|
|
|
|
|
(8)% |
||||||||||||||||||||||||||
|
Equipment sales |
|
|
|
|
|
44% |
|
|
|
|
|
45% |
|||||||||||||||||||||||||||
|
|
Total oper ating revenues |
|
|
|
|
|
- |
|
|
|
|
|
- |
||||||||||||||||||||||||||
|
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|
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|
|
|
||||||||||||||||||||||||
|
System operations (excluding Depreciation, amortization and accretion reported below) |
|
|
|
|
|
(2)% |
|
|
|
|
|
(3)% |
|||||||||||||||||||||||||||
|
Cost of equipment sold |
|
|
|
|
|
3% |
|
|
|
|
|
5% |
|||||||||||||||||||||||||||
|
Selling, general and administrative |
|
|
|
|
|
(1)% |
|
|
|
|
|
(2)% |
|||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
- |
||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
|
Operating cash flow* |
|
|
|
|
|
3% |
|
|
|
|
|
(2)% |
||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Depreciation, amortization and accretion |
|
|
|
|
|
2% |
|
|
|
|
|
3% |
|||||||||||||||||||||||||||
|
(Gain) loss on asset disposals, net |
|
|
|
|
|
(12)% |
|
|
|
|
|
2% |
|||||||||||||||||||||||||||
|
(Gain) loss on sale of business and other exit costs, net |
|
|
|
|
|
N/M |
|
|
|
|
|
100% |
|||||||||||||||||||||||||||
|
(Gain) loss on license sales and exchanges |
|
|
|
|
|
>(100)% |
|
|
|
|
|
93% |
|||||||||||||||||||||||||||
|
|
Total operating expenses |
|
|
|
|
|
(1)% |
|
|
|
|
|
14% |
||||||||||||||||||||||||||
|
Operating income (loss) |
|
$ |
|
$ |
|
>100% |
|
$ |
|
$ |
|
(93)% |
|||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Net Income |
|
$ |
|
$ |
|
37% |
|
$ |
|
$ |
|
(80)% |
|||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Adjusted EBITDA* |
|
$ |
|
$ |
|
5% |
|
$ |
|
$ |
|
2% |
|||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Capital expenditures |
|
$ |
|
$ |
|
(31)% |
|
$ |
|
$ |
|
(14)% |
|||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
* |
Represents a non-GAAP financial measure. Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure. |
||||||||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
N/M - Percentage change not meaningful |
|||||||||||||||||||||||||||||||||||||||
|
S ervice revenues consist of:
Equipment revenues consist of:
|
Key components of changes in the statement of operations line items were as follows:
Total operating revenues
Service revenues decreased for the three and six months ended June 30, 2016 as a result of (i) a decrease in retail service revenu es driven by industry-wide price competition, including discounts on shared data plans provided to customers on equipment installment plans and those providing their own device at the time of activation or renewal; and (ii) reductions in inbound roaming re venue s driven by lower roaming rates. Such reductions were partially offset by an increase in the average connections base and continued adoption of shared data plans.
Federal USF revenue was $23 million and $46 million for the three and six months ended June 30, 2016, respectively , which remained flat when compared to the same periods last year . Pursuant to the FCC's Reform Order (“ Reform Order”), U.S. Cellular’s Federal USF support was to be phased down at the rate of 20% per year beginning July 1, 2012 . The Phase II Mobility Fund was not operational as of July 2014 and , therefore, as provided by the Reform Order, the phase down was suspended at 60% of the baseline amount. U.S. Cellular will continue to receive USF support at the 60% level until the FCC takes further action. At this time, U.S. Cellular c annot predict t he changes that the FCC might make to the USF high cost support program and, accordingly, 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 increased for the three and six months ended June 30, 2016 due primarily to an increase in average revenue per device sold from sales und er equipment installment plans and an increa se in the number of devices sold . Equipment installment plan sales contributed $162 million and $69 million during the three months ended June 30, 2016 and 2015, respectively, and $309 million and $137 million for the six months ended June 30, 2016 and 2015, respectively. Equipment installment plan s represented 69% of t he total postpaid devices sold to end users for the three and six months ended June 30, 2016 and 44% and 43% for the three and six months ended June 30, 2015, respectively. Equipment installment plan connections represented 37% and 20% of total postpaid c onnections as of June 30, 2016 and 2015, respectively.
System operations expenses
System operations expenses remained relatively flat for the three months ended June 30, 2016 when compared to the three months ended June 30, 2015.
System operations expenses decreased 3% to $376 million for the six months ended June 30, 2016 when compared to the six months ended June 30, 2015. The primary drivers were as follows:
Expenses incurred when U.S. Cellular’s customers used other carriers’ net works while roa ming decreased $12 million or 12% to $90 million driven primarily by lower rates for both data and voice traffic, partially offset by increased data roaming usage.
Customer usage expenses decreased $10 million or 10% to $88 million driven by a decrease in circuit costs from the migration to LTE and lower fees for platform and content providers.
The aforementioned drivers were partially offset by m aintenance, utility and cell site expenses, which increased $11 million or 6% to $197 million reflecting higher support costs for the expanded 4G LT E network, increased cell site rent, the completion of certain tower maintenance and repair projects, and other maintenance activities.
U.S. Cellular expects system operations expenses to increase in the future t o 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 data usage. However, these increases are expected to b e offset to some extent by cost savings generated by shifting data traffic to the 4G LTE network from the 3G network.
Cost of equipment sold
Cost of equipment sold increased primarily as a result of a 6% and 7% increase in devices sold for the three and si x months ended June 30, 2016, respectively. Cost of equipment sold included $174 million and $105 million related to equipment installment plan sales for the three months ended June 30, 2016 and 2015, respectively, and $334 million and $191 million for th e six months ended June 30, 2016 and 2015, respectively. Loss on equipment , defined as Equipment sales revenues less Cost of equipment sold, was $ 44 million and $ 102 million for the three months ended June 30, 2016 and 2015, respectively, and $ 101 million and $ 204 million for the six months ended June 30, 2016 and 2015, respectively.
Selling, general and administrative expenses
Selling, general and administrative expenses remained relatively flat for the three and six months ended June 30, 2016 when compar ed to the same periods last year.
Depreciation, amortization, and accretion expenses
The increase in Depreciation, amortization, and accretion expenses for the three and six months ended June 30, 2016 is mainly driven by the increase in amortization expense related to billing system upgrades.
(Gain) loss on sale of business and other exit costs, net
The net gain for the six months ended June 30, 2015 was due primarily to a $108 million gain recognized on sale of towers and certain related contracts, assets and liabilities.
(Gain) loss on license sales and exchanges , net
The net gains in 2016 and 2015 were due to gains recognized on license exchange trans actions with third parties.
See Note 5 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.
Business Overview
TDS Telecom operates in three reportable segments: Wireline, Cable and HMS. The overall strategy for the W ireline and C able businesses is to own the best data pipe s in each market in order to capitalize on data growth and the need for higher broadband speeds and leverage that growth by bundling services with video and voice . In addition, through its HMS business, TDS Telecom provides a wide range of Information Technology ( “IT”) services including colocation, dedicated hosting, hosted application management, cloud computing services and planning, engineering, procurement, installation, sales and management of IT infrastructure hardware solutions.
|
OPERATIONS |
|
|
|
Financial Overview — TDS Telecom
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
2016 vs. |
|
|
|
|
|
|
|
2016 vs. |
|
|
|
2016 |
|
2015 |
|
2015 |
|
2016 |
|
2015 |
|
2015 |
|||||||
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
Wireline |
|
$ |
|
$ |
|
- |
|
$ |
|
$ |
|
(1)% |
||||||
|
|
Cable |
|
|
|
|
|
2% |
|
|
|
|
|
2% |
||||||
|
|
HMS |
|
|
|
|
|
6% |
|
|
|
|
|
6% |
||||||
|
|
Intra-company elimination |
|
|
|
|
|
20% |
|
|
|
|
|
(2)% |
||||||
|
|
|
TDS Telecom operating revenues |
|
|
|
|
|
2% |
|
|
|
|
|
1% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
Wireline |
|
|
|
|
|
(1)% |
|
|
|
|
|
- |
||||||
|
|
Cable |
|
|
|
|
|
12% |
|
|
|
|
|
8% |
||||||
|
|
HMS |
|
|
|
|
|
2% |
|
|
|
|
|
3% |
||||||
|
|
Intra-company elimination |
|
|
|
|
|
20% |
|
|
|
|
|
(2)% |
||||||
|
|
|
TDS Telecom operating expenses |
|
|
|
|
|
2% |
|
|
|
|
|
2% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
TDS Telecom operating income |
|
$ |
|
$ |
|
(5)% |
|
$ |
|
$ |
|
(12)% |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
|
$ |
|
(6)% |
|
$ |
|
$ |
|
(13)% |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA* |
|
$ |
|
$ |
|
- |
|
$ |
|
$ |
|
(2)% |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
|
$ |
|
(14)% |
|
$ |
|
$ |
|
(2)% |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Numbers may not foot due to rounding. |
|||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Represents a non-GAAP financial measure. Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure. |
||||||||||||||||||
|
|
Three and Six Months Ended Operating revenues for the three and six months ended June 30, 2016 grew slightly as increases in revenues from HMS and Cable operations were offset by dec lines in Wireline commercial and wholesale revenues. |
Total operating expenses
Operating expenses for the three and six months ended June 30, 2016 increased to support growth in HMS and Cable .
Business Overview
TDS Telecom’s W ireline business provides broadband, video and voice services. These services are provided to residential, commercial, and wholesale customers in a mix of rural, small town and suburban markets, with the large st concentration of its customers in the Uppe r Midwest and the Southeast. TDS Telecom’s strategy is to offer its residential customers broadband, video, and voice services throu gh value-added bundling. In its commercial business, TDS Telecom’s strategic focus is on small - to medium - sized business es and its sales efforts emphasize advanced IP-based voice and data services.
Operational Overview
|
|
|
|
Wireline residential broadband customers, comprised mainly of ILEC connections, are increasingly choosing higher speeds. In total, Wireline increased residenti al revenue per connection by 3% for the six months ended June 30, 2016. |
|
|
|
|
|
|
Total connections were flat as a 13,300 increase in IPTV connections was offset by a 4% decline in voice connections . |
|
TDS managedIP connections grew 3% ; however, this did not offset the decline in voice and broadband connections .
|
Financial Overview — Wireline
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|||||||||||||
|
|
|
2016 |
|
2015 |
|
2016 vs. 2015 |
|
2016 |
|
2015 |
|
2016 vs. 2015 |
||||||||
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Residential |
|
$ |
|
$ |
|
4% |
|
$ |
|
$ |
|
3% |
||||||||
|
Commercial |
|
|
|
|
|
(4)% |
|
|
|
|
|
(4)% |
||||||||
|
Wholesale |
|
|
|
|
|
(3)% |
|
|
|
|
|
(4)% |
||||||||
|
|
Service revenues |
|
|
|
|
|
- |
|
|
|
|
|
(1)% |
|||||||
|
Equipment and product sales |
|
|
|
|
|
(11)% |
|
|
|
|
|
2% |
||||||||
|
|
Total operating revenues |
|
|
|
|
|
- |
|
|
|
|
|
(1)% |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Cost of services (excluding Depreciation, amortization and accretion reported below) |
|
|
|
|
|
1% |
|
|
|
|
|
- |
||||||||
|
Cost of equipment and products |
|
|
|
|
|
(22)% |
|
|
|
|
|
(15)% |
||||||||
|
Selling, general and administrative |
|
|
|
|
|
- |
|
|
|
|
|
3% |
||||||||
|
|
|
|
|
|
|
|
|
|
|
1% |
|
|
|
|
|
1% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Operating cash flow* |
|
|
|
|
|
(2)% |
|
|
|
|
|
(5)% |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Depreciation, amortization and accretion |
|
|
|
|
|
(10)% |
|
|
|
|
|
(6)% |
||||||||
|
(Gain) loss on asset disposals, net |
|
|
|
|
|
(43)% |
|
|
|
|
|
(35)% |
||||||||
|
(Gain) loss on sale of business and other exit costs, net |
|
|
|
|
|
>100% |
|
|
|
|
|
>100% |
||||||||
|
|
Total operating expenses |
|
|
|
|
|
(1)% |
|
|
|
|
|
- |
|||||||
|
Operating income |
|
$ |
|
$ |
|
1% |
|
$ |
|
$ |
|
(9)% |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Income before income taxes |
|
$ |
|
$ |
|
- |
|
$ |
|
$ |
|
(9)% |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Adjusted EBITDA* |
|
$ |
|
$ |
|
(2)% |
|
$ |
|
$ |
|
(5)% |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Capital expenditures |
|
$ |
|
$ |
|
(13)% |
|
$ |
|
$ |
|
6% |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numbers may not foot due to rounding. |
||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Represents a non-GAAP financial measure. Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure. |
|||||||||||||||||||
|
|
Residential revenues consist of:
Commercial revenues consist of:
Wholesale revenues consist of:
|
Key components of changes in the statement of operations items were as follows:
Total operating revenues
Residential revenues increased for the three and six months ended June 30, 2016 as growth in IPTV and data more than offset the decline in legacy voice services. For both periods , IPTV average connections grew nearly 50%, offset by a 4 % decline in average voice connections.
Commercial revenues decreased for the three and six months e nded June 30, 2016 as declining legacy voice and data connections reduced revenues, partially offset by an increase in revenue driven by 3% growth in average managedIP connections in both periods.
Wholesale revenues decreased for the three and six months e nded June 30, 2016 due primarily to the effect of divestitures, a 15% reduction in intra-state minutes-of-use and a reduction in special access revenues. A $2 million increase in annual adjustments related to regulatory support mechanisms favorably impact ed both periods in 2016.
Cost of services
Cost of services were relatively flat for the three and six months ended June 30, 2016 as increased charges related to the growth in IPTV were offset by reduced costs of provisioning circuits, purchasing unbundle d network elements and providing long-distance services.
Selling, general and administrative expenses
Selling, general and administrative expenses were relatively flat for the three month s ended June 30, 2016 . E xpenses increased for the six month period due to growth in employee-related expenses.
Depreciation, amortization and accretion
Depreciation, amortization and accretion decreased for the three and six months ended June 30, 2016 due primarily to a $4 million adjustment recorded in the three months ended June 30, 2016 for excess depreciation attributable to the third quarter of 2014 through the first quarter of 2016 .
Business Overview
TDS Telecom’s cable strategy is to expand its broadba nd services and leverage that growth by bundling with video and voice services. TDS Telecom seek s to be the leading provider of bro adband services in its targeted markets by leveraging its core competencies in network m anagement and customer focus.
Operational Overview
|
|
Cable connections grew 5% over 201 5 with increases in broadband and voice outpacing declines in video. |
Financial Overview — Cable
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|||||||||||||
|
|
|
2016 |
|
2015 |
|
2016 vs. 2015 |
|
2016 |
|
2015 |
|
2016 vs. 2015 |
||||||||
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Residential |
|
$ |
|
$ |
|
3% |
|
$ |
|
$ |
|
2% |
||||||||
|
Commercial |
|
|
|
|
|
(3)% |
|
|
|
|
|
3% |
||||||||
|
|
Total operating revenues |
|
|
|
|
|
2% |
|
|
|
|
|
2% |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Cost of services (excluding Depreciation, amortization and accretion reported below) |
|
|
|
|
|
19% |
|
|
|
|
|
15% |
||||||||
|
Selling, general and administrative |
|
|
|
|
|
(11)% |
|
|
|
|
|
(7)% |
||||||||
|
|
|
|
|
|
|
|
|
|
|
7% |
|
|
|
|
|
6% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Operating cash flow* |
|
|
|
|
|
(14)% |
|
|
|
|
|
(9)% |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Depreciation, amortization and accretion |
|
|
|
|
|
5% |
|
|
|
|
|
5% |
||||||||
|
(Gain) loss on asset disposals, net |
|
|
|
|
|
>100% |
|
|
|
|
|
>100% |
||||||||
|
|
Total operating expenses |
|
|
|
|
|
12% |
|
|
|
|
|
8% |
|||||||
|
Operating income (loss) |
|
$ |
|
$ |
|
>(100)% |
|
$ |
|
$ |
|
(90)% |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Income (loss) before income taxes |
|
$ |
|
$ |
|
>(100)% |
|
$ |
|
$ |
|
(86)% |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Adjusted EBITDA* |
|
$ |
|
$ |
|
(13)% |
|
$ |
|
$ |
|
(9)% |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Capital expenditures |
|
$ |
|
$ |
|
40% |
|
$ |
|
$ |
|
26% |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numbers may not foot due to rounding. |
||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Represents a non-GAAP financial measure. Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure. |
|||||||||||||||||||
|
|
Residential and Commercial revenues consist of:
|
Key components of changes in the statement of operations items were as follows:
Total operating revenues
Residential revenues increased for the three and six months ended June 30, 2016 due primarily to a 7% increase in year-to-date average residential connections partially offset b y a decrease in revenue caused by promotional pricing.
Commercial revenues de creased for the three months ended June 30, 2016 due to a $1 million discrete favorable impact related to the resolution of an uncertainty involving a vendor contract recorded in the three months ended June 30, 2015, partially offset by increases in pricing.
Commercial revenues increased for the six months ended June 30, 2016 due primarily to increases in pricing.
Cost of services
Cost of services increased for the three and six months ended June 30, 2016 due primarily to increases in employee expenses, programming content costs and costs related to converting analog video customers to digital signals to gain access to additional ba ndwidth.
Selling, general and administrative
Selling, general and administrative expenses decreased for the three and six months ended June 30, 2016 due to lower employee costs, partially offset by an increase in property taxes.
Business Overview
Under TDS Telecom’s OneNeck IT Solutions brand, TDS Telecom offer s a full-s uite of IT solutions ranging from equipment resale to full management and hosting of a customer’s IT infrastructure and applications. The goal of HMS operations is to create, deliver, and support a platform of I T products and services tailored for mid- market business customers.
Financial Overview — HMS
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|||||||||||||
|
|
|
2016 |
|
2015 |
|
2016 vs. 2015 |
|
2016 |
|
2015 |
|
2016 vs. 2015 |
||||||||
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Service revenues |
|
$ |
|
$ |
|
11% |
|
$ |
|
$ |
|
7% |
||||||||
|
Equipment and product sales |
|
|
|
|
|
3% |
|
|
|
|
|
5% |
||||||||
|
|
Total operating revenues |
|
|
|
|
|
6% |
|
|
|
|
|
6% |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Cost of services (excluding Depreciation, amortization and accretion reported below) |
|
|
|
|
|
(13)% |
|
|
|
|
|
(4)% |
||||||||
|
Cost of equipment and products |
|
|
|
|
|
1% |
|
|
|
|
|
4% |
||||||||
|
Selling, general and administrative |
|
|
|
|
|
33% |
|
|
|
|
|
6% |
||||||||
|
|
|
|
|
|
|
|
|
|
|
2% |
|
|
|
|
|
2% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Operating cash flow* |
|
|
|
|
|
78% |
|
|
|
|
|
>100% |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Depreciation, amortization and accretion |
|
|
|
|
|
11% |
|
|
|
|
|
12% |
||||||||
|
|
Total operating expenses |
|
|
|
|
|
2% |
|
|
|
|
|
3% |
|||||||
|
Operating loss |
|
$ |
|
$ |
|
99% |
|
$ |
|
$ |
|
46% |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Loss before income taxes |
|
$ |
|
$ |
|
63% |
|
$ |
|
$ |
|
29% |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Adjusted EBITDA* |
|
$ |
|
$ |
|
75% |
|
$ |
|
$ |
|
>100% |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Capital expenditures |
|
$ |
|
$ |
|
(82)% |
|
$ |
|
$ |
|
(76)% |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numbers may not foot due to rounding. |
|
|
|
|
|
|
|
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Represents a non-GAAP financial measure. Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure. |
|||||||||||||||||||
|
Service revenues consist of:
Equipment revenues consist of:
|
Key components of changes in the statement of operations items were as follows:
Growth in maintenance services and professional services resulted in an increase in Service revenues for the three and six months ended June 30, 2016. Cost of services decreased for the three and six months ended June 30, 2016 due primarily to reduced employee expenses. Equipment and product sales revenues from sales of IT infrastructure hardw are solutions increased for the three and six months ended June 30, 2016 due primarily to higher spending by existing customers. There was a corresponding increase in Cost of equipment and products needed to support revenue growth. Selling, general and a dministrative expenses in creased due primarily to commissions on increased sales for the three and six months ended June 30, 2016.
Liquidity and Capital Resources
Sources of Liquidity
TDS and its subsidiaries operate capital-intensive businesses. Historic ally, TDS has used internally-generated funds and also has obtained substantial funds from external sources for general corporate purposes. In the past, TDS’ existing cash and investment balances, funds available under its revolving credit facilities, fun ds from other financing sources, including a term loan and other long-term debt, and cash flows from operating, investing and financing activities, including sales of assets or businesses, provided sufficient liquidity and financial flexibility for TDS to meet its normal day-to-day operating needs and debt service requirements, to finance the build-out and enhancement of markets and to fund acquisitions. There is no assurance that this will be the case in the future. It may be necessary from time - to - time to increase the size of the existing revolving credit facilities, to put in place new credit facilities, or to obtain other forms of financing in order to fund potential expenditures. TDS’ liquidity would be adversely affected if, among other things, TDS is unable to obtain short or long-term financing on acceptable terms, TDS makes significant spectrum license purchases in FCC auctions or from other parties, TDS makes significant business acquisitions, the LA Partnership discontinues or reduces distributi ons compared to historical levels , or Federal USF and/or other regulatory support payments continue to decline. In addition, although sales of assets or businesses by TDS have been an important source of liquidity in recent periods, TDS does not expect a similar level of such sales in the future, which will reduce a source of liquidity. In recent years, TDS’ credit rating has declined to sub-investment grade.
TDS believes that existing cash and investment balances, funds available under its revolving c redit facilities, and expected cash flows from operating and investing activities provide liquidity for TDS to meet its normal day-to-day operating needs and debt service re quirements for the coming year. Although TDS currently has a significant cash bala nce, i n certain recent periods, TDS has incurred negative free cash flow (defined as Cash flows from operating activities less Cash paid for additions to property, plant and equipment) and this will continue in the future if operating results do not improv e or capital expenditures are not reduced . TDS currently expects to have negative free cash flow in 2016 due to anticipated growth in equipment installment plan receivables combined with significant capital expenditures . TDS may require substantial addit ional capital for, among other uses, funding day-to-day operating needs, working capital, acquisitions of providers of wireless or wireline telecommunications services, cable markets, IT services or other businesses, spectrum license or system acquisitions , system development and network capacity expansion, debt service requirements, the repurchase of shares, the payment of dividends, or making additional investments. There can be no assurance that sufficient funds will continue to be available to TDS or i ts subsidiaries on terms or at prices acceptable to TDS. Insufficient cash flows from operating activities, changes in its credit ratings, defaults of the terms of debt or credit agreements, uncertainty of access to capital, deterioration in the capital m arkets, reduced regulatory capital at banks which in turn limits their ability to borrow and lend, other changes in the performance of TDS or in market conditions or other factors could limit or restrict the availability of financing on terms and prices ac ceptable to TDS, which could require TDS to reduce its acquisition, capital expenditure and business development programs, reduce the acquisition of spectrum licenses, and/or reduce or cease share repurchases and/or the payment of dividends. TDS cannot pr ovide assurance that circumstances that could have a material adverse effect on its liquidity or capital resources will not occur. Any of the foregoing would have an adverse impact on TDS’ businesses, financial condition or results of operations.
Cash and Cash Equivalents
Cash and cash equivalents include cash and money market investments. The primary objective of TDS’ Cash and cash equivalents investment activities is to preserve principal. Cash held by U.S. Cellular is for its operational needs and acq uisition, capital expenditure and business development programs. TDS does not have direct access to U.S. Cellular cash unless U.S. Cellular pays a dividend on its common stock. U.S. Cellular has no current intention to pay a dividend to its shareholders.
|
|
At June 30, 2016 , TDS’ consolidated cash and cash equivalents totaled $ 899 million compared to $ 985 million at December 31, 2015 . The majority of TDS’ Cash and cash equivalents was held in bank deposit accounts and in money market funds that invest exclusively in U.S. Treasury Notes or in repurchase agreements fully collateralized by such obligations . TDS monitors the financial viability of the money market funds and direct investments in which it invests and believes that the credit risk associated with these investments is low. |
TDS and U.S. Cellular have revolving credit facilities available for general corporate purposes. In June 2016, TDS entered into a new $400 million revolving credit agreement with certain lenders and other parties and U.S. Cellular entered into a new $300 million revolving credit agreement with certain lenders and other parties. As a result of the new agreements, TDS’ and U.S. Cellular’s revolving credit agreements due to expire in December 2017 were terminated. Amounts under both of the new revolving cre dit facilities may be borrowed, repaid and reborrowed from time-to-time until maturity in June 2021. Certain TDS and U.S. Cellular wholly-owned subsidiaries have jointly and severally unconditionally guaranteed the payment and performance of the obligatio ns of TDS and U.S. Cellular under the revolving credit agreements. As of June 30, 2016 , there were no outstanding borrowings under the revolving credit facilities, except for letters of credit, and TDS and U.S. Ce llular’s unused capacity under their revolving credit facilities was $ 399 million and $ 283 million, respectively. The continued availability of the new revolving credit facilities requires TDS and U.S. Cellular to comply with certain negative and affirmative covenants, maintain certain financial ratios and provide representations on certain matters at the time of each borrowing. See Note 8 — Debt in the Notes to Consolidated Financial Statements for additional information.
In June 2016, U.S. Cellular also amended and restated its senior term loan credit facility. Certain modifications were made to the financial covenants and subsidiary guarantees were added in order to align with the new revolving credit agreements. There were no significant changes to the maturity date or other key terms of the agreement.
TDS and U.S. Cellular believe they were in compliance wi th all of the financial covenants and requirements set forth in their revolving credit facilities and the senior term loan credit facility as of June 30, 2016 .
TDS and U.S. Cellular have in place effective shelf registration statements on Form S-3 to issue senior or subordinated debt securities.
The proceeds from any of the aforementioned financing facilities are available for general corporate purposes, including spectrum purchases and capital expenditures.
The l ong-term debt payments due for the remainder of 2016 and the next four years represent less than 3% of TDS’ total long-term debt obligation measured as of June 30, 201 6 .
Capital Expenditures
Capital expenditures (i.e., additions to property, plant and equipment and system development expenditures), which in clude accruals and capitalized interest , in 2016 and 2015 were as follows:
|
|
U.S. Cellular’s capital expenditures for 2016 are expected to be approximately $500 million . These expenditures are expected to be for the following general purposes:
TDS Telecom’s capital expenditures for 2016 are expected to be $180 million . These expenditures are expected to be for the followi ng general purposes:
|
TDS plans to finance its capital expenditures program for 2016 using primarily Cash flows from operating activities and, as necessary, existing cash balances and borrowings under it s revolving credit agreements and/or other long-term debt.
Acquisitions, Divestitures and Exchanges
TDS may be engaged from time-to-time in negotiations relating to the acquisition, divestiture or exchange of companies, properties, wireless spectrum and other possible businesses. In general, TDS may not disclose such transactions until there is a definitive agreement. TDS assesses its business interests on an ongoing basis with a goal of improving the competitiveness of its operations and maximizing its long-term return on capital. As part of this strategy, TDS reviews attractive opportunities to acquire additional wireless operating markets and wireless spectrum; and telecommunications, cable, HMS or other possible businesses. TDS also may seek to div est outright or include in exchanges for other interests those interests that are not strategic to its long-term success.
In March 2016, the FCC released a list of applicants that successfully completed applications for the forward auction of 600 MHz spe ctrum licenses, referred to as Auction 1002, which included U.S. Cellular. In July 2016, the FCC released a list of applicants that qualified to bid in Auction 1002, which again included U.S. Cellular. Forward auction bidding is scheduled to begin in Aug ust 2016. See “Regulatory Matters — FCC Auction 1002.” Prior to becoming a qualified bidder, U.S. Cellular was required to make an upfront payment, the size of which establishes its initial bidding eligibility . In June 2016, U.S. Cellular made an upfron t payment to the FCC of $143 million to establish its initial bidding eligibility. If U.S. Cellular is a winning bidder in the auction, it may be required to make additional payments to the FCC that may be substantial. In such event, U.S. Cellular plans to finance such payments from its existing cash balances, borrowings under its revolving credit agreement and/or additional long-term debt. Further, if U.S. Cellular is not the winning bidder of any licenses, or is the winning bidder of licenses with an a ggregate bid price that is less than the upfront payment, all or a portion of the upfront payment will be refunded to U.S. Cellular.
In 2015 and in 2016, U.S. Cellular entered into multiple spectrum license purchase agreements. The aggregate purchase pric e for these spectrum licenses is $ 56 million, of which $ 46 million closed in the six months ended June 30, 2016 . In 2016, U.S. Cellular also entered into multiple agreements with third parties to transfer FCC licenses in non-operating markets and receive FCC licenses in operating markets. The agreements provide for the transfer of certain AWS and PCS spectrum licenses and approximately $ 29 million, net, in cash to U.S. Cellular, in exchange for U.S. Cellular transferring certain AWS, PCS and 700 MHz spectrum licenses to the third parties. The first closi ng of one of the exchange agreements occurred in June 2016 at which time U.S. Cellular received $ 13 million of cash. The remaining license purchase and exchange transactions are expected to close in the second half of 2016. See Note 5 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to these transactions.
Variable Interest Entities
TDS consolidates certain entities as “variable interest entities” under GAAP. See Note 9 — Variable Interest Entities in the Notes to Consolidated Financial Statements for additional information related to these variable interest entities. TDS may elect to make capital contributions and/or advances to variable interest entities in order to fund their operations.
Common Share Repurchase Programs
TDS and U.S. Cellular have r epurchased and expect to continue to repurchase their Common Shares, in each case subject to any available repurchase program. Share repurchases made under these programs in 2016 and 2015 were as follows:
|
Number of |
|
Average Cost |
|
Dollar Amount |
||||
|
Six Months Ended June 30, |
Shares |
|
Per Share |
|
(in millions) |
|||
|
2016 |
|
|
|
|
|
|
|
|
|
|
TDS Common Shares |
|
$ |
|
$ |
|||
|
|
U.S. Cellular Common Shares |
|
$ |
|
$ |
|||
|
|
|
|
|
|
||||
|
2015 |
|
|
|
|
||||
|
|
TDS Common Shares |
|
$ |
|
$ |
|||
|
|
U.S. Cellular Common Shares |
|
$ |
|
$ |
|||
For additional information related to the current TDS repurchase authorization, see Unregistered Sales of Equity Securities and Use of Proceeds.
On November 17, 2009, the Board of Directors of U.S. Cellular authorized the repurchase of up to 1,300,000 Common Shares on an annual basis beginning in 2009 and continuing each year thereafter, on a cumulative basis. These purchases will be made pursuant to open market purchases, block purchases, private purchases or otherwise, depending on market conditions. This authorization does not have an expiration date.
Contractual and Other Obligations
There were no material changes outside the ordinary course o f business between December 31, 2015 and June 30, 2016 to the Contractual and Other Obligations disclosed in Management’s Discussion and Analysis of Financial Co ndition and Results of Operations included in TDS’ Form 10-K for the year ended December 31, 2015 .
Off-Balance Sheet Arrangements
TDS had no transactions, agreements or other contractual arrangements with unconsolidated entities involving “off-balance sheet arrangements,” as defined by SEC rules, that had or are reasonably likely to have a material current or fut ure effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Consolidated Cash Flow Analysis
TDS operates a capital- and marketing-intensive busine ss. TDS makes substantial investments to acquire wireless licenses and properties and to construct and upgrade communications 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. TDS utilizes cash on hand, cash from operating activities, cash proceeds from divestitures and dispositions of invest ments, 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 seasonal ity, the timing of acquisitions and divestitures, capital expenditures and other factors. The following discussion summarizes TDS' cash flow activities for the six months ended June 30, 2016 and 2015 .
2016 Commentary
TDS’ Cash and cash equivalents decreased $ 86 million in 2016. Net cash provided by operating activities was $ 40 0 million in 2016 due to net income of $ 42 million plus non-cash items of $ 424 million and distributions from unconsolidated entities of $ 30 million. This was partially offset by changes in working capital items which decreased net cash by $ 96 million. TDS received a federal tax refund of $ 63 million related to an overpayment of the 2015 expected tax liability, which resulted from the enactment of federal bonus depreciation in December 2015. This was offset by a use of cash of $ 94 million due to an increase in equipment installment plan receivables, which are e xpected to continue to increase and further require the use of working capital in the near term.
The net cash provided by operating activities was offset by Cash flows used for investing activities of $ 452 million. Cash paid in 201 6 for additions to property, plant and equipment totaled $ 281 million. In June 2016, U.S. Cellular made a deposit of $ 143 million to the FCC for its participation in Auction 1002. Cash paid for acquis itions and licenses in 2016 was $ 46 million partially offset by Cash received from divestitures and exchanges of $ 17 million. See Note 5 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to these transactions.
2015 Commentary
Cash flows fro m operating activities were $ 538 million in 2015 , contributing to a net increase in Cash and cash equivalents of $ 160 million for the period. Changes in w orking capital items provided net cash of $ 170 million. A s a result of increased focus by U.S. Cellular to sell through inventory of wireless devices on hand in 2015, inventory levels decreased. Dur ing 2015, TDS received federal income tax refunds of $ 100 million related to an overpayment of the 2014 expected tax liability and the carryback of its 2014 net operating loss to the 2012 and 2013 tax years. These refunds result ed from the enactment of federal bonus depreciation in December 2014. In addition, income taxes incurred on the sale of towers and on the license exchange in 2015 were not payable until periods after June 30, 2015 , resulting in increased income tax payabl e amounts included in Accrued taxes.
Cash flows used for investing activities were $ 346 million in 2015 . Cash paid for addition s to property, plant and equipment totaled $ 359 million in 2015 . During 2015, a $278 million payment was made by Advantage Spectrum L.P. to the FCC for licenses for which it was the provisional winning bidder in Auction 97 . Cas h received from divestitures and exchanges in 2015 included $ 117 million related to licenses and $ 141 million related to the sale of 359 towers and certain related contracts, assets and liabilities.
Other Information
U.S. Cellular did not receive any cash distribution in 2015 and in the six months ended June 30, 2016 from the LA Partnership. In July 2016, U.S. Cellular received a cash distribution of $10 million.
Consolidated Balance Sheet AnalysisThe following discussion addresses certain captions in the consolidated balance sheet and changes therein. This discussion is intended to highlight the si gnificant changes and is not intended to fully reconcile the changes. Changes in financial condition during 2016 are as follows:
Income taxes receivable
Income taxes receivable decreased $ 64 million due primarily to the receipt of a federal income tax refund of $ 63 million in March 2016 .
Assets held for sale increased $ 23 million due to reclassification of Licenses to this account as a result of exchanges with third parties. The license exchange agreements are expected to close in the second half of 2016 . See Note 5 — Acquisitions, Divestitures and Exchanges for additional information.
Other assets and deferred charges
Other assets and deferred charge s increased $ 169 million due primarily to an upfront payment of $ 143 million to the FCC to establish U.S. Cellular’s initial bidding eligibility for its participation in Auction 1002. See Note 5 — Acquisitions, Divestitures and Exchanges for additional information.
Supplemental Information Relating to Non-GAAP Financial Measures
TDS sometimes uses information derived from consolidated financial information but not presented in its financial statements prepared in accordance with U.S. GAAP to evaluate the performance of its busin ess. Certain of these measures are considered “non-GAAP financial measures” under U.S. Securities and Exchange Commission Rules. Specifically, TDS has referred to the following measures in this Form 10-Q Report:
- EBITDA
- Adjusted EBITDA
- Operating cash flow
- Free cash flow
- Adjusted free cash flow
- Postpaid ABPU
- Postpaid ABPA
Below is a reconciliation of each of these measures.
Adjusted EBITDA and Operating Cash Flow
Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization and accretion) is defined as net income adjusted for the items set forth in the reconciliation. Operating cash flow is defined as net income adjusted for the items set forth in the reconciliation. Adjusted EBITDA and Operating cash flow are not measures of financial perfo rmance under GAAP and should not be considered as alternatives to Net income, as indicators of cash flows or as measures of liquidity. TDS does not intend to imply that any such items set forth in the reconciliation below are non-recurring, infrequent or unusual; such items may occur in the future.
Adjusted EBITDA is a segment measure reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing their performance. See Note 11 — Business Segment Information in the Notes to Consolidated Financial Statements for additional information.
Management uses Adjusted EBITDA and Operating cash flow as measurements of profitability , and therefore reconciliations to applicable GAAP income measures are deemed most appropriate. Management believes Adjusted EBITDA and Operating cash flow are useful measures of TDS’ operating results before significant recurring non-cash charges, gains and losses, and other items as presented below as they provide additional relevant and useful information to investors and other users of TDS’ financial data in evaluating the effectiveness of its operations and underlying business trends in a manner that is consistent with management’s evaluation of business performance. Adjusted EBITDA shows adjusted earnings before interest, taxes, depreciation, amortization and accretion, while Operating cash flow reduces this measure further to exclude Equity in earni ngs of unconsolidated entities and Interest and dividend income in order to more effectively show the performance of operating activities excluding investment activities. The following table reconciles Adjusted EBITDA and Operating cash flow to the corres ponding GAAP measure, Net income or Income (loss) before income taxes. Income tax expense is not provided at the individual segment level for Wireline, Cable and HMS. TDS calculates income tax expense for TDS Telecom in total.
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|||||||||
|
TDS - CONSOLIDATED |
2016 |
|
2015 |
|
2016 |
|
2015 |
||||||
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
||
|
Net i ncome (GAAP) |
$ |
|
$ |
|
$ |
|
$ |
||||||
|
Add back: |
|
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|
|
|
|
|
||||||
|
|
Income tax expense |
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|
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|||||
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Inter est expense |
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|||||
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|
Depre ciation, amortization and accretion |
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|||||
|
EBITDA (Non-GAAP) |
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|
|
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|
|
||||||
|
Add back or deduct: |
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|
|
||||||
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|
(Gain) loss on sale of business and other exit costs, net |
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|||||
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|
(Gain ) loss on license sales and exchanges, net |
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|||||
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|
(Gain ) loss on asset disposals, net |
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|||||
|
Adjusted EBITDA (Non-GAAP) |
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||||||
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Deduct: |
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||||||
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Equity in earnings of unconsolidated entities |
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Inter est and dividend income |
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Other , net |
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Operating cash flow (Non-GAAP) |
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||||||
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Deduct: |
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|
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|
||||||
|
|
Depreciation, amortization and accretion |
|
|
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|||||
|
|
(Gain) loss on sale of business and other exit costs, net |
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|||||
|
|
(Gain ) loss on license sales and exchanges, net |
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|||||
|
|
(Gain) loss on asset disposals, net |
|
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|
|
|
|||||
|
Operating income (GAAP) |
$ |
|
$ |
|
$ |
|
$ |
||||||
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|||||||||
|
U.S. CELLULAR |
2016 |
|
2015 |
|
2016 |
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2015 |
||||||
|
(Dollars in millions) |
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|
|
|
|
|
||
|
Net i ncome (GAAP) |
$ |
|
$ |
|
$ |
|
$ |
||||||
|
Add back: |
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|
|
|
|
|
||||||
|
|
Income tax expense |
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|||||
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|
Inter est expense |
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|
|||||
|
|
Depre ciation, amortization and accretion |
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|||||
|
EBITDA (Non-GAAP) |
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|
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|
|
|
||||||
|
Add back or deduct: |
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|
|
|
|
|
|
||||||
|
|
(Gain) loss on sale of business and other exit costs, net |
|
|
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|
|||||
|
|
(Gain ) loss on license sales and exchanges, net |
|
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|
|||||
|
|
(Gain ) loss on asset disposals, net |
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|
|||||
|
Adjusted EBITDA (Non-GAAP) |
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||||||
|
Deduct: |
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||||||
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|
Equity in earnings of unconsolidated entities |
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|
Inter est and dividend income |
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Other , net |
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|
|||||
|
Operating cash flow (Non-GAAP) |
|
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|
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|
||||||
|
Deduct: |
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|
|
|
|
|
|
||||||
|
|
Depreciation, amortization and accretion |
|
|
|
|
|
|
|
|||||
|
|
(Gain ) loss on sale of business and other exit costs, net |
|
|
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|
|||||
|
|
(Gain ) loss on license sales and exchanges, net |
|
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|
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|
|||||
|
|
(Gain) loss on asset disposals, net |
|
|
|
|
|
|
|
|||||
|
Operating income (GAAP) |
$ |
|
$ |
|
$ |
|
$ |
||||||
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|||||||||
|
TDS TELECOM |
2016 |
|
2015 |
|
2016 |
|
2015 |
||||||
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
||
|
Net i ncome (GAAP) |
$ |
|
$ |
|
$ |
|
$ |
||||||
|
Add back: |
|
|
|
|
|
|
|
||||||
|
|
Income tax expense |
|
|
|
|
|
|
|
|||||
|
|
Inter est expense |
|
|
|
|
|
|
|
|||||
|
|
Depre ciation, amortization and accretion |
|
|
|
|
|
|
|
|||||
|
EBITDA (Non-GAAP) |
|
|
|
|
|
|
|
||||||
|
Add back or deduct: |
|
|
|
|
|
|
|
||||||
|
|
(Gain) loss on sale of business and other exit costs, net |
|
|
|
|
|
|
|
|||||
|
|
(Gain) loss on asset disposals, net |
|
|
|
|
|
|
|
|||||
|
Adjusted EBITDA (Non-GAAP) |
|
|
|
|
|
|
|
||||||
|
Deduct: |
|
|
|
|
|
|
|
||||||
|
|
Interest and dividend income |
|
|
|
|
|
|
|
|||||
|
Operating cash flow (Non-GAAP) |
|
|
|
|
|
|
|
||||||
|
Deduct: |
|
|
|
|
|
|
|
||||||
|
|
Depreciation, amortization and accretion |
|
|
|
|
|
|
|
|||||
|
|
(Gain ) loss on sale of business and other exit costs, net |
|
|
|
|
|
|
|
|||||
|
|
(Gain) loss on asset disposals, net |
|
|
|
|
|
|
|
|||||
|
Operating income (GAAP) |
$ |
|
$ |
|
$ |
|
$ |
||||||
|
|
|
|
|
|
|
|
|
|
|
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|
Numbers may not foot due to rounding. |
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|
||
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|||||||||
|
WIRELINE |
2016 |
|
2015 |
|
2016 |
|
2015 |
||||||
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
||
|
Incom e before income taxes (GAAP) |
$ |
|
$ |
|
$ |
|
$ |
||||||
|
Add back: |
|
|
|
|
|
|
|
||||||
|
|
Interest expense |
|
|
|
|
|
|
|
|||||
|
|
Depre ciation, amortization and accretion |
|
|
|
|
|
|
|
|||||
|
EBITDA (Non-GAAP) |
|
|
|
|
|
|
|
||||||
|
Add back or deduct: |
|
|
|
|
|
|
|
||||||
|
|
(Gain) loss on sale of business and other exit costs, net |
|
|
|
|
|
|
|
|||||
|
|
(Gain) loss on asset disposals, net |
|
|
|
|
|
|
|
|||||
|
Adjusted EBITDA (Non-GAAP) |
|
|
|
|
|
|
|
||||||
|
Deduct: |
|
|
|
|
|
|
|
||||||
|
|
Interest and dividend income |
|
|
|
|
|
|
|
|||||
|
Operating cash flow (Non-GAAP) |
|
|
|
|
|
|
|
||||||
|
Deduct: |
|
|
|
|
|
|
|
||||||
|
|
Depreciation, amortization and accretion |
|
|
|
|
|
|
|
|||||
|
|
(Gain ) loss on sale of business and other exit costs, net |
|
|
|
|
|
|
|
|||||
|
|
(Gain) loss on asset disposals, net |
|
|
|
|
|
|
|
|||||
|
Operating income (GAAP) |
$ |
|
$ |
|
$ |
|
$ |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numbers may not foot due to rounding. |
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|||||||||
|
CABLE |
2016 |
|
2015 |
|
2016 |
|
2015 |
||||||
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
||
|
Incom e (loss) before income taxes (GAAP) |
$ |
|
$ |
|
$ |
|
$ |
||||||
|
Add back: |
|
|
|
|
|
|
|
||||||
|
|
Depreciation, amortization and accretion |
|
|
|
|
|
|
|
|||||
|
EBITDA (Non-GAAP) |
|
|
|
|
|
|
|
||||||
|
Add back or deduct: |
|
|
|
|
|
|
|
||||||
|
|
(Gain) loss on asset disposals, net |
|
|
|
|
|
|
|
|||||
|
Adjusted EBITDA (Non-GAAP) |
|
|
|
|
|
|
|
||||||
|
Deduct: |
|
|
|
|
|
|
|
||||||
|
|
Other, net |
|
|
|
|
|
|
|
|||||
|
Operating cash flow (Non-GAAP) |
|
|
|
|
|
|
|
||||||
|
Deduct: |
|
|
|
|
|
|
|
||||||
|
|
Depreciation, amortization and accretion |
|
|
|
|
|
|
|
|||||
|
|
(Gain) loss on asset disposals, net |
|
|
|
|
|
|
|
|||||
|
Operating income (loss) (GAAP) |
$ |
|
$ |
|
$ |
|
$ |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numbers may not foot due to rounding. |
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|||||||||
|
HMS |
2016 |
|
2015 |
|
2016 |
|
2015 |
||||||
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
||
|
Loss before income taxes (GAAP) |
$ |
|
$ |
|
$ |
|
$ |
||||||
|
Add back: |
|
|
|
|
|
|
|
||||||
|
|
Interest expense |
|
|
|
|
|
|
|
|||||
|
|
Depre ciation, amortization and accretion |
|
|
|
|
|
|
|
|||||
|
EBITDA (Non-GAAP) |
|
|
|
|
|
|
|
||||||
|
Add back or deduct: |
|
|
|
|
|
|
|
||||||
|
|
(Gain) loss on asset disposals, net |
|
|
|
|
|
|
|
|||||
|
Adjusted EBITDA (Non-GAAP) |
|
|
|
|
|
|
|
||||||
|
Deduct: |
|
|
|
|
|
|
|
||||||
|
|
Other, net |
|
|
|
|
|
|
|
|||||
|
Operating cash flow (Non-GAAP) |
|
|
|
|
|
|
|
||||||
|
Deduct: |
|
|
|
|
|
|
|
||||||
|
|
Depreciation, amortization and accretion |
|
|
|
|
|
|
|
|||||
|
|
(Gain) loss on asset disposals, net |
|
|
|
|
|
|
|
|||||
|
Operating loss (GAAP) |
$ |
|
$ |
|
$ |
|
$ |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numbers may not foot due to rounding. |
|
|
|
|
|
|
|
|
|
|
|
||
Free Cash Flow and Adjusted Free Cash Flow
The following table presents Free cash flow and Adjusted free cash flow. Management uses Free cash flow as a liquidity measure and it is defined as Cash flows from operating activities less Cash paid for additions to property, plant and equipment. Adjusted free cash flow is defined as Cash flows from operating activities (which includes cash outflows related to the Sprint decommissioning), as adjusted for cash proceeds from the Sprint Cost Reimbursement (which are included in Cash flows from investing activities in the Consolidated Statement of Cash Fl ows), less Cash paid for additions to property, plant and equipment. Free cash flow and Adjusted free cash flow are non-GAAP financial measures which TDS believes may be useful to investors and other users of its financial information in evaluating liquid ity, specifically, the amount of cash generated by business operations (including cash proceeds from the Sprint Cost Reimbursement), after Cash paid for additions to property, plant and equipment.
|
|
|
Six Months Ended June 30, |
|||||
|
|
2016 |
|
2015 |
||||
|
(Dollars in millions) |
|
|
|
|
|
||
|
Cash flows from operating activities (GAAP) |
$ |
|
$ |
||||
|
Less: Cash paid for additions to property, plant and equipment |
|
|
|
||||
|
|
Free cash flow (Non-GAAP) |
$ |
|
$ |
|||
|
Add: Sprint Cost Reimbursement 1 |
|
|
|
||||
|
|
Adjusted free cash flow (Non-GAAP) |
$ |
|
$ |
|||
|
|
|
|
|
|
|
|
|
|
1 |
On May 16, 2013, pursuant to a Purchase and Sale Agreement, U.S. Cellular sold customers and certain PCS spectrum licenses to subsidiaries of Sprint Corp. fka Sprint Nextel Corporation (“Sprint”) in U.S. Cellular’s Chicago, central Illinois, St. Louis and certain Indiana/Michigan/Ohio markets in consideration for $480 million in cash. The Purchase and Sale Agreement also contemplated certain other agreements. These agreements require Sprint to reimburse U.S. Cellul ar up to $200 million (the “Sprint Cost Reimbursement”) for certain network decommissioning costs, network site lease rent and termination costs, network access termination costs, and employee termination benefits for specified engineering employees. |
||||||
Postpaid ABPU and Postpaid ABPA
U.S. Cellular presents Postpaid ABPU and Postpaid ABPA to reflect the revenue shift from Service revenues to Equipment and product sales resulting from the increased adoption of equipment installment plans. Postpaid ABPU an d Postpaid ABPA, as previously defined, are non-GAAP financial measures which U.S. Cellular believes are useful to investors and other users of its financial information in showing trends in both service and equipment revenues received from customers.
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|||||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
||||||
|
(Dollars and connection counts in millions) |
|
|
|
|
|
|
|
|
|
|
|
||
|
Calculation of Postpaid ARPU |
|
|
|
|
|
|
|
||||||
|
Postpaid service revenues |
$ |
|
$ |
|
$ |
|
$ |
||||||
|
Average number of postpaid connections |
|
|
|
|
|
|
|
||||||
|
Number of months in period |
|
|
|
|
|
|
|
||||||
|
|
Postpaid ARPU (GAAP metric) |
$ |
|
$ |
|
$ |
|
$ |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation of Postpaid ABPU |
|
|
|
|
|
|
|
||||||
|
Postpaid service revenues |
$ |
|
$ |
|
$ |
|
$ |
||||||
|
Equipment installment plan billings |
|
|
|
|
|
|
|
||||||
|
|
Total billings to postpaid connections |
$ |
|
$ |
|
$ |
|
$ |
|||||
|
Average number of postpaid connections |
|
|
|
|
|
|
|
||||||
|
Number of months in period |
|
|
|
|
|
|
|
||||||
|
|
Postpaid ABPU (Non-GAAP metric) |
$ |
|
$ |
|
$ |
|
$ |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation of Postpaid ARPA |
|
|
|
|
|
|
|
||||||
|
Postpaid service revenues |
$ |
|
$ |
|
$ |
|
$ |
||||||
|
Average number of postpaid accounts |
|
|
|
|
|
|
|
||||||
|
Number of months in period |
|
|
|
|
|
|
|
||||||
|
|
Postpaid ARPA (GAAP metric) |
$ |
|
$ |
|
$ |
|
$ |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation of Postpaid ABPA |
|
|
|
|
|
|
|
||||||
|
Postpaid service revenues |
$ |
|
$ |
|
$ |
|
$ |
||||||
|
Equipment installment plan billings |
|
|
|
|
|
|
|
||||||
|
|
Total billings to postpaid accounts |
$ |
|
$ |
|
$ |
|
$ |
|||||
|
Average number of postpaid accounts |
|
|
|
|
|
|
|
||||||
|
Number of months in period |
|
|
|
|
|
|
|
||||||
|
|
Postpaid ABPA (Non-GAAP metric) |
$ |
|
$ |
|
$ |
|
$ |
|||||
Application of Critical Accounting P olicies and Estimates
TDS prepares its consolidated financial statements in accordance with GAAP. TDS’ significant accounting policies are discussed in detail in Note 1 — Summary of Significant Ac counting Policies and Recent Accounting Pronouncements in the Notes to Consolidated Financial Statements and TDS’ Application of Critical Accounting Policies and Estimates is discussed in detail in Management’s Discussion and Analysis of Financial Conditio n and Results of Operations, both of which are included in TDS’ Form 10-K for the year ended December 31, 2015 . There were no material changes to TDS’ application of critical accounting policies and estimates duri ng the six months ended June 30, 2016 .
Recent Accounting Pronouncements
See Note 1 — Basis of Presentation in the Notes to Consolidated Financial Statements for information on recent accounting pronouncements.
The discussion below includes updates related to recent regulatory developments. These updates should be read in conjunction with the disclosures previously provided under “Regulatory Matters” in TDS’ Form 10-K for the year ended December 31, 2015 .
FCC Auction 1002
On March 18, 2016, the FCC released a list of applicants that successfully completed applications for the forward auction of 600 MHz spectrum licenses, referred to as Auction 1002, which included U.S. Cellular. On July 15, 2016, the FCC released a list of the applicants that qualified to bid in Auction 1002, which again included U.S. Cellular. Forward auction bidding is scheduled to begin on August 16, 2016. As a result of the participa tion of U.S. Cellular, since February 10, 2016, TDS has been subject to FCC anti-collusion rules that place certain restrictions on public disclosures and business communications with other companies relating to U.S. Cellular’s participation. These restri ctions will continue until the down payment deadline for Auction 100 2 , which will be ten business days after release of the FCC’s Channel Reassignment Public Notice, following the end of the auction. These anti-collusion rules, which could last nine month s or more from February 10, 2016, may restrict the conduct of certain TDS activities with other auction applicants as well as with nationwide providers of wireless services which are not applicants. The restrictions could have an adverse effect on TDS’ bu siness, financial condition or results of operations.
FCC Connect America Fund (CAF)
On March 30, 2016, the FCC released an order modifying the USF program to extend the Connect America Fund (CAF) program to rate-of-return incumbent local exchange carriers for the purpose of extending broadband services, including standalone broadband, in underserved rural areas. The FCC is providing rate-of-return carriers with two paths to receive funds from the CAF. The first path includes a voluntary model-based appro ach and includes support for a ten-year period in exchange for meeting defined build-out obligations. This election must be done at the state level. The second path is based on existing rate-of-return mechanisms, but with substantial modifications. This path also includes defined build-out obligations. TDS Telecom is reviewing the order and is considering its options under the two paths. There is no assurance that either of the new CAF options will provide TDS Telecom with the level of support TDS Tele com received under previous federal support mechanisms.
FCC Net Neutrality Order
TDS previously disclosed that the FCC adopted rules relating to net neut rality which reclassified broadband internet access service under Title II, and that lawsuits had been filed challenging such rules and reclassification. In June 2016, the U.S. Court of Appeals for the District of Columbia Circuit uphe ld the FCC’s rules a nd reclassification . A request for a rehearing of this decision was filed in July 2016 , and it is expected that this court decision also will be appealed and subject to further proceedings. TDS cannot predict the outcome of any further proceedings or the impact on its business.
Private Securities Litigation Reform Act of 1995
Safe Harbor Cautionary Statement
This Form 10-Q, including exhibits, contains statements that are not based on historical facts and represent forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, that address activities , events or developments that TDS intends, expects, projects, believes, estimates, plans or anticipates will or may occur in the future are forward-looking statements. The words “believes,” “anticipates,” “estimates,” “expects,” “plans,” “intends,” “proje cts” and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause ac tual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include those set forth below, as more fully described under “Risk Factors” in TDS’ Form 10-K for the year ended December 31, 2015 . However, such factors are not necessarily all of the important factors that could cause actual results, performance or a chievements to differ materially from those expressed in, or implied by, the forward-looking statements contained in this document. Other unknown or unpredictable factors also could have material adverse effects on future results, performance or achieveme nts. TDS undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. You should carefully consider the Risk Factors in TDS’ Form 10-K for the year ended December 31, 2015 , the following factors and other information contained in, or incorporated by reference into, this Form 10-Q to understand the material risks relating to TDS’ business.
- Intense competition in the markets in which T DS operates could adversely affect TDS’ revenues or increase its costs to compete.
- A failure by TDS to successfully execute its business strategy (including planned acquisitions, spectrum acquisitions, divestitures and exchanges) or allocate resources or c apital could have an adverse effect on TDS’ business, financial condition or results of operations.
- Uncertainty in TDS’ future cash flow and liquidity or in the ability to access capital, deterioration in the capital markets, other changes in TDS’ performa nce or market conditions, changes in TDS’ credit ratings or other factors could limit or restrict the availability of financing on terms and prices acceptable to TDS, which could require TDS to reduce its construction, development or acquisition programs, reduce the acquisition of spectrum licenses, and/or reduce or cease share repurchases and/or the payment of dividends.
- TDS has a significant amount of indebtedness which could adversely affect its financial performance and in turn adversely affect its abil ity to make payments on its indebtedness, comply with terms of debt covenants and incur additional debt.
- Changes in roaming practices or other factors could cause TDS’ roaming revenues to decline from current levels, roaming expenses to increase from curre nt levels and/or impact TDS’ ability to service its customers in geographic areas where TDS does not have its own network, which could have an adverse effect on TDS’ business, financial condition or results of operations.
- A failure by TDS to obtain access to adequate radio spectrum to meet current or anticipated future needs and/or to accurately predict future needs for radio spectrum could have an adverse effect on TDS’ business, financial condition or results of operations.
- To the extent conducted by the FCC, TDS may participate in FCC auctions of additional spectrum in the future directly or indirectly and, during certain periods, will be subject to the FCC’s anti-collusion rules, which could have an adverse effect on TDS.
- Changes in the regulatory enviro nment or a failure by TDS to timely or fully comply with any applicable regulatory requirements could adversely affect TDS’ business, financial condition or results of operations.
- An inability to attract people of outstanding potential, to develop their po tential through education and assignments, and to retain them by keeping them engaged, challenged and properly rewarded could have an adverse effect on TDS' business, financial condition or results of operations.
- TDS’ assets are concentrated primarily in t he U.S. telecommunications industry. Consequently, its operating results may fluctuate based on factors related primarily to conditions in this industry.
- TDS’ smaller scale relative to larger competitors that may have much greater financial and other resources than TDS could cause TDS to be unable to compete successfully, which could adversely affect its business, financial condition or results of operations.
- Changes in various business factors, including changes in demand, customer preferences and per ceptions, price competition, churn from customer switching activity and other factors, could have an adverse effect on TDS’ business, financial condition or results of operations.
- Advances or changes in technology could render certain technologies used by TDS obsolete, could put TDS at a competitive disadvantage, could reduce TDS’ revenues or could increase its costs of doing business.
- Complexities associated with deploying new technologies present substantial risk and TDS’ investments in unproven technolog ies may not produce the benefits that TDS expects.
- TDS receives regulatory support and is subject to numerous surcharges and fees from federal, state and local governments, and the applicability and the amount of the support and fees are subject to great u ncertainty.
- Performance under device purchase agreements could have a material adverse impact on TDS' business, financial condition or results of operations.
- Changes in TDS’ enterprise value, changes in the market supply or demand for wireless licenses, wi reline or cable markets or IT service providers, adverse developments in the businesses or the industries in which TDS is involved and/or other factors could require TDS to recognize impairments in the carrying value of its licenses, goodwill, franchise ri ghts and/or physical assets.
- Costs, integration problems or other factors associated with acquisitions, divestitures or exchanges of properties or licenses and/or expansion of TDS’ businesses could have an adverse effect on TDS’ business, financial conditi on or results of operations.
- TDS offers customers the option to purchase certain devices under installment contracts which, compared to fixed-term service contracts, includes risks that TDS may possibly incur greater churn, lower cash flows, increased cost s and/or increased bad debts expense due to differences in contract terms, which could have an adverse impact on TDS' financial condition or results of operations.
- A failure by TDS to complete significant network construction and systems implementation act ivities as part of its plans to improve the quality, coverage, capabilities and capacity of its networks and support systems could have an adverse effect on its operations.
- Difficulties involving third parties with which TDS does business, including change s in TDS’ relationships with or financial or operational difficulties of key suppliers or independent agents and third party national retailers who market TDS’ services, could adversely affect TDS’ business, financial condition or results of operations.
- TD S has significant investments in entities that it does not control. Losses in the value of such investments could have an adverse effect on TDS’ financial condition or results of operations.
- A failure by TDS to maintain flexible and capable telecommunicati on networks or information technology, or a material disruption thereof, could have an adverse effect on TDS’ business, financial condition or results of operations.
- TDS has experienced and, in the future, expects to experience cyber-attacks or other breac hes of network or information technology security of varying degrees on a regular basis, which could have an adverse effect on TDS' business, financial condition or results of operations.
- The market price of TDS’ Common Shares is subject to fluctuations du e to a variety of factors.
- Changes in facts or circumstances, including new or additional information, could require TDS to record charges in excess of amounts accrued in the financial statements, which could have an adverse effect on TDS’ business, financ ial condition or results of operations.
- Disruption in credit or other financial markets, a deterioration of U.S. or global economic conditions or other events could, among other things, impede TDS’ access to or increase the cost of financing its operating and investment activities and/or result in reduced revenues and lower operating income and cash flows, which would have an adverse effect on TDS’ business, financial condition or results of operations.
- Settlements, judgments, restraints on its current or f uture manner of doing business and/or legal costs resulting from pending and future litigation could have an adverse effect on TDS’ business, financial condition or results of operations.
- The possible development of adverse precedent in litigation or concl usions in professional studies to the effect that radio frequency emissions from wireless devices and/or cell sites cause harmful health consequences, including cancer or tumors, or may interfere with various electronic medical devices such as pacemakers, could have an adverse effect on TDS’ wireless business, financial condition or results of operations.
- Claims of infringement of intellectual property and proprietary rights of others, primarily involving patent infringement claims, could prevent TDS from u sing necessary technology to provide products or services or subject TDS to expensive intellectual property litigation or monetary penalties, which could have an adverse effect on TDS’ business, financial condition or results of operations.
- Certain matters , such as control by the TDS Voting Trust and provisions in the TDS Restated Certificate of Incorporation, may serve to discourage or make more difficult a change in control of TDS.
- Any of the foregoing events or other events could cause revenues, earnings, capital expenditures and/or any other financial or statistical information to vary from TDS’ forward-looking estimates by a material amount.
In addition to the information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in TDS’ Annual Report on Form 10-K for the year ended December 31, 2015 , which could materially affect TDS’ business, financial condition or future results. The risks described in this Form 10-Q and the Form 10-K for the year ended December 31, 2015 , may not be the onl y risks that could affect TDS. Additional unidentified or unrecognized risks and uncertainties could materially adversely affect TDS’ business, financial condi tion a nd/or operating results. Subject to the foregoing, TDS has not identified for disclosure any material changes to the risk factors as previously disclosed in TDS’ Annual Report on Form 10-K for the year ended December 31, 2015 .
Quantitative and Qualitative Disclosures about Market Risk
MARKET RISK
Refer to the disclosure under Market Risk in TDS’ Form 10-K for the year ended December 31, 2015 for additional information , including information regarding required principal payments and the weighted average interest rates related to TDS’ L ong-term debt. There have been no material changes to such information since December 31, 2015 . See Note 8 — Debt in the Notes to Consolidated Financial Statements for additional information .
See Note 2 — Fair Value Measurements in the Notes to Consolidated Financial Statements for additional information related to the fa ir value of TDS’ L ong-term debt as of June 30, 2016 .
Telephone and Data Systems, Inc.
Consolidated Statement of Operations(Unaudited)
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|||||||||
|
|
|
|
|
June 30, |
|
June 30, |
||||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
|||||||
|
(Dollars and shares in millions, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
Service |
$ |
|
$ |
|
$ |
|
$ |
||||||
|
|
Equipment and product sales |
|
|
|
|
|
|
|
||||||
|
|
|
Total operating revenues |
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Operating expenses |
|
|
|
|
|
|
||||||||
|
|
Cost of services (excluding Depreciation, amortization and accretion reported below) |
|
|
|
|
|
|
|||||||
|
|
Cost of equipment and products |
|
|
|
|
|
|
|||||||
|
|
Selling, general and administrative |
|
|
|
|
|
|
|||||||
|
|
Depreciation, amortization and accretion |
|
|
|
|
|
|
|||||||
|
|
(Gain) loss on asset disposals, net |
|
|
|
|
|
|
|||||||
|
|
(Gain) loss on sale of business and other exit costs, net |
|
|
|
|
|
|
|||||||
|
|
(Gain) loss on license sales and exchanges, net |
|
|
|
|
|
|
|||||||
|
|
|
Total operating expenses |
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Operating income |
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Investment and other income (expense) |
|
|
|
|
|
|
||||||||
|
|
Equity i n earnings of unconsolidated entities |
|
|
|
|
|
|
|||||||
|
|
Interest and dividend income |
|
|
|
|
|
|
|||||||
|
|
Interest expense |
|
|
|
|
|
|
|||||||
|
|
Other, net |
|
|
|
|
|
|
|||||||
|
|
|
Total investment and other income |
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Income before income taxes |
|
|
|
|
|
|
||||||||
|
|
Income t ax expense |
|
|
|
|
|
|
|||||||
|
Net income |
|
|
|
|
|
|
||||||||
|
Less: Net income attributable to noncontrolling |
|
|
|
|
|
|
||||||||
|
interes ts, net of tax |
|
|
|
|
|
|
||||||||
|
Net income attributable to TDS shareholders |
|
|
|
|
|
|
||||||||
|
TDS Prefe rred dividend requirement |
|
|
|
|
|
|
||||||||
|
Net income available to TDS common shareholders |
$ |
|
$ |
$ |
|
$ |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Basic weighted average shares outstanding |
|
|
|
|
||||||||||
|
Basic earnings per share available to TDS common shareholders |
$ |
|
$ |
|
$ |
|
$ |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
|
|
||||||||||
|
Diluted earnings per share available to TDS common shareholders |
$ |
|
$ |
|
$ |
|
$ |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share to TDS shareholders |
$ |
|
$ |
|
$ |
|
$ |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
The accompanying notes are an integral part of these consolidated financial statements. |
||||||||||||||
Telephone and Data Systems, Inc.
Consolidated Statement of Comprehensive Income
(Unaudited)
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|||||||||
|
|
|
|
|
|
June 30, |
|
June 30, |
||||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
||||||||
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net income |
$ |
|
$ |
|
$ |
|
$ |
||||||||
|
|
Net change in accumulated other comprehensive income |
|
|
|
|
|
|
|
|||||||
|
|
|
Change in net unrealized gain (loss) on equity investments |
|
|
|
|
|
|
|
||||||
|
|
|
Change related to retirement plan |
|
|
|
|
|
|
|
||||||
|
|
|
|
Amounts included in net periodic benefit cost |
|
|
|
|
|
|
|
|||||
|
|
|
|
|
for the period |
|
|
|
|
|
|
|
||||
|
|
|
|
|
Amortization of prior service cost |
|
|
|
|
|
|
|
||||
|
|
|
|
Change in deferred income taxes |
|
|
|
|
|
|
|
|||||
|
|
|
Change related to retirement plan, net of tax |
|
|
|
|
|
|
|
||||||
|
|
Net change in accumulated other comprehensive income |
|
|
|
|
|
|
|
|||||||
|
Comprehensive income |
|
|
|
|
|
|
|
||||||||
|
|
Less: Net income attributable to noncontrolling |
|
|
|
|
|
|
|
|||||||
|
|
|
interests, net of tax |
|
|
|
|
|
|
|
||||||
|
Comprehensive income attributable to TDS shareholders |
$ |
|
$ |
|
$ |
|
$ |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements. |
|||||||||||||||
Telephone and Data Systems, Inc.
Consolidated Statement of Cash Flows(Unaudited)
|
|
|
|
|
Six Months Ended |
|||||
|
|
|
|
|
|
June 30, |
||||
|
|
2016 |
|
2015 |
||||||
|
(Dollars in millions) |
|
|
|
|
|
||||
|
Cash flows from operating activities |
|
|
|
|
|
||||
|
|
Net income |
$ |
|
$ |
|||||
|
|
Add (deduct) adjustments to reconcile net income to net cash flows |
|
|
|
|||||
|
|
from operating activities |
|
|
|
|||||
|
|
|
|
Depreciation, amortization and accretion |
||||||
|
|
|
|
Bad debts expense |
||||||
|
|
|
|
Stock-based compensation expense |
||||||
|
|
|
|
Deferred income taxes, net |
||||||
|
|
|
|
Equity in earnings of unconsolidated entities |
||||||
|
|
|
|
Distributions from unconsolidated entities |
||||||
|
|
|
|
(Gain) loss on asset disposals, net |
||||||
|
|
|
|
(Gain) loss on sale of business and other exit costs, net |
||||||
|
|
|
|
(Gain) loss on license sales and exchanges, net |
||||||
|
|
|
|
Noncash interest expense |
||||||
|
|
|
|
Other operating activities |
||||||
|
|
Changes in assets and liabilities from operations |
|
|
|
|||||
|
|
|
|
Accounts receivable |
||||||
|
|
|
|
Equipment installment plans receivable |
||||||
|
|
|
|
Inventory |
||||||
|
|
|
|
Accounts payable |
||||||
|
|
|
|
Customer deposits and deferred revenues |
||||||
|
|
|
|
Accrued taxes |
||||||
|
|
|
|
Accrued interest |
||||||
|
|
|
|
Other assets and liabilities |
||||||
|
|
|
|
|
Net cash provided by operating activities |
|
|
|
||
|
|
|
|
|
|
|
|
|
||
|
Cash flows from investing activities |
|
|
|||||||
|
|
Cash paid for additions to property, plant and equipment |
|
|
|
|||||
|
|
Cash paid for acquisitions and licenses |
|
|
|
|||||
|
|
Cash received from divestitures and exchanges |
|
|
|
|||||
|
|
Federal Communications Commission deposit |
|
|
|
|||||
|
|
Other investing activities |
|
|
|
|||||
|
|
|
|
|
Net cash used in investing activities |
|
|
|
||
|
|
|
|
|
|
|||||
|
Cash flows from financing activities |
|
|
|||||||
|
|
Repayment of long-term debt |
|
|
|
|||||
|
|
Issuance of long-term debt |
|
|
|
|||||
|
|
TDS Common Shares reissued for benefit plans, net of tax payments |
|
|
|
|||||
|
|
U.S. Cellular Common Shares reissued for benefit plans, net of tax payments |
|
|
|
|||||
|
|
Repurchase of TDS Common Shares |
|
|
|
|||||
|
|
Repurchase of U.S. Cellular Common Shares |
|
|
|
|||||
|
|
Dividends paid to TDS shareholders |
|
|
|
|||||
|
|
Payment of debt issuance costs |
|
|
|
|||||
|
|
Distributions to noncontrolling interests |
|
|
|
|||||
|
|
Other financing activities |
|
|
|
|||||
|
|
|
Net cash used in financing activities |
|
|
|||||
|
|
|
|
|
|
|
|
|
||
|
Net increase (decrease) in cash and cash equivalents |
|
|
|||||||
|
|
|
|
|
|
|
|
|||
|
Cash and cash equivalents |
|
|
|||||||
|
|
Beginning of period |
|
|
|
|||||
|
|
End of period |
$ |
|
$ |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements. |
|||||||||
Telephone and Data Systems, Inc.
Consolidated Balance Sheet — Assets
|
June 30, |
|
December 31, |
||||||
|
|
2016 |
|
2015 |
|||||
|
(Dollars in millions) |
|
|
|
|
|
|||
|
Current assets |
|
|
|
|
|
|||
|
|
Cash and cash equivalents |
$ |
|
$ |
||||
|
|
Accounts receivable |
|
|
|
||||
|
|
|
Due from customers and agents, less allowances of $48 and $49, respectively |
|
|
|
|||
|
|
|
Other, less allowances of $2 and $1, respectively |
|
|
|
|||
|
|
Inventory, net |
|
|
|
||||
|
|
Prepaid expenses |
|
|
|
||||
|
|
Income taxes receivable |
|
|
|
||||
|
|
Other current assets |
|
|
|
||||
|
|
|
|
Total current assets |
|
|
|
||
|
|
|
|
|
|
|
|
||
|
Assets held for sale |
|
|
|
|||||
|
|
|
|
|
|
|
|
||
|
Licenses |
|
|
|
|||||
|
Goodwill |
|
|
|
|||||
|
Franchise rights |
|
|
|
|||||
|
Other intangible assets, net of accumulated amortization of $147 and $144, respectively |
|
|
|
|||||
|
Investments in unconsolidated entities |
|
|
|
|||||
|
|
|
|
|
|
|
|
||
|
Property, plant and equipment |
|
|
|
|||||
|
|
In service and under construction |
|
|
|
||||
|
|
Less: Accumulated depreciation and amortization |
|
|
|
||||
|
|
|
|
Property, plant and equipment, net |
|
|
|
||
|
|
|
|
|
|
|
|
||
|
Other assets and deferred charges |
|
|
|
|||||
|
|
|
|
|
|
|
|
||
|
Total asset s 1 |
$ |
|
$ |
|||||
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements. |
||||||||
Telephone and Data Systems, Inc.
Consolidated Balance Sheet — Liabilities and Equity
(Unaudited)
|
June 30, |
|
December 31, |
||||||
|
|
2016 |
|
2015 |
|||||
|
(Dollars and shares in millions, except per share amounts) |
|
|
|
|
|
|||
|
Current liabilities |
|
|
|
|
|
|||
|
|
Current portion of long-term debt |
$ |
|
$ |
||||
|
|
Accounts payable |
|
|
|
||||
|
|
Customer deposits and deferred revenues |
|
|
|
||||
|
|
Accrued interest |
|
|
|
||||
|
|
Accrued taxes |
|
|
|
||||
|
|
Accrued compensation |
|
|
|
||||
|
|
Other current liabilities |
|
|
|
||||
|
|
|
|
Total current liabilities |
|
|
|
||
|
|
|
|
|
|
|
|
||
|
Deferred liabilities and credits |
|
|
|
|||||
|
|
Deferred income tax liability, net |
|
|
|
||||
|
|
Other deferred liabilities and credits |
|
|
|
||||
|
|
|
|
|
|
|
|
||
|
Long-term debt, net |
|
|
|
|||||
|
|
|
|
|
|
|
|
||
|
Commitments and contingencies |
|
|
|
|||||
|
|
|
|
|
|
|
|
||
|
Noncontrolling interests with redemption features |
|
|
|
|||||
|
|
|
|
|
|
|
|
||
|
Equity |
|
|
|
|||||
|
|
TDS shareholders’ equity |
|
|
|
||||
|
|
|
Series A Common and Common Shares |
|
|
|
|||
|
|
|
|
Authorized 290 shares (25 Series A Common and 265 Common Shares) |
|
|
|
||
|
|
|
|
Issued 133 shares (7 Series A Common and 126 Common Shares) |
|
|
|
||
|
|
|
|
Outstanding 109 shares (7 Series A Common and 102 Common Shares) |
|
|
|
||
|
|
|
|
Par Value ($.01 per share) |
|
|
|
||
|
|
|
Capital in excess of par value |
|
|
|
|||
|
|
|
|
Treasury shares, at cost, 24 Common Shares |
|
|
|
||
|
|
|
Accumulated other comprehensive income (loss) |
|
|
|
|||
|
|
|
Retained earnings |
|
|
|
|||
|
|
|
|
Total TDS shareholders' equity |
|
|
|
||
|
|
|
|
|
|
|
|
||
|
|
Preferred shares |
|
|
|
||||
|
|
Noncontrolling interests |
|
|
|
||||
|
|
|
|
|
|
|
|
||
|
|
|
Total equity |
|
|
|
|||
|
|
|
|
|
|
|
|
||
|
Total liabilities and equity 1 |
$ |
|
$ |
|||||
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements. |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
The consolidated total assets as of June 30, 2016 and December 31, 2015 include assets held by consolidated VIEs of $804 million and $658 million, respectively, which are not available to be used to settle the obligations of TDS. The consolidated total liabilities as of June 30, 2016 and December 31, 2015 include certain liabilities of consolidated VIEs of $16 million and $1 million, respectively, for which the creditors of th e VIEs have no recourse to the general credit of TDS. See Note 9 — Variable Interest Entities for additional information. |
|||||||
|
|
|
|||||||
|
|
|
|||||||
|
|
|
|||||||
Telephone and Data Systems, Inc.
Consolidated Statement of Changes in Equity
(Unaudited)
|
|
TDS Shareholders |
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
|
Series A Common and Common shares |
|
Capital in excess of par value |
|
Treasury shares |
|
Accumulated other comprehensive income (loss) |
|
Retained earnings |
|
Total TDS shareholders' equity |
|
Preferred shares |
|
Noncontrolling interests |
|
Total equity |
||||||||||
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015 |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
|
Net income attributable to TDS shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Net income attributable to noncontrolling interests classified as equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
TDS Common and Series A Common share dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Repurchase of Common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Dividend reinvestment plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Incentive and compensation plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Stock-based compensation awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Distributions to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
June 30, 2016 |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements. |
|||||||||||||||||||||||||||
Telephone an d Data Systems, Inc.
Consolidated Statement of Changes in Equity
(Unaudited)
|
|
TDS Shareholders |
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
|
Series A Common and Common shares |
|
Capital in excess of par value |
|
Treasury shares |
|
Accumulated other comprehensive income (loss) |
|
Retained earnings |
|
Total TDS shareholders' equity |
|
Preferred shares |
|
Noncontrolling interests |
|
Total equity |
||||||||||
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014 |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
|
Net income attributable to TDS shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Net income attributable to noncontrolling interests classified as equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
TDS Common and Series A Common share dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Dividend reinvestment plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Incentive and compensation plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Stock-based compensation awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
June 30, 2015 |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements. |
|||||||||||||||||||||||||||
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
The accounting policies of Telephone and Data Systems, Inc. (“TDS”) conform to accounting principles generally accepted in the United States of America (“GAAP”) as set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The consolidated financial statements include the accounts of TDS and subsidiaries in which it has a controlling financial interest, including TDS’ 83% -owned wireless telephone s ubsidiary, United States Cellular Corporation (“U.S. Cellular”) and TDS’ wholly-owned subsidiary, TDS Telecommunications Corporation (“TDS Telecom”). In addition, the consolidated financial statements include certain entities in which TDS has a variable i nterest that require consolidation under GAAP. All material intercompany accounts and transactions have been eliminated.
The unaudited consolidated financial statements included herein have been prepared by TDS pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, TDS believes that the disclosures included herein are adequate to make the information presented not misleading. Calculated amounts and percentages are based on the underlying actual numbers rather than the numbers rounded to millions as presented. These unaudited consoli dated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in TDS’ Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2015 .
TDS’ business segments reflected in this Quarterly Report on Form 10-Q for the period ended June 30, 2016 are U.S. Cellular, Wireline, Cable, and Hosted and Managed Services (“HMS”) operations. TDS’ non-reportable other business activities are presented as “Corporate, Eliminations and Other”, which includes the operations of TDS’ wholly-owned subsidiary Suttle-Straus, Inc. (“Suttle-Straus”). Suttle-Straus’ financial results were not significant to TDS’ operations. All of TDS’ segments operate only in the United States, except for HMS, which includes an insignificant foreign operation. See Note 11 — Business Segment Information for summary financial information on each business segment.
The accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring items, unless otherwise disclosed) necessa ry for the fair statement of TDS’ financial position as of June 30, 2016 and December 31, 2015 , its results of operations and comprehensive income fo r the three and six months ended June 30, 2016 and 2015 , and its cash flows and changes in equity for the six months ended June 30, 2016 and 2015 . These results are not necessarily indicative of the results to be expected for the full year.
Re cently Issued Accounting Pronouncements
In August 2014, the FASB issued Accounting Standards Update 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 requires TDS to assess its ability to continue as a going concern each i nterim and annual reporting period and provide certain disclosures if there is substantial doubt about the entity’s ability to continue as a going concern, including management’s plan to alleviate the substantial doubt. TDS is required to adopt the provis ions of ASU 2014-15 for the annual period ending December 31, 2016, but early adoption is permitted. The adoption of ASU 2014-15 will not impact TDS’ financial position or results of operations but may impact future disclosures.
In July 2015, the FASB iss ued Accounting Standards Update 2015-11, Inventory: Simplifying the Measurement of Inventory (“ASU 2015-11”), which requires inventory to be measured at the lower of cost or net realizable value. TDS is required to adopt ASU 2015-11 on January 1, 2017. E arly adoption is permitted. The adoption of ASU 2015-11 is not expected to have a significant impact on TDS’ financial position or results of operations.
In January 2016, the FASB issued Accounting Standards Update 2016-01, Financial Instruments – Overall : Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). This ASU introduces changes to current accounting for equity investments and financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. TDS is required to adopt ASU 2016-01 on January 1, 2018. Certain provisions are eligible for early adoption. TDS is evaluating the effects that adoption of ASU 2016-01 will have on its financial position and resu lts of operations.
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 requires lessees to record a right-of-use asset and lease liability for almost all leases. This ASU does not substantially impac t lessor accounting. TDS is required to adopt ASU 2016-02 on January 1, 2019. Early adoption is permitted. Upon adoption of ASU 2016-02, TDS expects a substantial increase to assets and liabilities on its balance sheet. TDS is still evaluating the full effects that adoption of ASU 2016-02 will have on its financial position and results of operations.
In March 2016, the FASB issued Accounting Standards Update 2016-04, Liabilities – Extinguishments of Liabilities: Recognition of Breakage from Certain Prep aid Stored-Value Products (“ASU 2016-04”). ASU 2016-04 requires companies that sell prepaid stored-value products redeemable for goods, services or cash at third-party merchants to recognize breakage (i.e., the value that is ultimately not redeemed by the consumer) in a way that is consistent with how it will be recognized under the new revenue recognition standard. TDS is required to adopt ASU 2016-04 on January 1, 2018. Early adoption is permitted. The adoption of ASU 2016-04 is not expected to have a significant impact on TDS’ financial position or results of operations.
In March 2016, the FASB issued Accounting Standards Update 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 20 16-09 intends to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. TDS is required to adopt ASU 2016-09 on January 1, 2017. Early adoption is permitted. TDS is evaluating the effects that adoption of ASU 2016-09 will have on its financial position, results of operations and cash flows.
In June 2016, the FASB issued Accounting Standards Update 2016 -13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires entities to use a new forward-looking, expected loss model to estimate credit losses. It also requires additional disc losure relating to the credit quality of trade and other receivables, including information relating to management’s estimate of credit allowances. TDS is required to adopt ASU 2016-13 on January 1, 2020. Early adoption as of January 1, 2019 is permitted . TDS is evaluating the effects that adoption of ASU 2016-13 will have on its financial position, results of operations and disclosures.
Amounts Collected from Customers and Remitted to Governmental Authorities
TDS records amounts collected from customers and remitted to governmental authorities net within a tax liability account if the tax is assessed upon the customer and TDS merely acts as an agent in collecting the tax on behalf of the imposing governmental authority. If the tax is assessed upon TDS, then amounts collected from customers as recovery of the tax are recorded in Service revenues and amounts re mitted to governmental authorities are recorded in Selling, general and administrative expenses in the Consolidated Statement of Operations. The amounts recorded gross in revenues that are billed to customers and remitted to governmental authorities total ed $ 22 million and $ 45 million for the three and six months ended June 30, 2016 , respectively, and $ 25 million and $ 52 million for the three and six months ended June 30, 2015 , respectively.
Note 2 Fair Value Measurements
As of June 30, 2016 and December 31, 2015 , TDS did not have any financial or nonfinancial assets or liabilities t hat were required to be recorded at fair value in its Consolidated Balance Sheet in accordance with GAAP.
The provisions of GAAP establish a fair value hierarchy that contains three levels for inputs used in fair value measurements. Level 1 inputs include quoted market prices for identical assets or liabilities in active markets. Level 2 inputs include quoted market prices for similar assets and liabilities in active markets or quoted market prices for identical assets and liabilities in inactive markets. Level 3 inputs are unobservable. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. A financial instrument’s level within the fair value hierarchy is not representative of its expected performance or its overall risk profile and, therefore, Level 3 assets are not necessarily higher risk than Level 2 or Level 1 assets.
TDS has applied the provisions of fair value accounting for purposes of computing the fair value of financial instruments for disclosure purposes as displayed below.
|
|
|
Level within the Fair Value Hierarchy |
|
|
|
June 30, 2016 |
|
December 31, 2015 |
||||||||||
|
|
|
|
|
|
|
Book Value |
|
Fair Value |
|
Book Value |
|
Fair Value |
||||||
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
1 |
|
|
|
$ |
|
$ |
|
$ |
|
$ |
|||||
|
Long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
Retail |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
||||
|
|
Institutional |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
||||
|
|
Other |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
||||
The fair value of Cash and cash equivalents approximates the book value due to the short-term nature of these financial instruments. Long-term debt excludes capital lease obligations and the current portion of Long-term debt. The fair value of “Retail” Long-term debt was estimated using market prices for TDS’ 7.0% Senior Notes, 6.875% Senior Notes, 6.625% Senior Notes and 5.875% Senior Notes, and U.S. Cellular’s 6.95% Senior Notes, 7.25% Senior Notes due 2063 and 7.25% Senior Notes due 2064. TDS’ “Institutional” debt consists of U.S. Cellular’s 6.7% Senior Notes which are traded over the counter. TDS’ “Other” debt consis ts of a senior term loan credit facility and other borrowings with financial institutions. TDS estimated the fair value of its Institutional and Other debt through a discounted cash flow analysis using the interest rates or estimated yield to maturity for each borrowing, which ranged from 0.00% to 7.12% and 0.00% to 7.51% at June 30, 2016 and December 31, 2015 , respectively.
Note 3 Equipment Installment Plans
TDS offers customers, through its owned and agent distribution channels, the option to purchase certain devices under equipment installment contracts over a specified time period. For certain equipment installment plans (“EIP”), after a specified period of time or amount of payments, the customer may have the right to upgrade to a new devic e and have the remaining unpaid equipment installment contract balance waived, subject to certain conditions, including trading in the original device in good working condition and signing a new equipment installment contract. TDS values this trade-in rig ht as a guarantee liability. The guarantee liability is initially measured at fair value and is determined based on assumptions including the probability and timing of the customer upgrading to a new device and the fair value of the device being traded-in at the time of trade-in. As of June 30, 2016 and December 31, 2015 , the guarantee liability related to these plans was $ 66 million and $ 93 million, respectively, and is reflected in Customer deposits and deferred revenues in the Consolidated Balance Sheet.
TDS equipment installment plans do not provide for explicit interest charges. For equipment installment plans with a duration of greater than twelve months, TDS imputes interest. Equipment installment plan receivables had a weighted average effective imputed interest rate of 10.2% and 9.7% as of June 30, 2016 and December 31, 2015 , respectively.
|
June 30, 2016 |
|
December 31, 2015 |
||||
|
(Dollars in millions) |
|
|
|
|
|
|
|
Short-term portion of unbilled equipment installment plan receivables, gross |
$ |
$ |
||||
|
Short-term portion of unbilled deferred interest |
|
|
||||
|
Short-term portion of unbilled allowance for credit losses |
|
|||||
|
Short-term portion of unbilled equipment installment plan receivables, net |
$ |
$ |
||||
|
|
|
|
||||
|
Long-term portion of unbilled equipment installment plan receivables, gross |
$ |
$ |
||||
|
Long-term portion of unbilled deferred interest |
|
|||||
|
Long-term portion of unbilled allowance for credit losses |
|
|||||
|
Long-term portion of unbilled equipment installment plan receivables, net |
$ |
$ |
||||
TDS assesses the collectability of the equipment installment plan receivables based on historical payment experience, account aging and other qualitative factors and provides an allowance for estimated losses. The credit profiles of TDS customers on equip ment installment plans are similar to those of TDS customers with traditional subsidized plans. Customers with a higher risk credit profile are required to make a deposit for equipment purchased through an installment contract .
TDS recorded out-of-period adjustments during the six months ended June 30, 2015 due to errors related to equipment installment plan transactions that were attributable to 2014. TDS determined that these adjustments were not material to the quarterly periods or the annual results for 2015. These equipment installment plan adjustments had the impact of reducing Equipment and product sales revenues by $ 6 million for both the three and six months ended June 30, 2015, and Income before income taxes by $ 5 million and $ 6 million, for the three and six months ended June 30, 2015, respectively.
Basic earnings per share available to TDS common shareholders is computed by dividing Net income available to TDS common shareholders by the weighted average n umber of common shares outstanding during the period. Diluted earnings per share available to TDS common shareholders is computed by dividing Net income available to TDS common shareholders by the weighted average number of common shares outstanding durin g the period adjusted to include the effects of potentially dilutive securities. Potentially dilutive securities primarily include incremental shares issuable upon the exercise of outstanding stock options and the vesting of restricted stock units.
|
Three Months Ended |
|
Six Months Ended |
|||||||||||||
|
|
June 30, |
|
June 30, |
||||||||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
||||||||
|
(Dollars and shares in millions, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic earnings per share available to TDS common |
|
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|
|||||
|
|
|
shareholders: |
|
|
|
|
|
|
|
|
|
|
|||
|
|
Net income available to TDS common shareholders used in basic earnings per share |
$ |
|
$ |
|
$ |
|
$ |
|||||||
|
Adjustments to compute diluted earnings: |
|
|
|
|
|
|
|
||||||||
|
|
Noncontrolling interest adjustment |
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|
|||||||
|
|
Net income available to TDS common shareholders |
|
|
|
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|
|
|
|||||||
|
|
|
used in diluted earnings per share |
$ |
|
$ |
|
$ |
|
$ |
||||||
|
|
|
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||||
|
Weighted average number of shares used in basic |
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||||||||
|
|
earnings per share: |
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|||||||
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Common Shares |
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||||||
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|
Series A Common Shares |
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Total |
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|||||
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||||
|
Effects of dilutive securities |
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||||||||
|
Weighted average number of shares used in diluted |
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||||||||
|
|
earnings per share |
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|||||||
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|
||||
|
Basic earnings per share available to TDS common |
|
|
|
|
|
|
|
||||||||
|
|
shareholders |
$ |
|
$ |
|
$ |
|
$ |
|||||||
|
|
|
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|
||||
|
Diluted earnings per share available to TDS common |
|
|
|
|
|
|
|
||||||||
|
|
shareholders |
$ |
|
$ |
|
$ |
|
$ |
|||||||
Certain Common Shares issuable upon the exercise of stock options, vesting of restricted stock units or conversion of preferred shares were not included in average diluted shares outstanding for the calculation of Diluted earnings per share available to TD S common shareholders because their effects were antidilutive. The number of such Common Shares excluded was 4 million shares for both the three and six months ended June 30, 2016, and 5 million shares for both the three and six months ended June 30, 2015.
Note 5 Acquisitions, Divestitures and Exchanges
In February 2016, U.S. Cellular entered into an agreement with a third party to exc hange certain 700 MHz licenses for certain AWS and PCS licenses and $ 28 million of cash. This license exchange will be accomplished in two closings. The first closing occurred in June 2016 at which time U.S. Cellular received $ 13 million of cash and recorded a gain of $ 9 million. The second closing is expected to occur in the second half of 2016 and U.S. Cellular expects to recognize a gain at that time. As a result of this exchange, the remaining licenses with a carrying value of $ 8 million have been classified as “Assets held for sale” in the Consolidated Balance Sheet as of June 30, 2016 .
In 20 16, U.S. Cellular entered into additional agreements with third parties to transfer FCC licenses in non-operating markets and receive FCC licenses in operating markets. The agreements provide for the transfer of certain AWS and PCS spectrum licenses and a pproximately $ 1 million, net, in cash to U.S. Cellular, in exchange for U.S. Cellular transferring certain AWS, PCS and 700 MHz spectrum licenses to the third parties. These transactions are subject to regulatory approval and ot her customary closing conditions, and are expected to close in the second half of 2016. See Note 12 — Subsequent Events for additional information related to one of these exchange agreements. Upon closing of each transaction, U.S. Cellular expects to recognize a gain. As a result of these additional exchange agreements, lice nses with a carrying value of $ 15 million have been classified as “Assets held for sale” in the Consolidated Balance Sheet as of June 30, 2016 .
In 2015 and 2016, U.S. Cellular entered into multiple agreements to purchase spectrum licenses located in U.S. Cellular’s existing operating markets. The aggregate purchase price for these spectrum licenses is $ 56 million, of which $ 46 million closed in the three months ended June 30, 2016. The remaining agreements are expected to close in the second half of 2016.
In March 2016, the FCC released a list of applicants that successfully completed applications for the forward auction of 600 MHz spectrum licenses, referred to as Auction 1002, including U.S. Cellular. Forward auction bidding is scheduled to begin on August 16, 2016. In June 2016, U.S. Cellular made an upfront payment to the FCC of $ 143 million to establish its initial bidding eligibility.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions) |
|
|
||
|
Balance December 31, 2015¹ |
$ |
|||
|
|
Acquisitions |
|
||
|
|
Transferred to Assets held for sale |
|
||
|
|
Exchanges |
|
||
|
Balance June 30, 2016¹ |
$ |
|||
|
|
||||
|
1 |
Amounts include payments totaling $338 million made by Advantage Spectrum L.P. to the FCC for licenses in which it was the provisional winning bidder in Auction 97. These licenses were granted by the FCC in July 2016. See Note 9 — Variable Interest Entities for additional information. |
|||
Note 7 Investments in Unconsolidated Entities
Investments in unconsolidated entities consist of amounts invested in wireless and wireline entities in which TDS holds a noncontrolling inte rest. These investments are accounted for using either the equity or cost method.
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|||||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
||||
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
||||||||
|
Operating expenses |
|
|
|
|
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|
||||
|
Operating income |
|
|
|
|
|
|
|
||||
|
Other income (expense), net |
|
|
|
|
|
|
|
||||
|
Net income |
$ |
|
$ |
|
$ |
|
$ |
||||
Revolving Credit Fac ilities
TDS and U.S. Cellular have revolving credit facilities available for general corporate purposes. In June 2016, TDS entered into a new $400 million revolving credit agreement with certain lenders and other parties and U.S. Cellular entered into a new $300 million revolving credit agreement with certain lenders and other parties. As a result of the new agreements, TDS’ and U.S. Cellular’s revolving credit agreements due to expire in December 2017 were terminated. Amounts under both of the new revolving cre dit facilities may be borrowed, repaid and reborrowed from time-to-time until maturity in June 2021. As of June 30, 2016 , there were no outstanding borrowings under the revolving credit facilities, except for lett ers of credit. Interest expense primarily associated with the unused commitment fees on the revolving lines of credit were $ 1 million for each of the six months ended June 30, 2016 and 2015 .
The following table summarizes the terms of such revolving credit facilities as of June 30, 2016 :
|
TDS |
|
U.S. Cellular |
|
|||||
|
(Dollars in millions) |
|
|
|
|
|
|
||
|
Maximum borrowing capacity |
$ |
|
$ |
|
||||
|
Letters of credit outstanding |
$ |
|
$ |
|
||||
|
Amount borrowed |
$ |
|
$ |
|
||||
|
Amount available for use |
$ |
|
$ |
|
||||
|
Illustrative borrowing rate: One-month London Interbank Offered |
|
|
|
|
|
|
||
|
|
Rate ("LIBOR") plus contractual spread 1 |
|
2.18 |
% |
|
2.18 |
% |
|
|
|
Illustrative LIBOR Rate |
|
0.43 |
% |
|
0.43 |
% |
|
|
|
Contractual spread |
|
1.75 |
% |
|
1.75 |
% |
|
|
Commitment fees on amount available for use 2 |
|
0.30 |
% |
|
0.30 |
% |
||
|
|
|
|
|
|
|
|
|
|
|
Agreement date |
|
June 2016 |
|
|
June 2016 |
|
||
|
Maturity date |
|
June 2021 |
|
|
June 2021 |
|
||
|
|
|
|
|
|
|
|
|
|
|
1 |
Borrowings under the revolving credit facility bear interest either at a LIBOR rate or at an alternative Base Rate as defined in the revolving credit agreement, plus an applicable margin, at TDS' or U.S. Cellular’s option. TDS and U.S. Cellular may select a borrowin g period of either one, two, three or six months (or other period of twelve months or less if requested by TDS or U.S. Cellular and approved by the lenders). |
|||||||
|
|
|
|
|
|
|
|
|
|
|
2 |
The revolving credit facility has commitment fees based on the unsecured senior debt ratings assigned to TDS and U.S. Cellular by certain ratings agencies. |
|||||||
The new revolving credit agreements include the following financial covenants:
- Consolidated Interest Coverage Ratio may not be less than 3.00 to 1.00 as of the end of any fiscal quarter.
- Consolidated Leverage Ratio may not be greater than the ratios indicated as of the end of any fiscal quarter for each period specified below:
|
|
Period |
Ratios |
|
|
|
|
|
|
|
|
From the agreement date of June 15, 2016 through June 30, 2019 |
3.25 to 1.00 |
|
|
|
|
|
|
|
|
From July 1, 2019 and thereafter |
3.00 to 1.00 |
|
Certain TDS and U.S. Cellular wholly-owned subsidiaries have jointly and severally unconditionally guaranteed the payment and performance of the obligations of TDS and U.S. Cellular under the revolving cr edit agreements pursuant to a guaranty dated June 15, 2016. Other subsidiaries that meet certain criteria will be required to provide a similar guaranty in the future. TDS and U.S. Cellular believe that they were in compliance with all of the financial a nd other covenants and requirements set forth in their revolving credit facilities as of June 30, 2016.
At June 30, 2016 , TDS had recorded $ 6 million of unamortized debt issuance costs related to the revolving credit facilities which is included in Other assets and deferred charges in the Consolidated Balance Sheet. Included in that amount was $ 4 million related to the new revolving credit facilities.
Term Loan
In June 2016, U.S. Cellular also amended and restated its senior term loan credit facility. Certain modifications were made to the financial covenants and subsidiary guarantees were added in order to align with the new revolving credit agreements. There were no significant changes to the maturity date or other key terms of the agreement.
Note 9 Variable Interest Entities
In February 2015, the FASB issued Accounting Standards Update 2015-02, Consolidation: Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 changes consolidation accounting including revising certain criter ia for identifying variable interest entities. TDS adopted the provisions of this standard as of January 1, 2016. As a result, certain consolidated subsidiaries and unconsolidated entities that were not defined as variable interest entities under previou s accounting guidance are defined as variable interest entities under the provisions of ASU 2015-02. TDS’ modified retrospective adoption of ASU 2015-02 did not change the group of entities which TDS is required to consolidate in its financial statements. Accordingly, the adoption of ASU 2015-02 did not impact its financial position or results of operations.
Consolidated VIEs
The following VIEs were formed to participate in FCC auctions of wireless spectrum and to fund, establish, and provide wireless service with respect to any FCC licenses won in the auctions:
- Advantage Spectrum L.P. (“Advantage Spectrum”) and Frequency Advantage L.P., the general partner of Advantage Spectrum;
- Aquinas Wireless L.P. (“Aquinas Wireless”); and
- King Street Wireless L.P. (“King Street Wireless”) and King Street Wireless, Inc., the general partner of King Street Wireless.
These particular VIEs are collectively referred to as designated entities. Historically and as of June 30, 2016 , TDS consolidated these VIEs.
The power to direct the activities that most significantly impact the economic performance of these VIEs is shared. Specifically, the general partner of these VIEs has the exclusive right to manage, operate and control th e limited partnerships and make all decisions to carry on the business of the partnerships. The general partner of each partnership needs the consent of the limited partner, an indirect TDS subsidiary, to sell or lease certain licenses, to make certain la rge expenditures, admit other partners or liquidate the limited partnerships. Although the power to direct the activities of these VIEs is shared, TDS has the most significant level of exposure to the variability associated with the economic performance o f the VIEs, indicating that TDS is the primary beneficiary of the VIEs. Therefore, in accordance with GAAP, these VIEs are consolidated.
In March 2015, King Street Wireless made a $ 60 million distribution to its owners. Of this distribution, $ 6 million was provided to King Street Wireless, Inc. and $ 54 million was provided to U.S. Cellular.
FCC Auction 97 ended in January 2015. TDS participated in Auction 97 indirectly thr ough its interest in Advantage Spectrum. An indirect subsidiary of TDS is a limited partner in Advantage Spectrum. Advantage Spectrum applied as a designated entity, and received bid credits with respect to spectrum purchased in Auction 97. Advantage Sp ectrum was the winning bidder for 124 licenses for an aggregate bid of $ 338 million, after its designated entity discount of 25 %. This amount is classified as Licenses in TDS ’ Consolidated Balance Sheet. Advantage Spectrum’s bid amount, less the initial deposit of $ 60 million paid in 2014, plus certain other charges totaling $ 2 million, was paid to the FCC in March 2015. These licenses were granted by the FCC in July 2016.
TDS also consolidates other VIEs that are limited partnerships that provide wireless service. ASU 2015-02 modified the manner in which limited partnerships and similar legal entities are evaluated unde r the variable interest model. A limited partnership is a variable interest entity unless the limited partners hold substantive participating rights or kick-out rights over the general partners. For certain limited partnerships, U.S. Cellular is the gene ral partner and manages the operations. In these partnerships, the limited partners do not have substantive kick-out or participating rights and, further, such limited partners do not have the authority to remove the general partner. Therefore, beginning January 1, 2016, these limited partnerships are also recognized as VIEs and are consolidated under the variable interest model. Prior to the adoption of ASU 2015-02, these limited partnerships were consolidated under the voting interest model.
The foll owing table presents the classification and balances of the consolidated VIEs’ assets and liabilities in TDS’ Consolidated Balance Sheet.
|
|
|
June 30, |
|
December 31, |
|||
|
|
|
|
2016¹ |
|
2015¹ |
||
|
(Dollars in millions) |
|
|
|
|
|
||
|
Assets |
|
|
|
|
|
||
|
|
Cash and cash equivalents |
$ |
|
$ |
|||
|
|
Accounts receivable |
|
|
|
|||
|
|
Other current assets |
|
|
|
|||
|
|
Licenses 2 |
|
|
|
|||
|
|
Property, plant and equipment, net |
|
|
|
|||
|
|
Other assets and deferred charges |
|
|
|
|||
|
|
|
Total assets |
$ |
|
$ |
||
|
|
|
|
|
|
|
||
|
Liabilities |
|
|
|
||||
|
|
Current liabilities |
$ |
|
$ |
|||
|
|
Deferred liabilities and credits |
|
|
|
|||
|
|
|
Total liabilities |
$ |
|
$ |
||
|
|
|
|
|
|
|
|
|
|
1 |
ASU 2015-02 was adopted on a modified retrospective basis and, accordingly, prior year amounts have not been revised to reflect the change in guidance. |
||||||
|
2 |
Includes payments totaling $338 million made by Advantage Spectrum to the FCC as described above. |
||||||
Unconsolidated VIEs
TDS manages the operations of and holds a variable interest in certain other limited partnerships, but is not the primary beneficiary of these entities and, therefore, does not consolidate them under the variable interest model outlined in ASU 2015-02.
TDS’ total investment in these unconsolidated entities was $ 6 million and $ 5 million at June 30, 2016 and December 31, 2015 , respectively, and is included in Investments in unconsolidated entities in TDS’ Consolidated Balance Sheet. The maximum exposure from unconsolidated VIE s is limited to the investment held by TDS in those entities.
Other Related Matters
TDS made contributions, loans and/or advances to its VIEs totaling $ 26 million and $ 281 million during the six months ended June 30, 2016 and June 30, 2015 , respectively. TDS may agree to make additional capital contributions and/or advances to these or other VIEs and/or to their general partners to provide additional funding for operations or the development of licenses grante d in various auctions. TDS may finance such amounts with a combination of cash on hand, borrowings under its revolving credit agreement and/or other long-term debt. There is no assurance that TDS will be able to obtain additional financing on commerciall y reasonable terms or at all to provide such financial support.
Note 10 Noncontrolling Interests
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
||||
|
Six Months Ended June 30, |
2016 |
|
2015 |
||||||
|
(Dollars in millions) |
|
|
|
|
|
||||
|
Net income attributable to TDS shareholders |
$ |
|
$ |
||||||
|
|
Transfer (to) from the noncontrolling interests |
|
|
|
|||||
|
|
|
Change in TDS' Capital in excess of par value from U.S. Cellular's issuance of U.S. Cellular shares |
|
|
|
||||
|
|
|
Change in TDS' Capital in excess of par value from U.S. Cellular's repurchases of U.S. Cellular shares |
|
|
|
||||
|
|
|
Purchase of ownership in subsidiaries from noncontrolling interests |
|
|
|
||||
|
|
|
Net transfers (to) from noncontrolling interests |
|
|
|
||||
|
|
Change from net income attributable to TDS and transfers (to) from noncontrolling interests |
$ |
|
$ |
|||||
Note 11 Business Segment Information
U.S. Cellular and TDS Telecom are billed for all services they receive from TDS, consisting primarily of information processing, accounting and finance, and general management services. Such billings are based on expenses specifically ident ified to U.S. Cellular and TDS Telecom and on allocations of common expenses. Management believes the method used to allocate common expenses is reasonable and that all expenses and costs applicable to U.S. Cellular and TDS Telecom are reflected in the ac companying business segment information on a basis that is representative of what they would have been if U.S. Cellular and TDS Telecom operated on a stand-alone basis.
|
|
|
|
|
|
|
TDS Telecom |
|
|
|
|
|
|
||||||||||||||
|
Three Months Ended or as of June 30, 2016 |
|
U.S. Cellular |
|
Wireline |
|
Cable |
|
HMS |
|
TDS Telecom Eliminations |
|
TDS Telecom Total |
|
Corporate, Eliminations and Other |
|
Total |
||||||||||
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
Service |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|||||||||
|
|
Equipment and product sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
|
Total operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Cost of services (excludin g Depreciation, amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
and accretion reported below) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Cost of equipment and products |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Depreciation, amortization and accretion 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
(Gain) loss on asset disposals, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
(Gain) loss on license sales and exchanges, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
E quity in earnings of unconsolidated entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Interest and dividend income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Other, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Income (loss) before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Income tax expense (benefit) 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Add back: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Depreciation, amortization and accretion 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
(Gain) loss on asset disposals, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
(Gain) loss on license sales and exchanges, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Income tax expense (benefit) 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Adjusted EBITDA 2 |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Investments in unconsolidated entities |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
|
Total assets |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
|
Capital expenditures |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numbers may not foot due to rounding. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
TDS Telecom |
|
|
|
|
|
|
|||||||||||||||
|
Three Months Ended or as of June 30, 2015 |
|
U.S. Cellular |
|
Wireline |
|
Cable |
|
HMS |
|
TDS Telecom Eliminations |
|
TDS Telecom Total |
|
Corporate, Eliminations and Other |
|
Total |
||||||||||
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
Service |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|||||||||
|
|
Equipment and product sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
|
Total operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Cost of services (excluding Depreciation, amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
and accretion reported below) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Cost of equipment and products |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Depreciation, amortization and accretion 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
(Gain) loss on asset disposals, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
(Gain) loss on sale of business and other exit costs, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Equity in earnings of unconsolidated entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Interest and dividend income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Other, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Income (loss) before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Income tax expense (benefit) 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Add back: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Depreciation, amortization and accretion 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
(Gain) loss on asset disposals, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
(Gain) loss on sale of business and other exit costs, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Income tax expense (benefit) 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Adjusted EBITDA 2 |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Investments in unconsolidated entities |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
|
Total assets |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
|
Capital expenditures |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Numbers may not foot due to rounding. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
TDS Telecom |
|
|
|
|
|
|
||||||||||||||
|
Six Months Ended or as of June 30, 2016 |
|
U.S. Cellular |
|
Wireline |
|
Cable |
|
HMS |
|
TDS Telecom Eliminations |
|
TDS Telecom Total |
|
Corporate, Eliminations and Other |
|
Total |
||||||||||
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
Service |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|||||||||
|
|
Equipment and product sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
|
Total operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Cost of services (excluding Depreciation, amort ization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
and accretion reported below) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Cost of equipment and products |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Depreciation, amortization and accretion 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
(Gain) loss on asset disposals, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
(Gain) loss on license sales and exchanges, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Equity in earnings of unconsolidated entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Interest and dividend income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Income (loss) before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Income tax expense (benefit) 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Add back: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Depreciation, amortization and accretion 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
(Gain) loss on asset disposals, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
(Gain) loss on license sales and exchanges, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Income tax expense (benefit) 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Adjusted EBITDA 2 |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Investments in unconsolidated entities |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
|
Total assets |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
|
Capital expenditures |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numbers may not foot due to rounding. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
TDS Telecom |
|
|
|
|
|
|
||||||||||||||
|
Six Months Ended or as of June 30, 2015 |
|
U.S. Cellular |
|
Wireline |
|
Cable |
|
HMS |
|
TDS Telecom Eliminations |
|
TDS Telecom Total |
|
Corporate, Eliminations and Other |
|
Total |
||||||||||
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
Service |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|||||||||
|
|
Equipment and product sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
|
Total operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Cost of services (excluding Depreciation, amort ization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
and accretion reported below) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Cost of equipment and products |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Depreciation, amortization and accretion 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
(Gain) loss on asset disposals, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
(Gain) loss on sale of business and other exit costs, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
(Gain) loss on license sales and exchanges, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Equity in earnings of unconsolidated entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Interest and dividend income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Income (loss) before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Income tax expense (benefit) 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Add back: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Depreciation, amortization and accretion 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
(Gain) loss on asset disposals, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(Gain) loss on sale of business and other exit costs, net |
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(Gain) loss on license sales and exchanges, net |
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Interest expense |
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Income tax expense (benefit) 1 |
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Adjusted EBITDA 2 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Investments in unconsolidated entities |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Total assets |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Capital expenditures |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Numbers may not foot due to rounding. |
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Income tax expense (benefit) is not provided at the individual segment level for Wireline, Cable and HMS. TDS calculates income tax expense for “TDS Telecom Total”. |
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2 |
Adjusted earnings before interest, taxes, depreciation, amortization and accretion (“Adjusted EBITDA”) is a segment measure re ported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing their performance. Adjusted EBITDA is defined as net income, adjusted for the items set forth in the reconciliation abov e. TDS believes Adjusted EBITDA is a useful measure of TDS’ operating results before significant recurring non-cash charges, gains and losses, and other items as presented above as they provide additional relevant and useful information to investors and o ther users of TDS' financial data in evaluating the effectiveness of its operations and underlying business trends in a manner that is consistent with management's evaluation of business performance. |
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3 |
During the three and six months ended June 30, 2016, TDS recorded an out-of-period adjustment attributable to the third quarte r of 2014 through the first quarter of 2016 related to the over-depreciation of certain assets in the Wireline segment. TDS has determined that this adjustment was not material to the prior quarterly or annual periods and also was not material to the curr ent period or anticipated full year 2016 results. As a result of this out-of-period adjustment, Depreciation, amortization and accretion expense decreased by $4 million for the three and six months ended June 30, 2016. |
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In February 2016, U.S. Cellular entered into an agreement with a third party that provided for the transfer of certain AWS spectrum licenses and $ 2 million in cash to U.S. Cellular, in exchange for U.S. Cellular transferring certain AWS, PCS and 700 MHz licenses with a carrying value of $ 7 million to the third party. This transaction closed on August 1, 2016. U.S. Cellula r expects to recognize a gain as a result of this exchange. See Note 5 — Acquisitions, Divestitures and Exchanges for additional information.
Telephone and Data Systems, Inc.
Additional Required Information
Evaluation of Disclosure Controls and Procedures
TDS maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchang e Act”)) that are designed to ensure that information required to be disclosed in its reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to TDS’ management, including its principal e xecutive o fficer and principal f inancial o fficer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the d isclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
As required by SEC Rule 13a-15(b), TDS carried out an evaluation, under the supervision and with the participation of management, including its principal e xecutive o fficer and principal f inancial o fficer, of the effectiveness of the design and operation of TDS’ disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on this evaluation, TDS’ principal e xecutive o fficer and principal f inancial o fficer concluded that TDS' disclosure controls and procedures were e ffective as of June 30, 2016 , at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal controls over financial reporting that have occurred during the quarter ended June 30, 2016 that have materially affected, or are reasonably likely to ma teriall y affect, TDS’ internal control over financial reporting.
Refer to the disclosure under Legal Proceedings in TDS’ Form 10-K for the year e nded December 31, 2015 . There have been no material changes to such information since December 31, 2015 .
Unregistered Sales of Equity Securities and Use of Proceeds
On August 2, 2013, the Board of Directors of TDS authorized , and TDS announced by Form 8-K, a $250 million stock repurchase program for TDS Common Shares. Depending on market conditions, such shares may be repurchased in compliance with Rule 10b- 18 of the Exchange Act, pursuant to Rule 10b5-1 under the Exchange Act, or pursuant to accelerated share repurchase arrangements, prepaid share repurchases, private transactions or as otherwise authorized. This authorization does not have an expiration da te. TDS did not determine to terminate the foregoing Common Share repurchase program, or cease making further purchases thereunder, during the second quarter of 2016 .
The following table provides certain information with respect to all purchases made by or on behalf of TDS, and any open market purchases made by any “affiliated purchaser” (as defined by the SEC) of TDS, of TDS Common Shares during the quarter covered by this Form 10-Q.
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Total Number of |
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Maximum Dollar |
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Average |
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Shares Purchased |
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Value of Shares that |
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Total Number |
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Price |
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as Part of Publicity |
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May Yet Be |
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of Shares |
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Paid per |
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Announced Plans or |
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Purchased Under the |
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Period |
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Purchased |
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Share |
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Programs |
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Plans or Programs |
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April 1 – 30, 2016 |
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$ |
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$ |
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May 1 – 31, 2016 |
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June 1 – 30, 2016 |
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Total for or as of the end of the |
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quarter ended June 30, 2016 |
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$ |
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$ |
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The following information is being provided to update prior disclosures made pursuant to the requirements of Form 8-K, Item 2.03 — Creation of a Direct Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement of a Registrant.
TDS entered into a new revolving credit agreement on June 15, 2016. A description of TDS’ revolving credit facility is included in TDS’ Curre nt Report on Form 8-K dated June 15, 2016 , and is incorporated by reference herein.
U.S. Cellular entered into a new revolving credit agreement on June 15, 2016. A description of U.S. Cellular’s revolving credit facility is included in U.S. Cellular’s Cu rrent Report on Form 8-K dated June 15, 2016 , and is incorporated by reference herein.
Neither TDS nor U.S. Cellular borrowed or repaid any cash amounts under their revolving credit facilities in the second quarter of 2016 or through the filing date of this Form 10-Q, and had no cash borrowings outstanding under their revolving credit facilities as of June 30, 2016 or as of the filing date of this Form 10-Q.
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Revolving Credit Agreement, among TDS, Wells Fargo National Ass ociation, as administrative agent, and the other lenders thereto, dated as of June 15, 2016, including Schedules and Exhibits, including the form of the subsidiary Guaranty, is hereby incorporated by reference to Exhibit 4.1 to TDS’ Current Report on Form 8-K dated June 15, 2016. |
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Exhibit 4.2 |
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Revolving Credit Agreement, among U.S. Cellular, Toronto Dominion (Texas) LLC, as administrative agent, and the other lenders thereto, dated as of June 15, 2016, including Schedules and Exhibits, including the form of the subsidiary Guaranty and Subordination Agreement, is hereby incorporated by reference to Exhibit 4.1 to U.S. Cellular's Form 8-K dated June 15, 2016. |
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Exhibit 4.3 |
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Amended and Restated Term Loan Credit Agreement, among U.S. Cellular and CoBank, ACB, as administrative agent, and the other lenders thereto, dated as of June 15, 2016, including Schedules and Exhibits, including the forms of the subsidiary Guaranty and Subordination Agreement, is hereby incorporated by reference to Exhibit 4.1 to U.S. Cellular's Form 8-K dated June 15, 2016. |
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Exhibit 10.1 |
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Form of U.S. Cellular 2013 Long-Term Incentive Plan Stock Option Award Agreement for the President and Chief Executive Officer of U.S. Cellular, is hereby incorporated by reference to Exhibit 10.3 to U.S. Cellular’s Current Report on Form 8-K dated March 14, 2016. |
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Exhibit 10.2 |
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Form of U.S. Cellular 2013 Long-Term Incentive Plan Restricted Stock Unit Award Agreement for the President and Chief Executive Officer of U.S. Cellular, is hereby incorporated by reference to Exhibit 10.4 to U.S. Cellular’s Current Report on Form 8-K dated March 14, 2016. |
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Exhibit 10.3 |
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Form of TDS Long-Term Incentive Plan Stock Option Award Agreement for Officers, is hereby incorporated by reference to Exhibit 10.3 to TDS' Quarterly Report on Form 10-Q for the quarter ended March 31, 2016. |
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Exhibit 10.4 |
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Form of TDS Performance Share Award Agreement, is hereby incorporated by reference to Exhibit 10.1 to TDS' Current Report on Form 8-K dated June 16, 2016. |
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Exhibit 10.5 |
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TDS 2016 Officer Bonus Program is hereby incorporated by reference to Exhibit 10.1 to TDS’ Current Report on Form 8-K dated June 21, 2015. |
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Exhibit 11 |
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Statement regarding computation of per share earnings is included herein as Note 4 — Earnings Per Share in the Notes to Consolidated Financial Statements. |
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Exhibit 12 |
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Statement regarding computation of ratio of earnings to fixed charges. |
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Exhibit 31.1 |
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Principal executive officer certification pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. |
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Exhibit 31.2 |
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Principal financial officer certification pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. |
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Exhibit 32.1 |
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Principal executive officer certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. |
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Exhibit 32.2 |
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Principal financial officer certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. |
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Exhibit 101.INS |
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XBRL Instance Document |
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Exhibit 101.SCH |
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XBRL Taxonomy Extension Schema Document |
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Exhibit 101.PRE |
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XBRL Taxonomy Presentation Linkbase Document |
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Exhibit 101.CAL |
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XBRL Taxonomy Calculation Linkbase Document |
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Exhibit 101.LAB |
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XBRL Taxonomy Label Linkbase Document |
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Exhibit 101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document |
The foregoing exhibits include only the exhibits that relate specifically to this Form 10-Q or that supplement the exhibits identified in TDS’ Form 10-K for the year ended December 31, 2015 . Reference is made to T DS’ Form 10-K for the year ended December 31, 2015 for a complete list of exhibits, which are incorporated herein except to the extent supplemented or superseded above.
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Form 10-Q Cross Reference Index
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Page No. |
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Part I. |
Financial Information |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Part II. |
Other Information |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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TELEPHONE AND DATA SYSTEMS, INC. |
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(Registrant) |
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Date: |
August 5, 2016 |
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/s/ LeRoy T. Carlson, Jr. |
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LeRoy T. Carlson, Jr., President and Chief Executive Officer (principal executive officer) |
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Date: |
August 5, 2016 |
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/s/ Douglas D. Shuma |
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Douglas D. Shuma, Senior Vice President - Finance and Chief Accounting Officer (principal financial officer and principal accounting officer) |
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Date: |
August 5, 2016 |
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/s/ Douglas W. Chambers |
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Douglas W. Chambers, Vice President and Controller |
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