TELEPHONE & DATA SYSTEMS INC /DE/
10-Qs and 10-Ks
PROXIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | ||
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the quarterly period ended September 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the transition period from to | ||
Commission file number 001-14157
(Exact name of Registrant as specified in its charter) | ||
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (312) 630-1900
Securities registered pursuant to Section 12(b) of the Act: | ||||||
Title of each class | Trading Symbol | Name of each exchange on which registered | ||||
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. | ☒ | No | ☐ | ||||
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). | ☒ | No | ☐ | ||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | |||||||
☒ | Accelerated filer | ☐ | |||||
Non-accelerated filer | ☐ | Smaller reporting company | |||||
Emerging growth company | |||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes | No | ☒ | ||||
The number of shares outstanding of each of the issuer's classes of common stock, as of September 30, 2019, is 107,475,700 Common Shares, $.01 par value, and 7,224,100 Series A Common Shares, $.01 par value.
Telephone and Data Systems, Inc.
Quarterly Report on Form 10-Q
For the Period Ended September 30, 2019
Index | Page No. |
| Telephone and Data Systems, Inc. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Executive Overview
The following discussion and analysis compares Telephone and Data Systems, Inc.’s (TDS) financial results for the three and nine months ended September 30, 2019, to the three and nine months ended September 30, 2018. It should be read in conjunction with TDS’ interim consolidated financial statements and notes included herein, and with the description of TDS’ business, its audited consolidated financial 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, 2018. Certain numbers included herein are rounded to millions for ease of presentation; however, certain calculated amounts and percentages are determined using the unrounded numbers.
This report contains statements that are not based on historical facts, including the words “believes,” “anticipates,” “estimates,” “expects,” “plans,” “intends,” “projects” and similar expressions. 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 factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward looking statements. See Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement for additional information.
TDS uses certain “non-GAAP financial measures” and each such measure is identified in 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 comparable measures determined in accordance with accounting principles generally accepted in the United States of America (GAAP) are included in the Supplemental Information Relating to Non-GAAP Financial Measures section within the MD&A of this Form 10-Q Report.
General
TDS is a diversified telecommunications company that provides high-quality communications services to approximately 6 million connections nationwide. TDS provides wireless services through its 82%-owned subsidiary, United States Cellular Corporation (U.S. Cellular). TDS also provides wireline and cable services through its wholly-owned subsidiary, TDS Telecommunications LLC (TDS Telecom). TDS' segments operate entirely in the United States. See Note 13 — Business Segment Information in the Notes to Consolidated Financial Statements for additional information about TDS' segments.
1
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 grow its businesses, create opportunities for its associates and employees, and 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 and financial performance, while also returning value to TDS shareholders primarily through the payment of a regular quarterly cash dividend.
In 2019, 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 continues to offer economical and competitively priced service plans and devices to its customers, and is focused on increasing revenues from sales of related products such as accessories and device protection plans and from new services such as fixed wireless broadband. In addition, U.S. Cellular is focused on expanding its solutions available to business and government customers, including a growing suite of connected machine-to-machine solutions and software applications across various categories. |
▪ | U.S. Cellular continues to devote efforts to enhance its network capabilities. VoLTE technology is now available to 67% of U.S Cellular's subscribers, and deployments in additional operating markets are expected in 2020 and 2021. VoLTE technology allows customers to utilize a 4G LTE network for both voice and data services, and offers enhanced services such as high definition voice and simultaneous voice and data sessions. |
▪ | U.S. Cellular also has begun to deploy 5G technology in its network and expects to launch commercial 5G services in selected markets in 2020. 5G technology is expected to help address customers' growing demand for data services as well as create opportunities for new services requiring high speed, reliability and low latency. U.S. Cellular is working with leading companies in the wireless infrastructure and handset ecosystem to provide rich 5G experiences for customers, initially focused on mobility services and using its low band spectrum. At the same time, as discussed below, U.S. Cellular has begun acquiring high band spectrum to enable the delivery of additional 5G services in the future. In the markets where U.S. Cellular commercially deploys 5G technology, customers using U.S. Cellular’s 4G LTE network will experience increased network speed due to U.S. Cellular's network modernization efforts. |
▪ | U.S. Cellular assesses its existing wireless 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, and to be able to expand its 5G service offerings, U.S. Cellular actively seeks attractive opportunities to acquire wireless spectrum licenses, including pursuant to FCC auctions. In June 2019, the FCC announced by way of public notice that U.S. Cellular was the provisional winning bidder for 408 wireless spectrum licenses in its 28 GHz auction (Auction 101) and 282 wireless spectrum licenses in its 24 GHz auction (Auction 102) for an aggregate purchase price of $256 million. The wireless spectrum licenses from Auction 101 were granted by the FCC on October 2, 2019, and the wireless spectrum licenses from Auction 102 are expected to be granted by the FCC during the fourth quarter of 2019. Additionally, in September 2019, U.S. Cellular filed an application to participate in Auction 103; bidding in that auction will commence on December 10, 2019. Auction 103 will offer 34 100 MHz blocks in the Upper 37 GHz, 39 GHz, and 47 GHz bands in all Partial Economic Areas. |
▪ | TDS Telecom’s Wireline business continues to focus on driving growth in its broadband and video services by investing in fiber deployment in new out-of-territory markets and inside existing markets. Construction has begun in two new out-of-territory clusters, mid-central Wisconsin and Idaho. With support from the FCC’s A-CAM program and state broadband grants, Wireline is also deploying higher speed broadband to more service addresses in rural areas. |
▪ | On August 13, 2019, TDS entered into an Asset Purchase Agreement to acquire substantially all of the assets of MI Connection Communications System, dba Continuum, for $80 million in cash, subject to working capital adjustments. The cable company passes approximately 36,500 households in North Carolina and offers broadband, video and voice services. The transaction is expected to close in the fourth quarter of 2019, subject to approvals and other closing conditions. |
▪ | TDS Telecom’s Cable business also continues to increase its broadband penetration by making network capacity investments and by offering more advanced services in its markets. |
▪ | TDS Telecom's Wireline and Cable businesses are investing in a next generation cloud-based video platform called TDS TV+ to enhance video services. |
2
Terms Used by TDS
The following is a list of definitions of certain industry terms that are used throughout this document:
▪ | 4G LTE – fourth generation Long-Term Evolution, which is a wireless technology that enables more network capacity for more data per user as well as faster access to data compared to third generation (3G) technology. |
▪ | 5G – fifth generation wireless technology that is expected to help address customers’ growing demand for data services as well as create opportunities for new services requiring high speed and reliability as well as low latency. |
▪ | Account – represents an individual or business financially responsible for one or multiple associated connections. An account may include a variety of types of connections such as handsets and connected devices. |
▪ | Alternative Connect America Cost Model (A-CAM) – a USF support mechanism for rate-of-return carriers, which provides revenue support through 2028. This support comes with an obligation to build defined broadband speeds to a certain number of locations. |
▪ | Broadband Connections – refers to the number of Wireline 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 percentage of the connections that disconnect service each month. These rates represent the average monthly churn rate for each respective period. |
▪ | Connected Devices – non-handset devices that connect directly to the U.S. Cellular network. Connected devices include products such as tablets, wearables, modems, and hotspots. |
▪ | DOCSIS – Data Over Cable Service Interface Specification is an international telecommunications standard that permits the addition of high-bandwidth data transfer to an existing cable TV (CATV) system. DOCSIS 3.1 is a system specification that increases data transmission rates. |
▪ | EBITDA – refers to earnings before interest, taxes, depreciation, amortization and accretion and is used in the non-GAAP metric Adjusted EBITDA throughout this document. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information. |
▪ | Free Cash Flow – non-GAAP metric defined as Cash flows from operating activities less Cash paid for additions to property, plant and equipment. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information. |
▪ | Gross Additions – represents the total number of new connections added during the period, without regard to connections that were terminated during that period. |
▪ | IPTV Connections – represents the number of Wireline customers provided video services using IP networking technology. |
▪ | Machine-to-Machine (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 agreements with device manufacturers and software developers which offer M2M solutions. |
▪ | ManagedIP Connections – refers to the number of telephone handsets, data lines and IP trunks providing communications using IP networking technology. |
▪ | Net Additions (Losses) – represents the total number of new connections added during the period, net of connections that were terminated during that period. |
▪ | OIBDA – refers to operating income before depreciation, amortization and accretion and is used in the non-GAAP metric Adjusted OIBDA throughout this document. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information. |
▪ | Partial Economic Areas – service areas of certain FCC licenses based on geography. |
▪ | Postpaid Average Revenue per Account (Postpaid ARPA) – metric which is calculated 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 which 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 U.S. Cellular postpaid connections and U.S. Cellular prepaid 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 Connections – individual lines of service associated with each device activated by a customer. Connections include all types of devices that connect directly to the U.S. Cellular network. |
▪ | 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 that provide voice services 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 standards 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 Wireline residential connections and by the number of months in the period. |
3
Results of Operations — TDS Consolidated
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||
2019 | 2018 | 2019 vs. 2018 | 2019 | 2018 | 2019 vs. 2018 | ||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||
Operating revenues | |||||||||||||||||||||
U.S. Cellular | $ | 1,031 | $ | 1,001 | 3 | % | $ | 2,970 | $ | 2,916 | 2 | % | |||||||||
TDS Telecom | 231 | 234 | (1 | )% | 695 | 695 | – | ||||||||||||||
All other1 | 59 | 62 | (4 | )% | 175 | 166 | 5 | % | |||||||||||||
Total operating revenues | 1,321 | 1,297 | 2 | % | 3,840 | 3,777 | 2 | % | |||||||||||||
Operating expenses | |||||||||||||||||||||
U.S. Cellular | 1,011 | 967 | 5 | % | 2,855 | 2,761 | 3 | % | |||||||||||||
TDS Telecom | 212 | 206 | 3 | % | 609 | 624 | (2 | )% | |||||||||||||
All other1 | 69 | 73 | (3 | )% | 205 | 200 | 2 | % | |||||||||||||
Total operating expenses | 1,292 | 1,246 | 4 | % | 3,669 | 3,585 | 2 | % | |||||||||||||
Operating income (loss) | |||||||||||||||||||||
U.S. Cellular | 20 | 34 | (40 | )% | 115 | 155 | (26 | )% | |||||||||||||
TDS Telecom | 20 | 28 | (29 | )% | 86 | 71 | 21 | % | |||||||||||||
All other1 | (11 | ) | (11 | ) | (5 | )% | (30 | ) | (34 | ) | 13 | % | |||||||||
Total operating income | 29 | 51 | (43 | )% | 171 | 192 | (11 | )% | |||||||||||||
Investment and other income (expense) | |||||||||||||||||||||
Equity in earnings of unconsolidated entities | 44 | 42 | 5 | % | 129 | 121 | 7 | % | |||||||||||||
Interest and dividend income | 7 | 6 | 15 | % | 24 | 18 | 39 | % | |||||||||||||
Interest expense | (42 | ) | (43 | ) | 1 | % | (128 | ) | (129 | ) | 1 | % | |||||||||
Other, net | — | 2 | N/M | — | 1 | N/M | |||||||||||||||
Total investment and other income | 9 | 7 | 34 | % | 25 | 11 | N/M | ||||||||||||||
Income before income taxes | 38 | 58 | (35 | )% | 196 | 203 | (3 | )% | |||||||||||||
Income tax expense | 15 | 5 | N/M | 64 | 48 | 32 | % | ||||||||||||||
Net income | 23 | 53 | (57 | )% | 132 | 155 | (15 | )% | |||||||||||||
Less: Net income attributable to noncontrolling interests, net of tax | 5 | 7 | (27 | )% | 22 | 36 | (39 | )% | |||||||||||||
Net income attributable to TDS shareholders | $ | 18 | $ | 46 | (62 | )% | $ | 110 | $ | 119 | (7 | )% | |||||||||
Adjusted OIBDA (Non-GAAP)2 | $ | 274 | $ | 271 | 1 | % | $ | 872 | $ | 839 | 4 | % | |||||||||
Adjusted EBITDA (Non-GAAP)2 | $ | 325 | $ | 321 | 1 | % | $ | 1,025 | $ | 979 | 5 | % | |||||||||
Capital expenditures3 | $ | 253 | $ | 177 | 43 | % | $ | 664 | $ | 430 | 54 | % | |||||||||
N/M - Percentage change not meaningful
1 | Consists of corporate and other operations and intercompany eliminations. |
2 | Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure. |
3 | Refer to Liquidity and Capital Resources within this MD&A for additional information on Capital expenditures. |
Refer to individual segment discussions in this MD&A for additional details on operating revenues and expenses at the segment level.
4
Equity in earnings of unconsolidated entities
Equity in earnings of unconsolidated entities represents TDS’ share of net income from entities 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 for both the three months ended September 30, 2019 and 2018, and $60 million and $58 million for the nine months ended September 30, 2019 and 2018, respectively. See Note 8 — Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.
Income tax expense
The effective tax rate on Income before income taxes for the three months ended September 30, 2019 and 2018, was 39.1% and 7.3%, respectively. The effective tax rate on Income before income taxes for the nine months ended September 30, 2019 and 2018, was 32.8% and 23.9%, respectively. The effective tax rate for the three and nine months ended September 30, 2019 was higher than in the corresponding 2018 periods due primarily to an income tax accounting method change that accelerated tax depreciation on certain assets for the 2017 tax year, resulting in a discrete tax benefit recorded in the third quarter of 2018, as well as an increase in projected unrecognized tax benefits for 2019 that had a disproportionate impact on the effective tax rate due to the relatively low pretax income in the 2019 quarter and year-to-date periods.
Net income attributable to noncontrolling interests, net of tax
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
(Dollars in millions) | |||||||||||||||
U.S. Cellular noncontrolling public shareholders’ | $ | 4 | $ | 6 | $ | 20 | $ | 22 | |||||||
Noncontrolling shareholders’ or partners’ | 1 | 1 | 2 | 14 | |||||||||||
Net income attributable to noncontrolling interests, net of tax | $ | 5 | $ | 7 | $ | 22 | $ | 36 | |||||||
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.
Net income attributable to noncontrolling interests, net of tax decreased during the nine months ended September 30, 2019, due primarily to an out-of-period adjustment recorded in the first quarter of 2018. TDS determined that this adjustment was not material to any of the periods impacted. See Note 11 — Variable Interest Entities in the Notes to Consolidated Financial Statements for additional information.
Earnings
(Dollars in millions)
Three Months Ended
Net income decreased due primarily to increased depreciation and other operating expenses, as well as higher income taxes, partially offset by higher revenues.
Nine Months Ended
Net income decreased due primarily to increased depreciation and other operating expenses, as well as higher income taxes in 2019 and gains on license exchanges recorded in 2018, partially offset by higher revenues. Adjusted EBITDA increased due primarily to higher revenues, partially offset by other operating expenses.
*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.
5
 | U.S. CELLULAR OPERATIONS |
Business Overview
U.S. Cellular owns, operates, and invests in wireless markets throughout the United States. U.S. Cellular is an 82%-owned subsidiary of TDS. U.S. Cellular’s strategy is to attract and retain wireless customers through a value proposition comprised of a high-quality network, outstanding customer service, and competitive devices, plans, and pricing, all provided with a local focus.
OPERATIONS
▪ | Serves customers with 5.0 million connections including 4.4 million postpaid, 0.5 million prepaid and 0.1 million reseller and other connections |
▪ | Operates in 21 states |
▪ | Employs approximately 5,500 associates |
▪ | 4,123 owned towers |
▪ | 6,554 cell sites in service |
6
Operational Overview
As of September 30, | 2019 | 2018 | ||||
Retail Connections – End of Period | ||||||
Postpaid | 4,395,000 | 4,466,000 | ||||
Prepaid | 510,000 | 528,000 | ||||
Total | 4,905,000 | 4,994,000 | ||||
Q3 2019 | Q3 2018 | Q3 2019 vs. Q3 2018 | YTD 2019 | YTD 2018 | YTD 2019 vs. YTD 2018 | |||||||||||
Postpaid Activity and Churn | ||||||||||||||||
Gross Additions | ||||||||||||||||
Handsets | 124,000 | 133,000 | (7 | )% | 328,000 | 340,000 | (4 | )% | ||||||||
Connected Devices | 39,000 | 39,000 | – | 108,000 | 107,000 | 1 | % | |||||||||
Total Gross Additions | 163,000 | 172,000 | (5 | )% | 436,000 | 447,000 | (2 | )% | ||||||||
Net Additions (Losses) | ||||||||||||||||
Handsets | (2,000 | ) | 15,000 | N/M | (26,000 | ) | 3,000 | N/M | ||||||||
Connected Devices | (17,000 | ) | (16,000 | ) | (6 | )% | (51,000 | ) | (55,000 | ) | 7 | % | ||||
Total Net (Losses) | (19,000 | ) | (1,000 | ) | N/M | (77,000 | ) | (52,000 | ) | (48 | )% | |||||
Churn | ||||||||||||||||
Handsets | 1.09 | % | 1.02 | % | 1.02 | % | 0.97 | % | ||||||||
Connected Devices | 3.44 | % | 3.04 | % | 3.17 | % | 2.89 | % | ||||||||
Total Churn | 1.38 | % | 1.29 | % | 1.29 | % | 1.24 | % | ||||||||
N/M - Percentage change not meaningful
Total postpaid gross additions decreased for the three and nine months ended September 30, 2019, when compared to the same period last year, due to aggressive industry-wide competition.
Total postpaid churn increased for the three and nine months ended September 30, 2019, due primarily to aggressive industry-wide competition and an increase in defections of connected wearables, which were launched late in the second quarter of 2018.
Postpaid Revenue
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||
2019 | 2018 | 2019 vs. 2018 | 2019 | 2018 | 2019 vs. 2018 | ||||||||||||||||
Average Revenue Per User (ARPU) | $ | 46.16 | $ | 45.31 | 2 | % | $ | 45.82 | $ | 44.79 | 2 | % | |||||||||
Average Revenue Per Account (ARPA) | $ | 119.87 | $ | 119.42 | — | % | $ | 119.39 | $ | 118.71 | 1 | % | |||||||||
Postpaid ARPU and Postpaid ARPA increased for the three and nine months ended September 30, 2019, when compared to the same period last year, due to several factors including: a shift in mix to higher-priced service plans; having proportionately more smartphone connections, which on a per-unit basis contribute more revenue than feature phones and connected devices; and an increase in device protection plan revenues.
7
Financial Overview - U.S. Cellular
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||
2019 | 2018 | 2019 vs. 2018 | 2019 | 2018 | 2019 vs. 2018 | ||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||
Retail service | $ | 663 | $ | 659 | 1 | % | $ | 1,984 | $ | 1,960 | 1 | % | |||||||||
Inbound roaming | 54 | 50 | 9 | % | 132 | 116 | 14 | % | |||||||||||||
Other | 57 | 50 | 13 | % | 156 | 148 | 5 | % | |||||||||||||
Service revenues | 774 | 759 | 2 | % | 2,272 | 2,224 | 2 | % | |||||||||||||
Equipment sales | 257 | 242 | 6 | % | 698 | 692 | 1 | % | |||||||||||||
Total operating revenues | 1,031 | 1,001 | 3 | % | 2,970 | 2,916 | 2 | % | |||||||||||||
System operations (excluding Depreciation, amortization and accretion reported below) | 199 | 200 | (1 | )% | 568 | 566 | – | ||||||||||||||
Cost of equipment sold | 266 | 258 | 3 | % | 724 | 716 | 1 | % | |||||||||||||
Selling, general and administrative | 358 | 346 | 3 | % | 1,027 | 1,014 | 1 | % | |||||||||||||
Depreciation, amortization and accretion | 181 | 160 | 13 | % | 524 | 478 | 10 | % | |||||||||||||
(Gain) loss on asset disposals, net | 5 | 3 | 66 | % | 13 | 5 | N/M | ||||||||||||||
(Gain) loss on sale of business and other exit costs, net | — | — | N/M | (1 | ) | — | N/M | ||||||||||||||
(Gain) loss on license sales and exchanges, net | 2 | — | N/M | — | (18 | ) | 98 | % | |||||||||||||
Total operating expenses | 1,011 | 967 | 5 | % | 2,855 | 2,761 | 3 | % | |||||||||||||
Operating income | $ | 20 | $ | 34 | (40 | )% | $ | 115 | $ | 155 | (26 | )% | |||||||||
Net income | $ | 24 | $ | 37 | (33 | )% | $ | 115 | $ | 143 | (20 | )% | |||||||||
Adjusted OIBDA (Non-GAAP)1 | $ | 208 | $ | 197 | 6 | % | $ | 651 | $ | 620 | 5 | % | |||||||||
Adjusted EBITDA (Non-GAAP)1 | $ | 256 | $ | 243 | 5 | % | $ | 793 | $ | 750 | 6 | % | |||||||||
Capital expenditures2 | $ | 170 | $ | 118 | 43 | % | $ | 467 | $ | 274 | 71 | % | |||||||||
N/M - Percentage change not meaningful
1 | Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure. |
2 | Refer to Liquidity and Capital Resources within this MD&A for additional information on Capital expenditures. |
8
Operating Revenues
Three Months Ended September 30, 2019 and 2018
(Dollars in millions)
Operating Revenues
Nine Months Ended September 30, 2019 and 2018
(Dollars in millions)
Service revenues consist of:
▪ | Retail Service - Charges for voice, data and value added services and recovery of regulatory costs |
▪ | Inbound Roaming - Charges to other wireless carriers whose customers use U.S. Cellular’s wireless systems when roaming |
▪ | Other Service - Amounts received from the Federal USF, tower rental revenues, and miscellaneous other service revenues |
Equipment revenues consist of:
▪ | Sales of wireless devices and related accessories to new and existing customers, agents, and third-party distributors |
Key components of changes in the statement of operations line items were as follows:
Total operating revenues
Retail service revenues increased for the three and nine months ended September 30, 2019, primarily as a result of the increase in Postpaid ARPU, which was previously discussed in the Operational Overview section.
Inbound roaming revenues increased for the three and nine months ended September 30, 2019, primarily driven by higher data usage, partially offset by lower rates.
Other service revenues increased for the three and nine months ended September 30, 2019, due primarily to an out-of-period adjustment to tower lease revenues recorded in the third quarter of 2019. See Note 9 — Leases in the Notes to Consolidated Financial Statements for additional information.
Equipment sales revenues increased for the three and nine months ended September 30, 2019, due to an increase in the average revenue per device sold and a shift in mix to smartphones, partially offset by a decrease in the number of devices sold.
Cost of equipment sold
Cost of equipment sold increased for the three and nine months ended September 30, 2019, due primarily to higher average cost per device sold and a shift in mix to smartphones, partially offset by a decrease in the number of devices sold.
9
Selling, general and administrative expenses
Selling, general and administrative expenses increased for the three and nine months ended September 30, 2019, due primarily to an increase in costs driven by information system initiatives, as well as an increase in bad debts expenses.
Depreciation, amortization and accretion
Depreciation, amortization, and accretion increased for the three and nine months ended September 30, 2019, due to (i) additional network assets being placed into service and (ii) accelerated depreciation of certain assets due to changes in network technology, which will continue throughout the remainder of 2019 and beyond.
10
 | TDS TELECOM OPERATIONS |
Business Overview
TDS Telecom operates in two segments: Wireline and Cable. TDS Telecom’s business objective is to provide a wide range of communications services to both residential and commercial customers.
OPERATIONS
▪ | Provides broadband, video and voice services to 1.2 million connections in 31 states. |
▪ | Employs approximately 2,800 employees. |
▪ | Wireline operates incumbent local exchange carriers (ILEC) and competitive local exchange carriers (CLEC) in 27 states. |
▪ | Cable operates primarily in Colorado, New Mexico, Texas, Utah, and Oregon. |
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Financial Overview — TDS Telecom
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||
2019 | 2018 | 2019 vs. 2018 | 2019 | 2018 | 2019 vs. 2018 | ||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||
Operating revenues | |||||||||||||||||||||
Wireline | $ | 169 | $ | 177 | (4 | )% | $ | 512 | $ | 526 | (3 | )% | |||||||||
Cable | 62 | 58 | 8 | % | 184 | 170 | 8 | % | |||||||||||||
TDS Telecom operating revenues1 | 231 | 234 | (1 | )% | 695 | 695 | – | ||||||||||||||
Operating expenses | |||||||||||||||||||||
Wireline | 153 | 149 | 3 | % | 435 | 451 | (4 | )% | |||||||||||||
Cable | 59 | 58 | 2 | % | 175 | 174 | 1 | % | |||||||||||||
TDS Telecom operating expenses1 | 212 | 206 | 3 | % | 609 | 624 | (2 | )% | |||||||||||||
TDS Telecom operating income | $ | 20 | $ | 28 | (29 | )% | $ | 86 | $ | 71 | 21 | % | |||||||||
Net income | $ | 18 | $ | 36 | (49 | )% | $ | 74 | $ | 73 | 2 | % | |||||||||
Adjusted OIBDA (Non-GAAP)2 | $ | 69 | $ | 77 | (10 | )% | $ | 228 | $ | 229 | – | ||||||||||
Adjusted EBITDA (Non-GAAP)2 | $ | 73 | $ | 80 | (9 | )% | $ | 238 | $ | 236 | 1 | % | |||||||||
Capital expenditures3 | $ | 81 | $ | 54 | 50 | % | $ | 193 | $ | 140 | 37 | % | |||||||||
Numbers may not foot due to rounding.
1 | Includes eliminations between the Wireline and Cable segments. |
2 | Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure. |
3 | Refer to Liquidity and Capital Resources within this MD&A for additional information on Capital expenditures. |
Operating Revenues
(Dollars in millions)
Total operating revenues
Operating revenues were relatively flat for the three and nine months ended September 30, 2019. While broadband and video connection growth increased residential revenues, commercial and wholesale revenues continued to decline.
Total operating expenses
Operating expenses increased for the three months ended September 30, 2019, due primarily to increased legal and consulting costs in 2019, and a gain on the sale of assets recorded during the third quarter of 2018. Operating expenses decreased for the nine months ended September 30, 2019, due primarily to decreased employee-related expenses and a gain on the sale of assets recorded in the first quarter of 2019.
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| WIRELINE OPERATIONS |
Business Overview
TDS Telecom’s Wireline 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 largest concentration of its customers in the Upper Midwest and the Southeast. TDS Telecom’s strategy is to offer its residential customers broadband, video, and voice services through value-added bundling. In its commercial business, TDS Telecom’s focus is on small- to medium-sized businesses and its sales efforts emphasize advanced IP-based services.
Operational Overview
ILEC Residential Broadband
Connections by Speeds
As of September 30,
Residential broadband customers are increasingly choosing higher speeds in ILEC markets with 66% choosing speeds of 10 Mbps or greater and 37% choosing speeds of 50 Mbps or greater.
Wireline Residential Revenue per
Connection
Increases in broadband connections and speeds, and video connection growth drove increases in average residential revenue per connection.
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Residential Connections
As of September 30,
Total residential connections were relatively flat as growth in broadband and video connections offset the decline in voice connections.
Commercial Connections
As of September 30,
Total commercial connections decreased by 9% due primarily to declines in connections in CLEC markets.
14
Financial Overview — Wireline
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||
2019 | 2018 | 2019 vs. 2018 | 2019 | 2018 | 2019 vs. 2018 | ||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||
Residential | $ | 83 | $ | 81 | 3 | % | $ | 245 | $ | 241 | 2 | % | |||||||||
Commercial | 41 | 46 | (9 | )% | 127 | 140 | (9 | )% | |||||||||||||
Wholesale | 45 | 50 | (11 | )% | 139 | 144 | (3 | )% | |||||||||||||
Service revenues | 169 | 176 | (4 | )% | 512 | 524 | (2 | )% | |||||||||||||
Equipment and product sales | — | — | (19 | )% | 1 | 1 | (25 | )% | |||||||||||||
Total operating revenues | 169 | 177 | (4 | )% | 512 | 526 | (3 | )% | |||||||||||||
Cost of services (excluding Depreciation, amortization and accretion reported below) | 68 | 68 | (1 | )% | 195 | 200 | (2 | )% | |||||||||||||
Cost of equipment and products | — | — | (7 | )% | 1 | 1 | (26 | )% | |||||||||||||
Selling, general and administrative | 52 | 49 | 7 | % | 148 | 146 | 2 | % | |||||||||||||
Depreciation, amortization and accretion | 33 | 35 | (8 | )% | 99 | 108 | (8 | )% | |||||||||||||
(Gain) loss on asset disposals, net | — | (4 | ) | N/M | (8 | ) | (3 | ) | N/M | ||||||||||||
Total operating expenses | 153 | 149 | 3 | % | 435 | 451 | (4 | )% | |||||||||||||
Operating income | $ | 16 | $ | 28 | (41 | )% | $ | 78 | $ | 75 | 4 | % | |||||||||
Income before income taxes | $ | 20 | $ | 31 | (36 | )% | $ | 88 | $ | 83 | 6 | % | |||||||||
Adjusted OIBDA (Non-GAAP)1 | $ | 49 | $ | 59 | (17 | )% | $ | 168 | $ | 179 | (6 | )% | |||||||||
Adjusted EBITDA (Non-GAAP)1 | $ | 52 | $ | 61 | (16 | )% | $ | 177 | $ | 186 | (5 | )% | |||||||||
Capital expenditures2 | $ | 61 | $ | 41 | 50 | % | $ | 145 | $ | 103 | 41 | % | |||||||||
Numbers may not foot due to rounding.
N/M - Percentage change not meaningful
1 | Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure. |
2 | Refer to Liquidity and Capital Resources within this MD&A for additional information on Capital expenditures. |
15
Operating Revenues
(Dollars in millions)
Residential revenues consist of:
▪ | Broadband services, including fiber- and copper-based high-speed internet, security and support services |
▪ | Video services, including IPTV and satellite offerings |
▪ | Voice services |
Commercial revenues consist of:
▪ | High-speed and dedicated business internet services |
▪ | Voice services |
Wholesale revenues consist of:
▪ | Network access services primarily to interexchange and wireless carriers for carrying data and voice traffic on TDS Telecom’s network |
▪ | Federal and state USF support, including A-CAM support |
Key components of changes in the statement of operations items were as follows:
Total operating revenues
Residential revenues increased for the three and nine months ended September 30, 2019, due primarily to growth in broadband and video connections and price increases, partially offset by declines in voice connections. Video connections grew 8% while voice connections declined 4%.
Commercial revenues decreased for the three and nine months ended September 30, 2019, due to declining connections mostly in CLEC markets.
Wholesale revenues decreased for the three and nine months ended September 30, 2019, due to $4 million of retroactive funding received from the A-CAM program in the third quarter of 2018.
Cost of services
Cost of services remained flat for the three months ended September 30, 2019, and decreased for the nine months ended September 30, 2019, due to lower employee-related expenses and decreases in the costs of provisioning legacy services, partially offset by increases in video programming charges.
Selling, general and administrative
Selling, general and administrative expenses increased for the three and nine months ended September 30, 2019, due primarily to increased legal and consulting costs.
Depreciation, amortization and accretion
Depreciation, amortization and accretion decreased as certain assets became fully depreciated.
(Gain) loss on asset disposals, net
(Gain) loss on asset disposals, net decreased for the three months ended September 30, 2019, due to the sale of certain tower assets in 2018. (Gain) loss on asset disposals, net increased for the nine months ended September 30, 2019, due to a gain related to the sale of fiber assets in certain CLEC markets during the first quarter of 2019.
16
 | CABLE OPERATIONS |
Business Overview
TDS Telecom’s Cable strategy is to expand its broadband services and leverage that growth by bundling with video and voice services. TDS Telecom seeks to be the leading provider of broadband services in its targeted markets by leveraging its core competencies in network management and customer focus.
Operational Overview
Cable Connections
As of September 30,
Cable connections grew 2% due primarily to a 7% increase in broadband connections.
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Financial Overview — Cable
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||
2019 | 2018 | 2019 vs. 2018 | 2019 | 2018 | 2019 vs. 2018 | ||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||
Residential | $ | 52 | $ | 47 | 9 | % | $ | 152 | $ | 140 | 9 | % | |||||||||
Commercial | 10 | 10 | 1 | % | 32 | 30 | 6 | % | |||||||||||||
Total operating revenues | 62 | 58 | 8 | % | 184 | 170 | 8 | % | |||||||||||||
Cost of services (excluding Depreciation, amortization and accretion reported below) | 27 | 26 | 4 | % | 79 | 78 | 1 | % | |||||||||||||
Selling, general and administrative | 15 | 14 | 6 | % | 44 | 42 | 6 | % | |||||||||||||
Depreciation, amortization and accretion | 17 | 17 | (2 | )% | 51 | 52 | (3 | )% | |||||||||||||
(Gain) loss on asset disposals, net | — | 1 | (86 | )% | 1 | 1 | (49 | )% | |||||||||||||
Total operating expenses | 59 | 58 | 2 | % | 175 | 174 | 1 | % | |||||||||||||
Operating income (loss) | $ | 3 | $ | — | N/M | $ | 8 | $ | (4 | ) | N/M | ||||||||||
Income (loss) before income taxes | $ | 4 | $ | — | N/M | $ | 9 | $ | (3 | ) | N/M | ||||||||||
Adjusted OIBDA (Non-GAAP)1 | $ | 20 | $ | 18 | 14 | % | $ | 60 | $ | 50 | 20 | % | |||||||||
Adjusted EBITDA (Non-GAAP)1 | $ | 21 | $ | 18 | 14 | % | $ | 61 | $ | 50 | 21 | % | |||||||||
Capital expenditures2 | $ | 20 | $ | 13 | 49 | % | $ | 48 | $ | 37 | 27 | % | |||||||||
Numbers may not foot due to rounding.
N/M - Percentage change not meaningful
1 | Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure. |
2 | Refer to Liquidity and Capital Resources within this MD&A for additional information on Capital expenditures. |
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Operating Revenues
(Dollars in millions)
Residential and Commercial revenues consist of:
▪ | Broadband services, including high-speed internet, security and support services |
▪ | Video services, including premium programming in HD, multi-room and TV Everywhere offerings |
▪ | Voice services |
Key components of changes in the statement of operations items were as follows:
Total operating revenues
Residential and commercial revenues increased for the three and nine months ended September 30, 2019, due to growth in connections and price increases.
Cost of services
Cost of services increased for the three and nine months ended September 30, 2019, due primarily to increases in maintenance and video programming charges.
Selling, general and administrative
Selling, general and administrative expenses increased for the three and nine months ended September 30, 2019, due primarily to increased employee-related expenses.
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Liquidity and Capital Resources
Sources of Liquidity
TDS and its subsidiaries operate capital-intensive businesses. Historically, 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 and receivables securitization agreements, funds from other financing sources, including a term loan and other long-term debt, and cash flows from operating and certain 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. See Market Risk for additional information regarding maturities of long-term debt.
Although TDS currently has a significant cash balance, TDS has incurred negative free cash flow at times in the past and this could occur in the future. However, TDS believes that existing cash and investment balances, funds available under its revolving credit and receivables securitization agreements, and expected cash flows from operating and investing activities will provide sufficient liquidity for TDS to meet its normal day-to-day operating needs and debt service requirements for the coming year.
TDS may require substantial additional capital for, among other uses, funding day-to-day operating needs including working capital, acquisitions of providers of cable, wireless or wireline telecommunications services, IT services or other businesses, wireless spectrum license or system acquisitions, capital expenditures, debt service requirements, the repurchase of shares, the payment of dividends, or making additional investments, including new technologies and out of territory builds. It may be necessary from time to time to increase the size of the existing revolving credit agreements, to put in place new credit agreements, or to obtain other forms of financing in order to fund potential expenditures. TDS, through U.S. Cellular, made payments related to wireless spectrum license auctions (see Regulatory Matters - Millimeter Wave Spectrum Auctions) and debt repayments during 2019, and TDS expects capital expenditures in 2019 to be higher than in 2018, due primarily to investments at U.S. Cellular to enhance network speed and capacity and to deploy 5G technology on its network, and at TDS Telecom to increase levels of fiber investment. TDS’ liquidity would be adversely affected if, among other things, TDS is unable to obtain financing on acceptable terms, TDS makes significant wireless spectrum license purchases, TDS makes significant business acquisitions, the LA Partnership discontinues or significantly reduces distributions compared to historical levels, or Federal USF and/or other regulatory support payments decline.
TDS’ credit rating currently is sub-investment grade. There can be no assurance that sufficient funds will continue to be available to TDS or its subsidiaries on terms or at prices acceptable to TDS. Insufficient cash flows from operating activities, changes in TDS' credit ratings, defaults of the terms of debt or credit agreements, uncertainty of access to capital, deterioration in the capital markets, 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 acceptable to TDS, which could require TDS to reduce its acquisition, capital expenditure and business development programs, reduce the acquisition of wireless spectrum licenses, and/or reduce or cease share repurchases and/or the payment of dividends. Any of the foregoing developments would have an adverse impact on TDS' businesses, financial condition or results of operations. TDS cannot provide assurance that circumstances that could have a material adverse effect on its liquidity or capital resources will not occur.
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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 use in its operations and acquisition, 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.
Cash and Cash Equivalents
(Dollars in millions)
At September 30, 2019, TDS' consolidated Cash and cash equivalents totaled $853 million compared to $921 million at December 31, 2018.
The majority of TDS’ Cash and cash equivalents is held in bank deposit accounts and in money market funds that purchase only debt issued by the U.S. Treasury or U.S. government agencies across a range of eligible money market investments that may include, but are not limited to, government agency repurchase agreements, government agency debt, U.S. Treasury repurchase agreements, U.S. Treasury debt, and other securities collateralized by U.S. government obligations. TDS monitors the financial viability of the money market funds and the financial institutions with which TDS has deposits and believes that the credit risk associated with these funds and institutions is low.
Financing
TDS and U.S. Cellular have unsecured revolving credit agreements available for general corporate purposes including acquisitions, wireless spectrum license purchases and capital expenditures. These credit agreements mature in May 2023. As of September 30, 2019, there were no outstanding borrowings under the revolving credit agreements, except for letters of credit, and TDS’ and U.S. Cellular’s unused capacity under their revolving credit agreements was $400 million and $298 million, respectively.
In March 2019, U.S. Cellular amended its senior term loan credit agreement in order to reduce the interest rate. There were no changes to the maturity date and no significant changes to other key terms of the agreement. In October 2019, U.S. Cellular made a $100 million principal prepayment on its senior term loan.
TDS and U.S. Cellular believe they were in compliance with all of the financial covenants and requirements set forth in their revolving credit agreements and the senior term loan credit agreement as of September 30, 2019.
U.S. Cellular, through its subsidiaries, also has a receivables securitization agreement to permit securitized borrowings for general corporate purposes using its equipment installment plan receivables. The unused capacity under this agreement was $200 million as of September 30, 2019, subject to sufficient collateral to satisfy the asset borrowing base provisions of the agreement. In September 2019, U.S. Cellular amended this agreement extending the expiration date of the agreement to December 15, 2021. There were no significant changes to other key terms of the agreement. U.S. Cellular believes that it was in compliance with all of the financial covenants and requirements set forth in its receivables securitization agreement as of September 30, 2019.
TDS and U.S. Cellular have in place effective shelf registration statements on Form S-3 to issue senior or subordinated debt securities.
As of September 30, 2019, long-term debt payments due for the remainder of 2019 and the next four years are $195 million, which represent 8% of the total gross long-term debt obligation.
21
Capital Expenditures
Capital expenditures (i.e., additions to property, plant and equipment and system development expenditures), which include the effects of accruals and capitalized interest, for the nine months ended September 30, 2019 and 2018, were as follows:
Capital Expenditures
(Dollars in millions)
U.S. Cellular’s capital expenditures for the nine months ended September 30, 2019 and 2018, were $467 million and $274 million, respectively.
Capital expenditures for the full year 2019 are expected to be between $625 million and $725 million. These expenditures are expected to be used principally for the following purposes:
▪ | Enhance and maintain U.S. Cellular's network coverage, including continuing to deploy VoLTE technology in certain markets and providing additional speed and capacity to accommodate increased data usage by current customers; |
▪ | Begin deploying 5G technology on its network; and |
▪ | Invest in information technology to support existing and new services and products. |
TDS Telecom’s capital expenditures for the nine months ended September 30, 2019 and 2018, were $193 million and $140 million, respectively.
Capital expenditures for the full year 2019 are expected to be between $300 million and $350 million. These expenditures are expected to be used principally for the following purposes:
▪ | Expand fiber deployment inside and outside of current footprint; |
▪ | Maintain and enhance existing infrastructure including build-out requirements to meet state broadband and A-CAM programs; |
▪ | Upgrade broadband capacity and speeds; |
▪ | Support success-based spending for IPTV, broadband, and Cable growth; and |
▪ | Build TDS TV+, a cloud-based video platform. |
TDS intends to finance its capital expenditures for 2019 using primarily Cash flows from operating activities, existing cash balances and, if required, its receivables securitization and/or revolving credit agreements.
Acquisitions, Divestitures and Exchanges
TDS may be engaged from time to time in negotiations (subject to all applicable regulations) relating to the acquisition, divestiture or exchange of companies, properties, wireless spectrum licenses 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 its long-term return on capital. As part of this strategy, TDS reviews attractive opportunities to acquire additional wireless operating markets and wireless spectrum licenses, including pursuant to FCC auctions; and telecommunications, cable or other possible businesses. TDS also may seek to divest outright or include in exchanges for other interests those interests that are not strategic to its long-term success.
In June 2019, the FCC announced by way of public notice that U.S. Cellular was the provisional winning bidder for 408 wireless spectrum licenses in its 28 GHz auction (Auction 101) and 282 wireless spectrum licenses in its 24 GHz auction (Auction 102) for an aggregate purchase price of $256 million. U.S. Cellular paid substantially all of the $256 million in the first half of 2019. The wireless spectrum licenses from Auction 101 were granted by the FCC on October 2, 2019, and the wireless spectrum licenses from Auction 102 are expected to be granted by the FCC during the fourth quarter of 2019.
On August 13, 2019, TDS entered into an Asset Purchase Agreement to acquire substantially all of the assets of MI Connection Communications System, dba Continuum, for $80 million in cash, subject to working capital adjustments. The cable company passes approximately 36,500 households in North Carolina and offers broadband, video and voice services. The transaction is expected to close in the fourth quarter of 2019, subject to approvals and other closing conditions.
22
Variable Interest Entities
TDS consolidates certain “variable interest entities” as defined under GAAP. See Note 11 — Variable Interest Entities in the Notes to Consolidated Financial Statements for additional information related to these variable interest entities. TDS may elect to make additional capital contributions and/or advances to these variable interest entities in future periods in order to fund their operations.
Common Share Repurchase Programs
TDS and U.S. Cellular have repurchased their Common Shares and U.S. Cellular expects to continue to repurchase its Common Shares, subject to any available repurchase program.
As of September 30, 2019, the maximum dollar value of TDS Common Shares that may yet be purchased under TDS’ program was $199 million. For additional information related to the current TDS repurchase authorization, see Unregistered Sales of Equity Securities and Use of Proceeds.
U.S. Cellular also has a share repurchase authorization. During the three and nine months ended September 30, 2019, U.S. Cellular repurchased 590,300 Common Shares for $21 million at an average cost per share of $35.45. As of September 30, 2019, the total cumulative amount of U.S. Cellular Common Shares authorized to be purchased is 5,310,549.
Contractual and Other Obligations
There were no material changes outside the ordinary course of business between December 31, 2018 and September 30, 2019, to the Contractual and Other Obligations disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in TDS’ Form 10-K for the year ended December 31, 2018.
On September 27, 2019, U.S. Cellular executed a new Master Service Agreement, Master Statement of Work for Managed Services and certain other documents with Amdocs Tethys Limited, effective October 1, 2019, to continue using the Billing and Operational Support System (B/OSS) and certain support functions offered by Amdocs Tethys Limited. The committed, non-cancellable amount to be paid to Amdocs Tethys Limited with respect to the new agreements is $241 million over five years.
Off-Balance Sheet Arrangements
TDS had no transactions, agreements or other contractual arrangements with unconsolidated entities involving “off-balance sheet arrangements,” as defined by SEC rules, that had or are reasonably likely to have a material current or future effect on its financial condition, results of operations, liquidity, capital expenditures or capital resources.
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Consolidated Cash Flow Analysis
TDS operates a capital- and marketing-intensive business. TDS makes substantial investments to acquire wireless spectrum 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-saving upgrades to TDS’ networks. TDS utilizes cash on hand, cash from operating activities, cash proceeds from divestitures and dispositions of investments, and short-term and long-term debt financing to fund its acquisitions (including wireless spectrum licenses), construction costs, operating expenses and share repurchases. Cash flows may fluctuate from quarter to quarter and year to year due to seasonality, the timing of acquisitions and divestitures, capital expenditures and other factors. The following discussion summarizes TDS' cash flow activities for the nine months ended September 30, 2019 and 2018.
2019 Commentary
TDS’ Cash, cash equivalents and restricted cash decreased $66 million. Net cash provided by operating activities was $874 million due to net income of $132 million plus non-cash items of $726 million and distributions received from unconsolidated entities of $100 million, including $33 million in distributions from the LA Partnership. This was offset by changes in working capital items which decreased net cash by $84 million. The more significant working capital changes were increases in accounts receivables and equipment installment plan receivables, offset by an increase to accrued taxes.
Cash flows used for investing activities were $837 million. Cash paid for additions to property, plant and equipment totaled $631 million. Cash payments for wireless spectrum license acquisitions were $257 million. These were partially offset by Cash received from divestitures and exchanges of $32 million and cash received from the redemption of short-term Treasury bills of $29 million.
Cash flows used for financing activities were $103 million, reflecting the repurchase of $21 million of U.S. Cellular Common Shares and ordinary activity such as the payment of dividends and the scheduled repayments of debt.
2018 Commentary
TDS’ Cash, cash equivalents and restricted cash increased $445 million. Net cash provided by operating activities was $812 million due to net income of $155 million plus non-cash items of $668 million and distributions received from unconsolidated entities of $91 million, including $33 million in distributions from the LA Partnership. This was offset by changes in working capital items which decreased net cash by $102 million. The working capital changes were primarily influenced by an increase in equipment installment plan receivables.
Cash flows used for investing activities were $325 million. Cash paid for additions to property, plant and equipment totaled $447 million. Cash paid for acquisitions and licenses was $10 million. This was partially offset by cash received from the redemption of short-term Treasury bills of $100 million and Cash received from divestitures and exchanges of $28 million.
Cash flows used for financing activities were $42 million, reflecting ordinary activity such as the payment of dividends and the scheduled repayments of debt, partially offset by cash proceeds from reissuance of Common Shares pursuant to stock-based compensation plans.
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Consolidated Balance Sheet Analysis
The following discussion addresses certain captions in the consolidated balance sheet and changes therein. This discussion is intended to highlight the significant changes and is not intended to fully reconcile the changes. Changes in financial condition during 2019 were as follows:
Assets held for sale
Assets held for sale decreased $45 million. Certain sale and exchange agreements that U.S. Cellular entered into in 2018 closed in the first quarter of 2019. This was partially offset by certain sale agreements that U.S. Cellular entered into in the third quarter of 2019, which are expected to close in the fourth quarter of 2019.
Licenses
Licenses increased $275 million due primarily to wireless spectrum license rights acquired through FCC auctions. See Note 7 — Intangible Assets in the Notes to Consolidated Financial Statements for additional information.
Operating lease right-of-use assets
Operating lease right-of-use assets increased $970 million due to the adoption of Accounting Standards Codification (ASC) 842. See Note 9 — Leases in the Notes to Consolidated Financial Statements for additional information.
Short-term operating lease liabilities
Short-term operating lease liabilities increased $115 million due to the adoption of ASC 842. See Note 9 — Leases in the Notes to Consolidated Financial Statements for additional information.
Long-term operating lease liabilities
Long-term operating lease liabilities increased $931 million due to the adoption of ASC 842. See Note 9 — Leases in the Notes to Consolidated Financial Statements for additional information.
Other deferred liabilities and credits
Other deferred liabilities and credits decreased $66 million due primarily to the adoption of ASC 842. See Note 9 — Leases in the Notes to Consolidated Financial Statements for additional information.
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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 business. Specifically, TDS has referred to the following measures in this Form 10-Q Report:
▪ | EBITDA |
▪ | Adjusted EBITDA |
▪ | Adjusted OIBDA |
▪ | Free cash flow |
Certain of these measures are considered “non-GAAP financial measures” under U.S. Securities and Exchange Commission Rules. Following are explanations of each of these measures.
EBITDA, Adjusted EBITDA and Adjusted OIBDA
EBITDA, Adjusted EBITDA and Adjusted OIBDA are defined as net income adjusted for the items set forth in the reconciliation below. EBITDA, Adjusted EBITDA and Adjusted OIBDA are not measures of financial performance under GAAP and should not be considered as alternatives to Net income or Cash flows from operating activities, 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 13 — Business Segment Information in the Notes to Consolidated Financial Statements for additional information.
Management uses Adjusted EBITDA and Adjusted OIBDA as measurements of profitability and, therefore, reconciliations to applicable GAAP income measures are deemed appropriate. Management believes Adjusted EBITDA and Adjusted OIBDA 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, and gains and losses, while Adjusted OIBDA reduces this measure further to exclude Equity in earnings of unconsolidated entities and Interest and dividend income in order to more effectively show the performance of operating activities excluding investment activities. The following tables reconcile EBITDA, Adjusted EBITDA and Adjusted OIBDA to the corresponding GAAP measures, Net income or Income (loss) before income taxes and Operating income (loss). Income tax expense is not provided at the individual segment level for Wireline and Cable. TDS calculates income tax expense (benefit) for TDS Telecom in total.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
TDS - CONSOLIDATED | 2019 | 2018 | 2019 | 2018 | |||||||||||
(Dollars in millions) | |||||||||||||||
Net income (GAAP) | $ | 23 | $ | 53 | $ | 132 | $ | 155 | |||||||
Add back: | |||||||||||||||
Income tax expense | 15 | 5 | 64 | 48 | |||||||||||
Interest expense | 42 | 43 | 128 | 129 | |||||||||||
Depreciation, amortization and accretion | 237 | 220 | 697 | 662 | |||||||||||
EBITDA (Non-GAAP) | 317 | 321 | 1,021 | 994 | |||||||||||
Add back or deduct: | |||||||||||||||
(Gain) loss on asset disposals, net | 6 | — | 5 | 3 | |||||||||||
(Gain) loss on sale of business and other exit costs, net | — | — | (1 | ) | — | ||||||||||
(Gain) loss on license sales and exchanges, net | 2 | — | — | (18 | ) | ||||||||||
Adjusted EBITDA (Non-GAAP) | 325 | 321 | 1,025 | 979 | |||||||||||
Deduct: | |||||||||||||||
Equity in earnings of unconsolidated entities | 44 | 42 | 129 | 121 | |||||||||||
Interest and dividend income | 7 | 6 | 24 | 18 | |||||||||||
Other, net | — | 2 | — | 1 | |||||||||||
Adjusted OIBDA (Non-GAAP) | 274 | 271 | 872 | 839 | |||||||||||
Deduct: | |||||||||||||||
Depreciation, amortization and accretion | 237 | 220 | 697 | 662 | |||||||||||
(Gain) loss on asset disposals, net | 6 | — | 5 | 3 | |||||||||||
(Gain) loss on sale of business and other exit costs, net | — | — | (1 | ) | — | ||||||||||
(Gain) loss on license sales and exchanges, net | 2 | — | — | (18 | ) | ||||||||||
Operating income (GAAP) | $ | 29 | $ | 51 | $ | 171 | $ | 192 | |||||||
26
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
U.S. CELLULAR | 2019 | 2018 | 2019 | 2018 | |||||||||||
(Dollars in millions) | |||||||||||||||
Net income (GAAP) | $ | 24 | $ | 37 | $ | 115 | $ | 143 | |||||||
Add back: | |||||||||||||||
Income tax expense | 15 | 14 | 55 | 55 | |||||||||||
Interest expense | 29 | 29 | 87 | 87 | |||||||||||
Depreciation, amortization and accretion | 181 | 160 | 524 | 478 | |||||||||||
EBITDA (Non-GAAP) | 249 | 240 | 781 | 763 | |||||||||||
Add back or deduct: | |||||||||||||||
(Gain) loss on asset disposals, net | 5 | 3 | 13 | 5 | |||||||||||
(Gain) loss on sale of business and other exit costs, net | — | — | (1 | ) | — | ||||||||||
(Gain) loss on license sales and exchanges, net | 2 | — | — | (18 | ) | ||||||||||
Adjusted EBITDA (Non-GAAP) | 256 | 243 | 793 | 750 | |||||||||||
Deduct: | |||||||||||||||
Equity in earnings of unconsolidated entities | 44 | 42 | 128 | 120 | |||||||||||
Interest and dividend income | 4 | 4 | 14 | 10 | |||||||||||
Adjusted OIBDA (Non-GAAP) | 208 | 197 | 651 | 620 | |||||||||||
Deduct: | |||||||||||||||
Depreciation, amortization and accretion | 181 | 160 | 524 | 478 | |||||||||||
(Gain) loss on asset disposals, net | 5 | 3 | 13 | 5 | |||||||||||
(Gain) loss on sale of business and other exit costs, net | — | — | (1 | ) | — | ||||||||||
(Gain) loss on license sales and exchanges, net | 2 | — | — | (18 | ) | ||||||||||
Operating income (GAAP) | $ | 20 | $ | 34 | $ | 115 | $ | 155 | |||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
TDS TELECOM | 2019 | 2018 | 2019 | 2018 | |||||||||||
(Dollars in millions) | |||||||||||||||
Net income (GAAP) | $ | 18 | $ | 36 | $ | 74 | $ | 73 | |||||||
Add back: | |||||||||||||||
Income tax expense (benefit) | 5 | (5 | ) | 23 | 7 | ||||||||||
Interest expense | (1 | ) | (1 | ) | (2 | ) | (1 | ) | |||||||
Depreciation, amortization and accretion | 50 | 53 | 150 | 160 | |||||||||||
EBITDA (Non-GAAP) | 72 | 83 | 245 | 238 | |||||||||||
Add back or deduct: | |||||||||||||||
(Gain) loss on asset disposals, net | — | (3 | ) | (7 | ) | (2 | ) | ||||||||
Adjusted EBITDA (Non-GAAP) | 73 | 80 | 238 | 236 | |||||||||||
Deduct: | |||||||||||||||
Interest and dividend income | 3 | 2 | 9 | 5 | |||||||||||
Other, net | — | 1 | — | 2 | |||||||||||
Adjusted OIBDA (Non-GAAP) | 69 | 77 | 228 | 229 | |||||||||||
Deduct: | |||||||||||||||
Depreciation, amortization and accretion | 50 | 53 | 150 | 160 | |||||||||||
(Gain) loss on asset disposals, net | — | (3 | ) | (7 | ) | (2 | ) | ||||||||
Operating income (GAAP) | $ | 20 | $ | 28 | $ | 86 | $ | 71 | |||||||
Numbers may not foot due to rounding.
27
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
WIRELINE | 2019 | 2018 | 2019 | 2018 | |||||||||||
(Dollars in millions) | |||||||||||||||
Income before income taxes (GAAP) | $ | 20 | $ | 31 | $ | 88 | $ | 83 | |||||||
Add back: | |||||||||||||||
Interest expense | (1 | ) | (1 | ) | (2 | ) | (1 | ) | |||||||
Depreciation, amortization and accretion | 33 | 35 | 99 | 108 | |||||||||||
EBITDA (Non-GAAP) | 52 | 65 | 185 | 189 | |||||||||||
Add back or deduct: | |||||||||||||||
(Gain) loss on asset disposals, net | — | (4 | ) | (8 | ) | (3 | ) | ||||||||
Adjusted EBITDA (Non-GAAP) | 52 | 61 | 177 | 186 | |||||||||||
Deduct: | |||||||||||||||
Interest and dividend income | 3 | 2 | 8 | 5 | |||||||||||
Other, net | — | 1 | — | 2 | |||||||||||
Adjusted OIBDA (Non-GAAP) | 49 | 59 | 168 | 179 | |||||||||||
Deduct: | |||||||||||||||
Depreciation, amortization and accretion | 33 | 35 | 99 | 108 | |||||||||||
(Gain) loss on asset disposals, net | — | (4 | ) | (8 | ) | (3 | ) | ||||||||
Operating income (GAAP) | $ | 16 | $ | 28 | $ | 78 | $ | 75 | |||||||
Numbers may not foot due to rounding.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
CABLE | 2019 | 2018 | 2019 | 2018 | |||||||||||
(Dollars in millions) | |||||||||||||||
Income (loss) before income taxes (GAAP) | $ | 4 | $ | — | $ | 9 | $ | (3 | ) | ||||||
Add back: | |||||||||||||||
Depreciation, amortization and accretion | 17 | 17 | 51 | 52 | |||||||||||
EBITDA (Non-GAAP) | 21 | 18 | 61 | 49 | |||||||||||
Add back or deduct: | |||||||||||||||
(Gain) loss on asset disposals, net | — | 1 | 1 | 1 | |||||||||||
Adjusted EBITDA (Non-GAAP) | 21 | 18 | 61 | 50 | |||||||||||
Deduct: | |||||||||||||||
Interest and dividend income | — | — | 1 | 1 | |||||||||||
Adjusted OIBDA (Non-GAAP) | 20 | 18 | 60 | 50 | |||||||||||
Deduct: | |||||||||||||||
Depreciation, amortization and accretion | 17 | 17 | 51 | 52 | |||||||||||
(Gain) loss on asset disposals, net | — | 1 | 1 | 1 | |||||||||||
Operating income (loss) (GAAP) | $ | 3 | $ | — | $ | 8 | $ | (4 | ) | ||||||
Numbers may not foot due to rounding.
28
Free Cash Flow
The following table presents Free cash flow, which is defined as Cash flows from operating activities less Cash paid for additions to property, plant and equipment. Free cash flow is a non-GAAP financial measure which TDS believes may be useful to investors and other users of its financial information in evaluating liquidity, specifically, the amount of net cash generated by business operations after deducting Cash paid for additions to property, plant and equipment.
Nine Months Ended September 30, | |||||||
2019 | 2018 | ||||||
(Dollars in millions) | |||||||
Cash flows from operating activities (GAAP) | $ | 874 | $ | 812 | |||
Less: Cash paid for additions to property, plant and equipment | 631 | 447 | |||||
Free cash flow (Non-GAAP) | $ | 243 | $ | 365 | |||
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Application of Critical Accounting Policies and Estimates
TDS prepares its consolidated financial statements in accordance with GAAP. TDS’ significant accounting policies are discussed in detail in Note 1 — Summary of Significant Accounting Policies and Recent Accounting Pronouncements and Note 2 — Revenue Recognition in the Notes to Consolidated Financial Statements and TDS’ Application of Critical Accounting Policies and Estimates is discussed in detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are included in TDS’ Form 10-K for the year ended December 31, 2018.
Recent Accounting Pronouncements
See Note 1 — Basis of Presentation and Note 9 — Leases in the Notes to Consolidated Financial Statements for information on recent accounting pronouncements.
Regulatory Matters
USTelecom Forbearance Petition
In response to the USTelecom Forbearance Petition, the FCC took a series of actions to provide relief from rules adopted pursuant to the Telecommunications Act of 1996. On July 12, 2019, the FCC issued an Order granting partial forbearance relief from rules that require ILECs to provide dedicated transport facilities between wire centers to their competitors on an unbundled basis at regulated rates. On August 2, 2019, the FCC granted ILECs relief from adopted rules - (1) a requirement they offer competitors "analog voice-grade copper loops" on an unbundled basis at regulated rates and (2) a requirement they offer legacy services for resale at regulated rates. To enable CLECs and their customers to make alternative service arrangements following forbearance, the Order provides a three-year transition period during which time ILECs and CLECs may negotiate commercial agreements. As a result of these orders, CLECs could potentially see a change in prices for the use of facilities currently purchased from other ILECs. TDS Telecom is exploring the options available to it brought forward by these decisions.
FCC Connect America Fund
In December 2018, the FCC authorized additional funding for companies that elected Alternative Connect America Model (A–CAM) support. On February 25, 2019, as directed within the order, the Wireline Competition Bureau (the Bureau) released a public notice offering TDS Telecom an additional $198 million in funding along with additional buildout obligations and extended the term of the revised offer by two years until December 31, 2028, which TDS Telecom accepted. On April 29, 2019, the Bureau authorized and directed the Universal Service Administrative Company (USAC) to obligate and disburse this revised support to those carriers that accept this revised offer. The offer provides A-CAM support up to $200 per location which increases annual support under the program to $82 million excluding transitional amounts, retroactive to January 1, 2019, and extending through 2028.
Millimeter Wave Spectrum Auctions
During 2018, the FCC established procedures for two auctions of wireless spectrum licenses in the 28 GHz and 24 GHz bands. The 28 GHz auction (Auction 101) commenced on November 14, 2018 and closed on January 24, 2019. Auction 101 offered two 425 MHz licenses in the 28 GHz band over portions of the United States that do not have incumbent licensees. The 24 GHz auction (Auction 102) commenced on March 14, 2019 and closed on May 28, 2019. Auction 102 offered up to seven 100 MHz licenses in the 24 GHz band in Partial Economic Areas covering most of the United States. On June 3, 2019, the FCC announced by way of public notice that U.S. Cellular was the provisional winning bidder for 408 wireless spectrum licenses in Auction 101 and 282 wireless spectrum licenses in Auction 102 for an aggregate purchase price of $256 million. The wireless spectrum licenses from Auction 101 were granted by the FCC on October 2, 2019, and the wireless spectrum licenses from Auction 102 are expected to be granted by the FCC during the fourth quarter of 2019.
On July 11, 2019, the FCC released a Public Notice establishing procedures for an additional Millimeter Wave auction offering wireless spectrum licenses in the 37, 39 and 47 GHz bands (Auction 103). On August 21, 2019, the FCC released a Public Notice announcing that all 39 GHz incumbents have agreed to relinquish their licenses in return for incentive payments. Consequently, Auction 103 will offer 34 100 MHz blocks in the Upper 37 GHz, 39 GHz, and 47 GHz bands in all Partial Economic Areas. On September 9, 2019, U.S. Cellular filed an application to participate in Auction 103; bidding in this auction will commence on December 10, 2019.
30
Private Securities Litigation Reform Act of 1995
Safe Harbor Cautionary Statement
This Form 10-Q, including exhibits, contains statements that are not based on historical facts and represent forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, that address activities, events or developments that TDS intends, expects, projects, believes, estimates, plans or anticipates will or may occur in the future are forward-looking statements. The words “believes,” “anticipates,” “estimates,” “expects,” “plans,” “intends,” “projects” and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, but are not limited to, those set forth below, as more fully described under “Risk Factors” in TDS’ Form 10-K for the year ended December 31, 2018. Each of the following risks could have a material adverse effect on TDS’ business, financial condition or results of operations. However, such factors are not necessarily all of the important factors that could cause actual results, performance or achievements to differ materially from those expressed in, or implied by, the forward-looking statements contained in this document. Other unknown or unpredictable factors also could have material adverse effects on future results, performance or achievements. TDS undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. You should carefully consider the Risk Factors in TDS’ Form 10-K for the year ended December 31, 2018, 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, financial condition or results of operations.
▪ | Intense competition in the markets in which TDS 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, fiber builds, divestitures and exchanges) or allocate resources or capital effectively could have an adverse effect on TDS’ business, financial condition or results of operations. |
▪ | Uncertainty in TDS’ future cash flow and liquidity or the inability to access capital, deterioration in the capital markets, other changes in TDS’ performance 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 amount of spectrum licenses acquired, 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 ability 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 current 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 for additional spectrum or for funding in certain Universal Service programs 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. |
▪ | Failure by TDS to timely or fully comply with any existing applicable legislative and/or regulatory requirements or changes thereto could adversely affect TDS’ business, financial condition or results of operations. |
▪ | An inability to attract people of outstanding talent throughout all levels of the organization, to develop their potential 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 and revenue are concentrated primarily in the 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 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 perceptions, price competition, churn from customer switching activity and other factors, could have an adverse effect on TDS’ business, financial condition or results of operations. |
31
▪ | 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 technologies 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 uncertainty, which could have an adverse effect on TDS’ business, financial condition or results of operations. |
▪ | 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, wireline 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 rights and/or physical assets or require re-evaluation of the indefinite-lived nature of such 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 condition or results of operations. |
▪ | A failure by TDS to complete significant network construction and systems implementation activities as part of its plans to improve the quality, coverage, capabilities and capacity of its network, support and other systems and infrastructure could have an adverse effect on its operations. |
▪ | Difficulties involving third parties with which TDS does business, including changes 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. |
▪ | TDS 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 telecommunication 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 breaches 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. |
▪ | Changes in facts or circumstances, including new or additional information, could require TDS to record adjustments to amounts reflected in the financial statements, which could have an adverse effect on TDS’ business, financial 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 future 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 conclusions 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 using 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 or have other consequences. |
▪ | The market price of TDS’ Common Shares is subject to fluctuations due to a variety of factors. |
▪ | 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. |
32
Risk Factors
In addition to the information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in TDS’ Annual Report on Form 10-K for the year ended December 31, 2018, 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, 2018, may not be the only risks that could affect TDS. Additional unidentified or unrecognized risks and uncertainties could materially adversely affect TDS’ business, financial condition and/or operating results. Subject to the foregoing, TDS has not identified for disclosure any material changes to the risk factors as previously disclosed in TDS’ Annual Report on Form 10-K for the year ended December 31, 2018.
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, 2018, for additional information, including information regarding required principal payments and the weighted average interest rates related to TDS’ Long-term debt. There have been no material changes to such information between December 31, 2018 and September 30, 2019.
See Note 3 — Fair Value Measurements in the Notes to Consolidated Financial Statements for additional information related to the fair value of TDS’ Long-term debt as of September 30, 2019.
33
Financial Statements
Telephone and Data Systems, Inc.
Consolidated Statement of Operations
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
(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 in earnings of unconsolidated entities | |||||||||||||||
Interest and dividend income | |||||||||||||||
Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Other, net | |||||||||||||||
Total investment and other income | |||||||||||||||
Income before income taxes | |||||||||||||||
Income tax expense | |||||||||||||||
Net income | |||||||||||||||
Less: Net income attributable to noncontrolling interests, net of tax | |||||||||||||||
Net income attributable to TDS shareholders | $ | $ | $ | $ | |||||||||||
Basic weighted average shares outstanding | |||||||||||||||
Basic earnings per share attributable to TDS shareholders | $ | $ | $ | $ | |||||||||||
Diluted weighted average shares outstanding | |||||||||||||||
Diluted earnings per share attributable to TDS shareholders | $ | $ | $ | $ | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
34
Telephone and Data Systems, Inc.
Consolidated Statement of Comprehensive Income
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Net income | $ | $ | $ | $ | |||||||||||
Net change in accumulated other comprehensive income | |||||||||||||||
Change related to retirement plan | |||||||||||||||
Amounts included in net periodic benefit cost for the period | |||||||||||||||
Amortization of prior service cost | ( | ) | |||||||||||||
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.
35
Telephone and Data Systems, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended September 30, | |||||||
2019 | 2018 | ||||||
(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 | ( | ) | |||||
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 investments | |||||||
Cash paid for investments | ( | ) | |||||
Cash received from divestitures and exchanges | |||||||
Other investing activities | |||||||
Net cash used in investing activities | ( | ) | ( | ) | |||
Cash flows from financing activities | |||||||
Repayment 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 U.S. Cellular Common Shares | ( | ) | |||||
Dividends paid to TDS shareholders | ( | ) | ( | ) | |||
Distributions to noncontrolling interests | ( | ) | ( | ) | |||
Other financing activities | ( | ) | |||||
Net cash used in financing activities | ( | ) | ( | ) | |||
Net increase (decrease) in cash, cash equivalents and restricted cash | ( | ) | |||||
Cash, cash equivalents and restricted cash | |||||||
Beginning of period | |||||||
End of period | $ | $ | |||||
The accompanying notes are an integral part of these consolidated financial statements.
36
Telephone and Data Systems, Inc.
Consolidated Balance Sheet — Assets
(Unaudited)
September 30, 2019 | December 31, 2018 | ||||||
(Dollars in millions) | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | $ | |||||
Short-term investments | |||||||
Accounts receivable | |||||||
Customers and agents, less allowances of $73 and $71, respectively | |||||||
Other, less allowances of $2 and $2, respectively | |||||||
Inventory, net | |||||||
Prepaid expenses | |||||||
Income taxes receivable | |||||||
Other current assets | |||||||
Total current assets | |||||||
Assets held for sale | |||||||
Licenses | |||||||
Goodwill | |||||||
Other intangible assets, net of accumulated amortization of $161 and $168, respectively | |||||||
Investments in unconsolidated entities | |||||||
Property, plant and equipment | |||||||
In service and under construction | |||||||
Less: Accumulated depreciation and amortization | |||||||
Property, plant and equipment, net | |||||||
Operating lease right-of-use assets | |||||||
Other assets and deferred charges | |||||||
Total assets1 | $ | $ | |||||
The accompanying notes are an integral part of these consolidated financial statements.
37
Telephone and Data Systems, Inc.
Consolidated Balance Sheet — Liabilities and Equity
(Unaudited)
September 30, 2019 | December 31, 2018 | ||||||
(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 | |||||||
Short-term operating lease liabilities | |||||||
Other current liabilities | |||||||
Total current liabilities | |||||||
Liabilities held for sale | |||||||
Deferred liabilities and credits | |||||||
Deferred income tax liability, net | |||||||
Long-term operating lease liabilities | |||||||
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 114 shares (7 Series A Common and 107 Common Shares) | |||||||
Par Value ($.01 per share) | |||||||
Capital in excess of par value | |||||||
Treasury shares, at cost, 18 and 19 Common Shares, respectively | ( | ) | ( | ) | |||
Accumulated other comprehensive loss | ( | ) | ( | ) | |||
Retained earnings | |||||||
Total TDS shareholders' equity | |||||||
Noncontrolling interests | |||||||
Total equity | |||||||
Total liabilities and equity1 | $ | $ | |||||
The accompanying notes are an integral part of these consolidated financial statements.
1 | The consolidated total assets as of September 30, 2019 and December 31, 2018, include assets held by consolidated variable interest entities (VIEs) of $ |
38
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 | Noncontrolling interests | Total equity | ||||||||||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||||||||||
June 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||
Net income attributable to TDS shareholders | — | — | — | — | — | ||||||||||||||||||||||||||
Net income attributable to noncontrolling interests classified as equity | — | — | — | — | — | ||||||||||||||||||||||||||
TDS Common and Series A Common share dividends ($0.165 per share) | — | — | — | — | ( | ) | ( | ) | — | ( | ) | ||||||||||||||||||||
Dividend reinvestment plan | — | — | ( | ) | — | ||||||||||||||||||||||||||
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||
Stock-based compensation awards | — | — | — | — | — | ||||||||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
September 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
39
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 | Noncontrolling interests | Total equity | ||||||||||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||||||||||
June 30, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||
Net income attributable to TDS shareholders | — | — | — | — | — | ||||||||||||||||||||||||||
Net income attributable to noncontrolling interests classified as equity | — | — | — | — | — | ||||||||||||||||||||||||||
TDS Common and Series A Common share dividends ($0.160 per share) | — | — | — | — | ( | ) | ( | ) | — | ( | ) | ||||||||||||||||||||
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 | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
September 30, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
40
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 | Noncontrolling interests | Total equity | ||||||||||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||||||||||
December 31, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||
Cumulative effect of accounting changes | — | — | — | — | — | ||||||||||||||||||||||||||
Net income attributable to TDS shareholders | — | — | — | — | — | ||||||||||||||||||||||||||
Net income attributable to noncontrolling interests classified as equity | — | — | — | — | — | ||||||||||||||||||||||||||
TDS Common and Series A Common share dividends ($0.495 per share) | — | — | — | — | ( | ) | ( | ) | — | ( | ) | ||||||||||||||||||||
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 | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
September 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
41
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 | Noncontrolling interests | Total equity | ||||||||||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||||||||||
December 31, 2017 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||
Cumulative effect of accounting changes | — | — | — | ( | ) | ||||||||||||||||||||||||||
Net income attributable to TDS shareholders | — | — | — | — | — | ||||||||||||||||||||||||||
Net income attributable to noncontrolling interests classified as equity | — | — | — | — | — | ||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | ( | ) | — | ( | ) | — | ( | ) | ||||||||||||||||||||
TDS Common and Series A Common share dividends ($0.480 per share) | — | — | — | — | ( | ) | ( | ) | — | ( | ) | ||||||||||||||||||||
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 | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
September 30, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
42
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
Note 1 Basis of Presentation
The accounting policies of Telephone and Data Systems, Inc. (TDS) conform to accounting principles generally accepted in the United States of America (GAAP) as set forth in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). Unless otherwise specified, references to accounting provisions and GAAP in these notes refer to the requirements of the FASB ASC. The consolidated financial statements include the accounts of TDS and subsidiaries in which it has a controlling financial interest, including TDS’ 82 %-owned subsidiary, United States Cellular Corporation (U.S. Cellular) and TDS’ wholly-owned subsidiary, TDS Telecommunications LLC (TDS Telecom). In addition, the consolidated financial statements include certain entities in which TDS has a variable interest that require consolidation under GAAP. All material intercompany accounts and transactions have been eliminated.
TDS’ business segments reflected in this Quarterly Report on Form 10-Q for the period ended September 30, 2019, are U.S. Cellular, Wireline, and Cable. TDS’ non-reportable other business activities are presented as “Corporate, Eliminations and Other”, which includes the operations of TDS’ wholly-owned hosted and managed services (HMS) subsidiary, which operates under the OneNeck IT Solutions brand, and its wholly-owned subsidiary Suttle-Straus, Inc. (Suttle-Straus). HMS’ and Suttle-Straus’ financial results were not significant to TDS’ operations. All of TDS’ segments operate only in the United States. See Note 13 — Business Segment Information for summary financial information on each business segment.
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 annual 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. Certain numbers included herein are rounded to millions for ease of presentation; however, certain calculated amounts and percentages are determined using the unrounded numbers. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in TDS’ Annual Report on Form 10-K (Form 10-K) for the year ended December 31, 2018.
The accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring items, unless otherwise disclosed) necessary for the fair statement of TDS’ financial position as of September 30, 2019 and December 31, 2018, its results of operations, comprehensive income and changes in equity for the three and nine months ended September 30, 2019 and 2018, and its cash flows for the nine months ended September 30, 2019 and 2018. These results are not necessarily indicative of the results to be expected for the full year. TDS has not changed its significant accounting and reporting policies from those disclosed in its Form 10-K for the year ended December 31, 2018, except as disclosed in Note 9 — Leases.
Restricted Cash
TDS presents restricted cash with cash and cash equivalents in the Consolidated Statement of Cash Flows. The following table provides a reconciliation of Cash and cash equivalents and restricted cash reported in the Consolidated Balance Sheet to the total of the amounts in the Consolidated Statement of Cash Flows as of September 30, 2019 and December 31, 2018.
September 30, 2019 | December 31, 2018 | ||||||
(Dollars in millions) | |||||||
Cash and cash equivalents | $ | $ | |||||
Restricted cash included in Other current assets | |||||||
Cash, cash equivalents and restricted cash in the statement of cash flows | $ | $ | |||||
Recently Issued Accounting Pronouncements Not Yet Adopted
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 disclosure 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, using the modified retrospective approach. Early adoption is permitted; however, TDS does not intend to adopt early. The adoption of ASU 2016-13 is not expected to have a significant impact on TDS' financial position or results of operations.
43
Note 2 Revenue Recognition
Disaggregation of Revenue
In the following table, revenue is disaggregated by type of service and timing of revenue recognition. Service revenues are recognized over time and Equipment sales are point in time.
TDS Telecom | |||||||||||||||||||||||
Three Months Ended September 30, 2019 | U.S. Cellular | Wireline | Cable | TDS Telecom Total1 | Corporate, Eliminations and Other | Total | |||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||
Revenues from contracts with customers: | |||||||||||||||||||||||
Type of service: | |||||||||||||||||||||||
Retail service | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Inbound roaming | |||||||||||||||||||||||
Residential | |||||||||||||||||||||||
Commercial | |||||||||||||||||||||||
Wholesale | |||||||||||||||||||||||
Other service | |||||||||||||||||||||||
Service revenues from contracts with customers | |||||||||||||||||||||||
Equipment and product sales | |||||||||||||||||||||||
Total revenues from contracts with customers2 | $ | $ | $ | $ | $ | $ | |||||||||||||||||
TDS Telecom | |||||||||||||||||||||||
Three Months Ended September 30, 2018 | U.S. Cellular | Wireline | Cable | TDS Telecom Total1 | Corporate, Eliminations and Other | Total | |||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||
Revenues from contracts with customers: | |||||||||||||||||||||||
Type of service: | |||||||||||||||||||||||
Retail service | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Inbound roaming | |||||||||||||||||||||||
Residential | |||||||||||||||||||||||
Commercial | |||||||||||||||||||||||
Wholesale | |||||||||||||||||||||||
Other service | |||||||||||||||||||||||
Service revenues from contracts with customers | |||||||||||||||||||||||
Equipment and product sales | |||||||||||||||||||||||
Total revenues from contracts with customers2 | $ | $ | $ | $ | $ | $ | |||||||||||||||||
44
TDS Telecom | |||||||||||||||||||||||
Nine Months Ended September 30, 2019 | U.S. Cellular | Wireline | Cable | TDS Telecom Total1 | Corporate, Eliminations and Other | Total | |||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||
Revenues from contracts with customers: | |||||||||||||||||||||||
Type of service: | |||||||||||||||||||||||
Retail service | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Inbound roaming | |||||||||||||||||||||||
Residential | |||||||||||||||||||||||
Commercial | |||||||||||||||||||||||
Wholesale | |||||||||||||||||||||||
Other service | ( | ) | |||||||||||||||||||||
Service revenues from contracts with customers | |||||||||||||||||||||||
Equipment and product sales | |||||||||||||||||||||||
Total revenues from contracts with customers2 | $ | $ | $ | $ | $ | $ | |||||||||||||||||
TDS Telecom | |||||||||||||||||||||||
Nine Months Ended September 30, 2018 | U.S. Cellular | Wireline | Cable | TDS Telecom Total1 | Corporate, Eliminations and Other | Total | |||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||
Revenues from contracts with customers: | |||||||||||||||||||||||
Type of service: | |||||||||||||||||||||||
Retail service | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Inbound roaming | |||||||||||||||||||||||
Residential | |||||||||||||||||||||||
Commercial | |||||||||||||||||||||||
Wholesale | |||||||||||||||||||||||
Other service | ( | ) | |||||||||||||||||||||
Service revenues from contracts with customers | |||||||||||||||||||||||
Equipment and product sales | |||||||||||||||||||||||
Total revenues from contracts with customers2 | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Numbers may not foot due to rounding.
1 | TDS Telecom Total includes eliminations between the Wireline and Cable segments. |
2 | Revenue line items in this table will not agree to amounts presented in the Consolidated Statement of Operations as the amounts in this table only include revenue resulting from contracts with customers. |
Contract Balances
The accounts receivable balance related to amounts billed and not paid on contracts with customers, net of allowances, is shown in the table below.
September 30, 2019 | December 31, 2018 | ||||||
(Dollars in millions) | |||||||
Accounts receivable | |||||||
Customer and agents | $ | $ | |||||
Other | |||||||
Total1 | $ | $ | |||||
1 | Accounts receivable line items presented in this table will not agree to amounts presented in the Consolidated Balance Sheet as the amounts in this table only include receivables resulting from contracts with customers. |
45
The following table provides a rollforward of contract assets from contracts with customers, which are recorded in Other current assets and Other assets and deferred charges in the Consolidated Balance Sheet.
Contract Assets | |||
(Dollars in millions) | |||
Balance at December 31, 2018 | $ | ||
Contract additions | |||
Reclassified to receivables | ( | ) | |
Balance at September 30, 2019 | $ | ||
The following table provides a rollforward of contract liabilities from contracts with customers, which are recorded in Customer deposits and deferred revenues and Other deferred liabilities and credits in the Consolidated Balance Sheet.
Contract Liabilities | |||
(Dollars in millions) | |||
Balance at December 31, 20181 | $ | ||
Contract additions | |||
Terminated contracts | ( | ) | |
Revenue recognized | ( | ) | |
Balance at September 30, 2019 | $ | ||
1 | The Balance at December 31, 2018 differs from the amount reported in Note 2 — Revenue Recognition of the 2018 Form 10-K, as the previously reported amount included certain lease-related balances that did not result from contracts with customers. |
Transaction price allocated to the remaining performance obligations
The following table includes estimated service revenues expected to be recognized related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period. These estimates represent service revenues to be recognized when services are delivered to customers pursuant to service plan contracts and under certain roaming agreements with other carriers. These estimates are based on contracts in place as of September 30, 2019, and may vary from actual results. As a practical expedient, revenue related to contracts of less than one year, generally month-to-month contracts, are excluded from these estimates.
Service Revenues | |||
(Dollars in millions) | |||
Remainder of 2019 | $ | ||
2020 | |||
Thereafter | |||
Total | $ | ||
TDS has certain contracts at U.S. Cellular and TDS Telecom in which it bills an amount equal to a fixed per-unit price multiplied by a variable quantity (e.g., certain roaming agreements with other carriers). Because TDS invoices for such items in an amount that corresponds directly with the value of the performance completed to date, TDS may recognize revenue in that amount. As a practical expedient, these contracts are excluded from the estimate of future revenues expected to be recognized related to performance obligations that are unsatisfied as of the end of a reporting period.
46
Contract Cost Assets
TDS expects that incremental commission fees paid as a result of obtaining contracts are recoverable and therefore TDS capitalizes these costs. As a practical expedient, costs with an amortization period of one year or less are not capitalized. TDS also incurs fulfillment costs, such as installation costs, where there is an expectation that a future benefit will be realized. Capitalized commission fees and fulfillment costs are amortized based on the timing of transfer of the goods or services to which the assets relate, typically the contract term which ranges from fifteen months to thirty-nine months . Contract cost asset balances, which are recorded in Other assets and deferred charges in the Consolidated Balance Sheet, were as follows:
September 30, 2019 | December 31, 2018 | ||||||
(Dollars in millions) | |||||||
Costs to obtain contracts | |||||||
Sales commissions | $ | $ | |||||
Fulfillment costs | |||||||
Installation costs | |||||||
Total contract cost assets | $ | $ | |||||
Amortization of contract cost assets was $31 million and $95 million for the three and nine months ended September 30, 2019, respectively, and $31 million and $93 million for the three and nine months ended September 30, 2018, respectively, and was included in Selling, general and administrative expenses.
Note 3 Fair Value Measurements
As of September 30, 2019 and December 31, 2018, TDS did not have any material financial or nonfinancial assets or liabilities that were required to be recorded at fair value in its Consolidated Balance Sheet in accordance with GAAP.
The provisions of GAAP establish a fair value hierarchy that contains three levels for inputs used in fair value measurements. Level 1 inputs include quoted market prices for identical assets or liabilities in active markets. Level 2 inputs include quoted market prices for similar assets and liabilities in active markets or quoted market prices for identical assets and liabilities in inactive markets. Level 3 inputs are unobservable. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. A financial instrument’s level within the fair value hierarchy is not representative of its expected performance or its overall risk profile and, therefore, Level 3 assets are not necessarily higher risk than Level 2 assets 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 | September 30, 2019 | December 31, 2018 | |||||||||||||||
Book Value | Fair Value | Book Value | Fair Value | ||||||||||||||
(Dollars in millions) | |||||||||||||||||
Cash and cash equivalents | 1 | $ | $ | $ | $ | ||||||||||||
Short-term investments | 1 | ||||||||||||||||
Long-term debt | |||||||||||||||||
Retail | 2 | ||||||||||||||||
Institutional | 2 | ||||||||||||||||
Other | 2 | ||||||||||||||||
The fair values of Cash and cash equivalents and Short-term investments approximate their book values due to the short-term nature of these financial instruments. Long-term debt excludes lease obligations, other installment arrangements, the current portion of Long-term debt and debt financing costs. 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 7.25 % 2063 Senior Notes, 7.25 % 2064 Senior Notes and 6.95 % Senior Notes. TDS’ “Institutional” debt consists of U.S. Cellular’s 6.7 % Senior Notes which are traded over the counter. TDS’ “Other” debt consists of a senior term loan credit agreement 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 3.80 % to 6.75 % and 5.03 % to 8.00 % at September 30, 2019 and December 31, 2018, respectively.
47
Note 4 Equipment Installment Plans
TDS sells devices to customers under equipment installment plans over a specified time period. For certain equipment installment plans, after a specified period of time or amount of payments, the customer may have the right to upgrade to a new device and have the remaining unpaid equipment installment contract balance waived, subject to certain conditions, including trading in the original device in good working condition and signing a new equipment installment contract. TDS values this trade-in right as a guarantee liability. The guarantee liability is initially measured at fair value and is determined based on assumptions including the probability and timing of the customer upgrading to a new device and the fair value of the device being traded-in at the time of trade-in. When a customer exercises the trade-in option, both the outstanding receivable and guarantee liability balances related to the respective device are reduced to zero, and the value of the used device that is received in the transaction is recognized as inventory. If the customer does not exercise the trade-in option at the time of eligibility, TDS begins amortizing the liability and records this amortization as additional equipment revenue. As of September 30, 2019 and December 31, 2018, the guarantee liability related to these plans was $9 million and $11 million, respectively, and is reflected in Customer deposits and deferred revenues in the Consolidated Balance Sheet.
The following table summarizes equipment installment plan receivables as of September 30, 2019 and December 31, 2018.
September 30, 2019 | December 31, 2018 | ||||||
(Dollars in millions) | |||||||
Equipment installment plan receivables, gross | $ | $ | |||||
Allowance for credit losses | ( | ) | ( | ) | |||
Equipment installment plan receivables, net | $ | $ | |||||
Net balance presented in the Consolidated Balance Sheet as: | |||||||
Accounts receivable — Customers and agents (Current portion) | $ | $ | |||||
Other assets and deferred charges (Non-current portion) | |||||||
Equipment installment plan receivables, net | $ | $ | |||||
TDS uses various inputs, including internal data, information from credit bureaus and other sources, to evaluate the credit profiles of its customers. From this evaluation, a credit class is assigned to the customer that determines the number of eligible lines, the amount of credit available, and the down payment requirement, if any. Customers assigned to credit classes requiring no down payment represent a lower risk category, whereas those assigned to credit classes requiring a down payment represent a higher risk category. The balance and aging of the equipment installment plan receivables on a gross basis by credit category were as follows:
September 30, 2019 | December 31, 2018 | ||||||||||||||||||||||
Lower Risk | Higher Risk | Total | Lower Risk | Higher Risk | Total | ||||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||
Unbilled | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Billed — current | |||||||||||||||||||||||
Billed — past due | |||||||||||||||||||||||
Equipment installment plan receivables, gross | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Activity for the nine months ended September 30, 2019 and 2018, in the allowance for credit losses for equipment installment plan receivables was as follows:
September 30, 2019 | September 30, 2018 | ||||||
(Dollars in millions) | |||||||
Allowance for credit losses, beginning of period | $ | $ | |||||
Bad debts expense | |||||||
Write-offs, net of recoveries | ( | ) | ( | ) | |||
Allowance for credit losses, end of period | $ | $ | |||||
48
Note 5 Earnings Per Share
Basic earnings per share attributable to TDS shareholders is computed by dividing Net income attributable to TDS shareholders by the weighted average number of Common Shares outstanding during the period. Diluted earnings per share attributable to TDS shareholders is computed by dividing Net income attributable to TDS shareholders by the weighted average number of Common Shares outstanding during the period adjusted to include the effects of potentially dilutive securities. Potentially dilutive securities primarily include incremental shares issuable upon the exercise of outstanding stock options and the vesting of performance and restricted stock units.
The amounts used in computing earnings per common share and the effects of potentially dilutive securities on the weighted average number of Common Shares were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
(Dollars and shares in millions, except per share amounts) | |||||||||||||||
Basic earnings per share attributable to TDS shareholders: | |||||||||||||||
Net income attributable to TDS shareholders used in basic earnings per share | $ | $ | $ | $ | |||||||||||
Adjustments to compute diluted earnings: | |||||||||||||||
Noncontrolling interest adjustment | ( | ) | ( | ) | ( | ) | |||||||||
Net income attributable to TDS shareholders used in diluted earnings per share | $ | $ | $ | $ | |||||||||||
Weighted average number of shares used in basic earnings per share: | |||||||||||||||
Common Shares | |||||||||||||||
Series A Common Shares | |||||||||||||||
Total | |||||||||||||||
Effects of dilutive securities | |||||||||||||||
Weighted average number of shares used in diluted earnings per share | |||||||||||||||
Basic earnings per share attributable to TDS shareholders | $ | $ | $ | $ | |||||||||||
Diluted earnings per share attributable to TDS shareholders | $ | $ | $ | $ | |||||||||||
Certain Common Shares issuable upon the exercise of stock options or vesting of performance and restricted stock units were not included in average diluted shares outstanding for the calculation of Diluted earnings per share attributable to TDS shareholders because their effects were antidilutive. The number of such Common Shares excluded was 3 million and less than 1 million for the three and nine months ended September 30, 2019, respectively, and 3 million and 4 million for the three and nine months ended September 30, 2018, respectively.
Note 6 Acquisitions, Divestitures and Exchanges
On August 13, 2019, TDS entered into an Asset Purchase Agreement to acquire substantially all of the assets of MI Connection Communications System, dba Continuum, for $80 million in cash, subject to working capital adjustments. The cable company passes approximately 36,500 households in North Carolina and offers broadband, video and voice services. The transaction is expected to close in the fourth quarter of 2019, subject to approvals and other closing conditions.
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Note 7 Intangible Assets
Activity related to Licenses for the nine months ended September 30, 2019, is presented below:
Licenses | |||
(Dollars in millions) | |||
Balance at December 31, 2018 | $ | ||
Acquisitions | |||
Transferred to Assets held for sale | ( | ) | |
Exchanges - Licenses received | |||
Balance at September 30, 2019 | $ | ||
Note 8 Investments in Unconsolidated Entities
Investments in unconsolidated entities consist of amounts invested in entities in which TDS holds a noncontrolling interest.
TDS’ Investments in unconsolidated entities are accounted for using either the equity method or measurement alternative method as shown in the table below. The measurement alternative method was elected for investments without readily determinable fair values formerly accounted for under the cost method. The carrying value of measurement alternative method investments represents cost minus any impairments plus or minus any observable price changes.
September 30, 2019 | December 31, 2018 | ||||||
(Dollars in millions) | |||||||
Equity method investments | $ | $ | |||||
Measurement alternative method investments | |||||||
Total investments in unconsolidated entities | $ | $ | |||||
The following table, which is based in part on information provided by third parties, summarizes the combined results of operations of TDS’ equity method investments.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Revenues | $ | $ | $ | $ | |||||||||||
Operating expenses | |||||||||||||||
Operating income | |||||||||||||||
Other income (expense), net | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Net income | $ | $ | $ | $ | |||||||||||
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Note 9 Leases
Change in Accounting Policy
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases and has since amended the standard with Accounting Standards Update 2018-01, Leases: Land Easement Practical Expedient for Transition to Topic 842, Accounting Standards Update 2018-10, Codification Improvements to Topic 842, Leases, Accounting Standards Update 2018-11, Leases: Targeted Improvements, and Accounting Standards Update 2018-20, Leases: Narrow-Scope Improvements for Lessors, collectively referred to as ASC 842. This standard replaces the previous lease accounting standard under ASC 840 - Leases and requires lessees to record a right-of-use (ROU) asset and lease liability for the majority of leases. TDS adopted the provisions of ASC 842 on January 1, 2019, using a modified retrospective method. Under this method, TDS elected to apply the new accounting standard only to the most recent period presented, recognizing the cumulative effect of the accounting change, if any, as an adjustment to the beginning balance of retained earnings. Accordingly, prior periods have not been recast to reflect the new accounting standard. The cumulative effect of applying the provisions of ASC 842 had no material impact on retained earnings.
TDS elected transitional practical expedients for existing leases which eliminated the requirements to reassess existing lease classification, initial direct costs, and whether contracts contain leases. TDS also elected the practical expedient related to land easements that allows it to carry forward the accounting treatment for pre-existing land easement agreements.
The cumulative effect of the adoption of ASC 842 on TDS’ Consolidated Balance Sheet as of January 1, 2019 is presented below.
December 31, 2018 | ASC 842 Adjustment | January 1, 2019 | |||||||
(Dollars in millions) | |||||||||
Prepaid expenses | $ | $ | ( | ) | $ | ||||
Operating lease right-of-use assets | |||||||||
Other assets and deferred charges | ( | ) | |||||||
Short-term operating lease liabilities | |||||||||
Other current liabilities | ( | ) | |||||||
Long-term operating lease liabilities | |||||||||
Other deferred liabilities and credits | ( | ) | |||||||
In connection with the adoption of ASC 842, TDS recorded ROU assets and lease liabilities for its operating leases in its Consolidated Balance Sheet as of January 1, 2019. The amounts for ROU assets and lease liabilities initially were calculated as the discounted value of future lease payments. The difference between the ROU assets and the corresponding lease liabilities at January 1, 2019 as shown in the table above resulted from adjustments to ROU assets to account for various lease prepayments and straight-line expense recognition deferral balances which existed as of December 31, 2018. Finance leases are included in Property, plant and equipment and Long-term debt, net consistent with the presentation under prior accounting standards.
Lessee Agreements
A lease is generally present in a contract if the lessee controls the use of identified property, plant or equipment for a period of time in exchange for consideration. Nearly all of TDS’ leases are classified as operating leases, although it does have a small number of finance leases. TDS’ most significant leases are for land and tower spaces, network facilities, retail spaces, and offices.
TDS has agreements with both lease and nonlease components, which are accounted for separately. As part of the present value calculation for the lease liabilities, TDS uses an incremental borrowing rate as the rates implicit in the leases are not readily determinable. The incremental borrowing rates used for lease accounting are based on TDS' unsecured rates, adjusted to approximate the rates at which TDS would be required to borrow on a collateralized basis over a term similar to the recognized lease term. TDS applies the incremental borrowing rates to lease components using a portfolio approach based upon the length of the lease term and the reporting entity in which the lease resides. The cost of nonlease components in TDS’ lease portfolio (e.g., utilities and common area maintenance) are not typically predetermined at lease commencement and are expensed as incurred at their relative standalone price.
Variable lease expense occurs when, subsequent to the lease commencement, lease payments are made that were not originally included in the lease liability calculation. TDS’ variable lease payments are primarily a result of leases with escalations that are tied to an index. The incremental changes due to the index changes are recorded as variable lease expense and are not included in the ROU assets or lease liabilities.
Lease term recognition determines the periods to which expense is allocated and also has a significant impact on the ROU asset and lease liability calculations. Many of TDS’ leases include renewal and early termination options. At lease commencement, the lease terms include options to extend the lease when TDS is reasonably certain that it will exercise the options. The lease terms do not include early termination options unless TDS is reasonably certain to exercise the options. Certain asset classes have similar lease characteristics; therefore, TDS has applied the portfolio approach for lease term recognition for its tower space, retail, and certain ground lease asset classes.
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The following table shows the components of lease cost included in the Consolidated Statement of Operations:
Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | ||||||
(Dollars in millions) | |||||||
Operating lease cost | $ | $ | |||||
Financing lease cost: | |||||||
Amortization of ROU assets | |||||||
Variable lease cost | |||||||
Total lease cost | $ | $ | |||||
The following table shows supplemental cash flow information related to lease activities:
Nine Months Ended September 30, 2019 | |||
(Dollars in millions) | |||
Cash paid for amounts included in the measurement of lease liabilities: | |||
Operating cash flows from operating leases | $ | ||
ROU assets obtained in exchange for lease obligations: | |||
Operating leases | $ | ||
Finance leases | |||
The following table shows the classification of TDS’ operating and finance leases in its Consolidated Balance Sheet:
September 30, 2019 | |||
(Dollars in millions) | |||
Operating Leases | |||
Operating lease right-of-use assets | $ | ||
Short-term operating lease liabilities | $ | ||
Long-term operating lease liabilities | |||
Total operating lease liabilities | $ | ||
Finance Leases | |||
Property, plant and equipment | $ | ||
Less: Accumulated depreciation and amortization | |||
Property, plant and equipment, net | $ | ||
Current portion of long-term debt | $ | ||
Long-term debt, net | |||
Total finance lease liabilities | $ | ||
The table below shows a weighted-average analysis for lease term and discount rate for all leases:
September 30, 2019 | ||
Weighted Average Remaining Lease Term | ||
Operating leases | ||
Finance leases | ||
Weighted Average Discount Rate | ||
Operating leases | % | |
Finance leases | % | |
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The maturities of lease liabilities are as follows:
Operating Leases | Finance Leases | ||||||
(Dollars in millions) | |||||||
Remainder of 2019 | $ | $ | |||||
2020 | |||||||
2021 | |||||||
2022 | |||||||
2023 | |||||||
Thereafter | |||||||
Total lease payments1 | $ | $ | |||||
Less: Imputed interest | |||||||
Present value of lease liabilities | $ | $ | |||||
1 | Lease payments exclude $ |
Lessor Agreements
TDS’ most significant lessor leases are for tower space and colocation space. All of TDS’ lessor leases are classified as operating leases. A lease is generally present in a contract if the lessee controls the use of identified property, plant, or equipment for a period of time in exchange for consideration. TDS’ lessor agreements with lease and nonlease components are generally accounted for separately; however, certain service agreements with insignificant lease components are accounted for as nonlease transactions.
Lease term recognition determines the periods to which revenue is allocated over the term of the lease. Many of TDS’ leases include renewal and early termination options. At lease commencement, lease terms include options to extend the lease when TDS is reasonably certain that lessees will exercise the options. Lease terms would not include periods after the date of a termination option that lessees are reasonably certain to exercise.
Variable lease income occurs when, subsequent to the lease commencement, lease payments are received that were not originally included in the lease receivable calculation. TDS’ variable lease income is primarily a result of leases with escalations that are tied to an index. The incremental increases due to the index changes are recorded as variable lease income.
The following table shows the components of lease income which are included in service revenues in the Consolidated Statement of Operations:
Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | ||||||
(Dollars in millions) | |||||||
Operating lease income1 | $ | $ | |||||
1 | During the third quarter of 2019, TDS recorded an out-of-period adjustment attributable to 2009 through the second quarter of 2019 due to errors in the timing of recognition of revenue for certain tower leases. This out-of-period adjustment had the impact of increasing operating lease income by $ |
The maturities of expected lease payments to be received are as follows:
Operating Leases | |||
(Dollars in millions) | |||
Remainder of 2019 | $ | ||
2020 | |||
2021 | |||
2022 | |||
2023 | |||
Thereafter | |||
Total future lease maturities | $ | ||
53
Disclosures under ASC 840
As of December 31, 2018, future minimum rental payments required under operating leases and rental receipts expected under operating leases that have noncancellable lease terms in excess of one year were as follows:
Operating Leases Future Minimum Rental Payments | Operating Leases Future Minimum Rental Receipts | ||||||
(Dollars in millions) | |||||||
2019 | $ | $ | |||||
2020 | |||||||
2021 | |||||||
2022 | |||||||
2023 | |||||||
Thereafter | |||||||
Total | $ | $ | |||||
Note 10 Commitments and Contingencies
Purchase Obligations
On September 27, 2019, U.S. Cellular executed a new Master Service Agreement, Master Statement of Work for Managed Services and certain other documents with Amdocs Tethys Limited, effective October 1, 2019, to continue using the Billing and Operational Support System (B/OSS) and certain support functions offered by Amdocs Tethys Limited. The committed, non-cancellable amount to be paid to Amdocs Tethys Limited with respect to the new agreements is $241 million over five years.
Note 11 Variable Interest Entities
Consolidated VIEs
TDS consolidates VIEs in which it has a controlling financial interest as defined by GAAP and is therefore deemed the primary beneficiary. A controlling financial interest will have both of the following characteristics: (a) the power to direct the VIE activities that most significantly impact economic performance; and (b) the obligation to absorb the VIE losses and the right to receive benefits that are significant to the VIE. TDS reviews these criteria initially at the time it enters into agreements and subsequently when events warranting reconsideration occur. These VIEs have risks similar to those described in the “Risk Factors” in TDS’ Form 10-K for the year ended December 31, 2018.
During 2017, U.S. Cellular formed USCC EIP LLC (Seller/Sub-Servicer), USCC Receivables Funding LLC (Transferor) and the USCC Master Note Trust (Trust), collectively the special purpose entities (SPEs), to facilitate a securitized borrowing using its equipment installment plan receivables. Under a Receivables Sale Agreement, U.S. Cellular wholly-owned, majority-owned and unconsolidated entities, collectively referred to as “affiliated entities”, transfer device equipment installment plan contracts to the Seller/Sub-Servicer. The Seller/Sub-Servicer aggregates device equipment installment plan contracts, and performs servicing, collection and all other administrative activities related to accounting for the equipment installment plan contracts. The Seller/Sub-Servicer sells the eligible equipment installment plan receivables to the Transferor, a bankruptcy remote entity, which subsequently sells the receivables to the Trust. The Trust, which is bankruptcy remote and isolated from the creditors of U.S. Cellular, will be responsible for issuing asset-backed variable funding notes (Notes), which are collateralized by the equipment installment plan receivables owned by the Trust. Given that U.S. Cellular has the power to direct the activities of these SPEs, and that these SPEs lack sufficient equity to finance their activities, U.S. Cellular is deemed to have a controlling financial interest in the SPEs and, therefore, consolidates them. All transactions with third parties (e.g., issuance of the asset-backed variable funding notes) will be accounted for as a secured borrowing due to the pledging of equipment installment plan contracts as collateral, significant continuing involvement in the transferred assets, subordinated interests of the cash flows, and continued evidence of control of the receivables.
The following VIEs were formed to participate in FCC auctions of wireless spectrum licenses and to fund, establish, and provide wireless service with respect to any FCC wireless spectrum licenses won in the auctions:
▪ | Advantage Spectrum, L.P. (Advantage Spectrum) and Sunshine Spectrum, Inc., the general partner of Advantage Spectrum; and |
▪ | King Street Wireless, L.P. (King Street Wireless) and King Street Wireless, Inc., the general partner of King Street Wireless. |
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These particular VIEs are collectively referred to as designated entities. 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 the 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 wireless spectrum licenses, to make certain large 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 of the VIEs, indicating that TDS is the primary beneficiary of the VIEs. Therefore, in accordance with GAAP, these VIEs are consolidated.
TDS also consolidates other VIEs that are limited partnerships that provide wireless service. A limited partnership is a variable interest entity unless the limited partners hold substantive participating rights or kick-out rights over the general partner. For certain limited partnerships, U.S. Cellular is the general 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, these limited partnerships are also recognized as VIEs and are consolidated under the variable interest model.
The following table presents the classification and balances of the consolidated VIEs’ assets and liabilities in TDS’ Consolidated Balance Sheet.
September 30, 2019 | December 31, 2018 | ||||||
(Dollars in millions) | |||||||
Assets | |||||||
Cash and cash equivalents | $ | $ | |||||
Short-term investments | |||||||
Accounts receivable | |||||||
Inventory, net | |||||||
Other current assets | |||||||
Licenses | |||||||
Property, plant and equipment, net | |||||||
Operating lease right-of-use assets | |||||||
Other assets and deferred charges | |||||||
Total assets | $ | $ | |||||
Liabilities | |||||||
Current liabilities | $ | $ | |||||
Long-term operating lease liabilities | |||||||
Other deferred liabilities and credits | |||||||
Total liabilities | $ | $ | |||||
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.
TDS’ total investment in these unconsolidated entities was $5 million and $4 million at September 30, 2019 and December 31, 2018, respectively, and is included in Investments in unconsolidated entities in TDS’ Consolidated Balance Sheet. The maximum exposure from unconsolidated VIEs 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 $229 million and $92 million, during the nine months ended September 30, 2019 and 2018, respectively; of which $199 million in 2019 and $66 million in 2018, are related to USCC EIP LLC as discussed above. 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 wireless spectrum licenses granted in various auctions. TDS may finance such amounts with a combination of cash on hand, borrowings under its revolving credit agreement and/or other long-term debt. There is no assurance that TDS will be able to obtain additional financing on commercially reasonable terms or at all to provide such financial support.
55
The limited partnership agreements of Advantage Spectrum and King Street Wireless also provide the general partner with a put option whereby the general partner may require the limited partner, a subsidiary of U.S. Cellular, to purchase its interest in the limited partnership. The general partner’s put options related to its interests in King Street Wireless will become exercisable in the fourth quarter of 2019. The general partner’s put options related to its interest in Advantage Spectrum will become exercisable in 2021 and 2022. The greater of the carrying value of the general partner's investment or the value of the put option, net of any borrowings due to TDS, is recorded as Noncontrolling interests with redemption features in TDS’ Consolidated Balance Sheet. Also in accordance with GAAP, minority share of income or changes in the redemption value of the put options, net of interest accrued on the loans, are recorded as a component of Net income attributable to noncontrolling interests, net of tax, in TDS’ Consolidated Statement of Operations.
Note 12 Noncontrolling Interests
The following schedule discloses the effects of Net income attributable to TDS shareholders and changes in TDS’ ownership interest in U.S. Cellular on TDS’ equity:
Nine Months Ended September 30, | 2019 | 2018 | |||||
(Dollars in millions) | |||||||
Net income attributable to TDS shareholders | $ | $ | |||||
Transfers to 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 noncontrolling interests | ( | ) | ( | ) | |||
Change from net income attributable to TDS and transfers to noncontrolling interests | $ | $ | |||||
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Note 13 Business Segment Information
U.S. Cellular and TDS Telecom are billed for services they receive from TDS, consisting primarily of information processing, accounting and finance, and general management services. Such billings are based on expenses specifically identified to U.S. Cellular and TDS Telecom and on allocations of common expenses. Management believes the method used to allocate common expenses is reasonable and that all expenses and costs applicable to U.S. Cellular and TDS Telecom are reflected in the accompanying business segment information on a basis that is representative of what they would have been if U.S. Cellular and TDS Telecom operated on a stand-alone basis.
Financial data for TDS’ reportable segments for the three and nine month periods ended, or as of September 30, 2019 and 2018, is as follows. See Note 1 — Basis of Presentation for additional information.
TDS Telecom | |||||||||||||||||||||||
Three Months Ended or as of September 30, 2019 | U.S. Cellular | Wireline | Cable | TDS Telecom Total1 | 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 | |||||||||||||||||||||||
(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)2 | ( | ) | |||||||||||||||||||||
Net income (loss) | ( | ) | |||||||||||||||||||||
Add back: | |||||||||||||||||||||||
Depreciation, amortization and accretion | |||||||||||||||||||||||
(Gain) loss on asset disposals, net | |||||||||||||||||||||||
(Gain) loss on license sales and exchanges, net | |||||||||||||||||||||||
Interest expense | ( | ) | ( | ) | |||||||||||||||||||
Income tax expense (benefit)2 | ( | ) | |||||||||||||||||||||
Adjusted EBITDA3 | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||
Investments in unconsolidated entities | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Total assets | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Capital expenditures | $ | $ | $ | $ | $ | $ | |||||||||||||||||
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TDS Telecom | |||||||||||||||||||||||
Three Months Ended or as of September 30, 2018 | U.S. Cellular | Wireline | Cable | TDS Telecom Total1 | 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 | |||||||||||||||||||||||
(Gain) loss on asset disposals, 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)2 | ( | ) | ( | ) | |||||||||||||||||||
Net income (loss) | ( | ) | |||||||||||||||||||||
Add back: | |||||||||||||||||||||||
Depreciation, amortization and accretion | |||||||||||||||||||||||
(Gain) loss on asset disposals, net | ( | ) | ( | ) | |||||||||||||||||||
Interest expense | ( | ) | ( | ) | |||||||||||||||||||
Income tax expense (benefit)2 | ( | ) | ( | ) | |||||||||||||||||||
Adjusted EBITDA3 | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||
Investments in unconsolidated entities | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Total assets | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Capital expenditures | $ | $ | $ | $ | $ | $ | |||||||||||||||||
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TDS Telecom | |||||||||||||||||||||||
Nine Months Ended or as of September 30, 2019 | U.S. Cellular | Wireline | Cable | TDS Telecom Total1 | 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 | |||||||||||||||||||||||
(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 | ( | ) | ( | ) | ( | ) | |||||||||||||||||
Income (loss) before income taxes | ( | ) | |||||||||||||||||||||
Income tax expense (benefit)2 | ( | ) | |||||||||||||||||||||
Net income (loss) | ( | ) | |||||||||||||||||||||
Add back: | |||||||||||||||||||||||
Depreciation, amortization and accretion | |||||||||||||||||||||||
(Gain) loss on asset disposals, net | ( | ) | ( | ) | ( | ) | |||||||||||||||||
(Gain) loss on sale of business and other exit costs, net | ( | ) | ( | ) | |||||||||||||||||||
Interest expense | ( | ) | ( | ) | |||||||||||||||||||
Income tax expense (benefit)2 | ( | ) | |||||||||||||||||||||
Adjusted EBITDA3 | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||
Capital expenditures | $ | $ | $ | $ | $ | $ | |||||||||||||||||
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TDS Telecom | |||||||||||||||||||||||
Nine Months Ended or as of September 30, 2018 | U.S. Cellular | Wireline | Cable | TDS Telecom Total1 | 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 | |||||||||||||||||||||||
(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 | ( | ) | ( | ) | ( | ) | |||||||||||||||||
Other, net | ( | ) | |||||||||||||||||||||
Income (loss) before income taxes | ( | ) | ( | ) | |||||||||||||||||||
Income tax expense (benefit)2 | ( | ) | |||||||||||||||||||||
Net income (loss) | ( | ) | |||||||||||||||||||||
Add back: | |||||||||||||||||||||||
Depreciation, amortization and accretion | |||||||||||||||||||||||
(Gain) loss on asset disposals, net | ( | ) | ( | ) | |||||||||||||||||||
(Gain) loss on license sales and exchanges, net | ( | ) | ( | ) | |||||||||||||||||||
Interest expense | ( | ) | ( | ) | |||||||||||||||||||
Income tax expense (benefit)2 | ( | ) | |||||||||||||||||||||
Adjusted EBITDA3 | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||
Capital expenditures | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Numbers may not foot due to rounding.
1 | TDS Telecom Total includes eliminations between the Wireline and Cable segments. |
2 | Income tax expense (benefit) is not provided at the individual segment level for Wireline and Cable. TDS calculates income tax expense for “TDS Telecom Total". |
3 | Adjusted earnings before interest, taxes, depreciation, amortization and accretion (Adjusted EBITDA) is a segment measure reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing their performance. Adjusted EBITDA is defined as net income, adjusted for the items set forth in the reconciliation above. 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 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. |
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Telephone and Data Systems, Inc.
Additional Required Information
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
TDS maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) that are designed to ensure that information required to be disclosed in its reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to TDS’ management, including its principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
As required by SEC Rules 13a-15(b), TDS carried out an evaluation, under the supervision and with the participation of management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of TDS’ disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on this evaluation, TDS’ principal executive officer and principal financial officer concluded that TDS' disclosure controls and procedures were effective as of September 30, 2019, 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 nine months ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, TDS’ internal control over financial reporting, except as follows: TDS implemented internal controls to ensure that, upon adoption of the new lease accounting standard codified in ASC 842, effective January 1, 2019, and for all periods thereafter, the financial statements will be presented in accordance with this new accounting standard.
Legal Proceedings
The United States Department of Justice (DOJ) has notified TDS that it is conducting inquiries of U.S. Cellular and TDS under the federal False Claims Act. The DOJ is investigating U.S. Cellular’s participation in wireless spectrum license auctions 58, 66, 73 and 97 conducted by the FCC. U.S. Cellular is a limited partner in several limited partnerships which qualified for the 25% bid credit in each auction. TDS and U.S. Cellular are cooperating with the DOJ’s review. TDS and U.S. Cellular believe that U.S. Cellular’s arrangements with the limited partnerships and the limited partnerships’ participation in the FCC auctions complied with applicable law and FCC rules. At this time, TDS cannot predict the outcome of this review.
Refer to the disclosure under Legal Proceedings in TDS’ Form 10-K for the year ended December 31, 2018, for additional information. There have been no material changes to such information since December 31, 2018.
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 date. TDS did not determine to terminate the foregoing Common Share repurchase program, or cease making further purchases thereunder, during the third quarter of 2019.
The maximum dollar value of shares that may yet be purchased under this program was $199 million as of September 30, 2019. There were no purchases made by or on behalf of TDS, and no open market purchases made by any “affiliated purchaser” (as defined by the SEC) of TDS, of TDS Common Shares during the quarter covered by this Form 10-Q.
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Other Information
The following information is being provided to update prior disclosures made pursuant to the requirements of Form 8-K, Item 2.03 — Creation of a Direct Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement of a Registrant.
Neither TDS nor U.S. Cellular borrowed or repaid any cash amounts under their revolving credit agreements in the third quarter of 2019 or through the filing date of this Form 10-Q, and had no cash borrowings outstanding under their revolving credit agreements as of September 30, 2019, or as of the filing date of this Form 10-Q.
Further, U.S. Cellular did not borrow or repay any cash amounts under its receivables securitization agreement in the third quarter of 2019 or through the filing date of this Form 10-Q, and had no cash borrowings outstanding under its receivables securitization agreement as of September 30, 2019, or as of the filing date of this Form 10-Q.
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Exhibits
Exhibit Number | Description of Documents |
Exhibit 3.1 | |
Exhibit 4.1 | |
Exhibit 4.2 | |
Exhibit 4.3* | |
Exhibit 10.1 | |
Exhibit 10.2 | |
Exhibit 10.3 | |
Exhibit 10.4* | |
Exhibit 10.5* | |
Exhibit 10.6* | |
Exhibit 10.7* | |
Exhibit 10.8* | |
Exhibit 31.1 | |
Exhibit 31.2 | |
Exhibit 32.1 | |
Exhibit 32.2 | |
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Exhibit 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
Exhibit 101.SCH | Inline XBRL Taxonomy Extension Schema Document |
Exhibit 101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document |
Exhibit 101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document |
Exhibit 101.LAB | Inline XBRL Taxonomy Label Linkbase Document |
Exhibit 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
Exhibit 104 | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the inline 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, 2018. Reference is made to TDS’ Form 10-K for the year ended December 31, 2018, for a complete list of exhibits, which are incorporated herein except to the extent supplemented or superseded above.
* Portions of this Exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K promulgated under the Exchange Act.
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Form 10-Q Cross Reference Index
Item Number | Page No. | ||||
Part I. | Financial Information | ||||
- | |||||
- | |||||
- | |||||
Part II. | Other Information | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TELEPHONE AND DATA SYSTEMS, INC. | |||||
(Registrant) | |||||
Date: | October 31, 2019 | /s/ LeRoy T. Carlson, Jr. | |||
LeRoy T. Carlson, Jr. President and Chief Executive Officer (principal executive officer) | |||||
Date: | October 31, 2019 | /s/ Peter L. Sereda | |||
Peter L. Sereda Executive Vice President and Chief Financial Officer (principal financial officer) | |||||
Date: | October 31, 2019 | /s/ Anita J. Kroll | |||
Anita J. Kroll Vice President - Controller and Chief Accounting Officer (principal accounting officer) | |||||
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TABLE OF CONTENTS
Note 1 Basis Of PresentationprintNote 2 Revenue RecognitionprintNote 3 Fair Value MeasurementsprintNote 4 Equipment Installment PlansprintNote 5 Earnings Per ShareprintNote 6 Acquisitions, Divestitures and ExchangesprintNote 7 Intangible AssetsprintNote 8 Investments in Unconsolidated EntitiesprintNote 9 LeasesprintNote 10 Commitments and ContingenciesprintNote 11 Variable Interest EntitiesprintNote 12 Noncontrolling InterestsprintNote 13 Business Segment Informationprint