UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[x]

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

For the quarterly period ended March 31, 2016

 

 

 

 

 

 

 

 

OR

 

 

 

 

 

 

 

 

[ ]

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

For the transition period from                                    to                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commission file number 001-14157

 

 

TELEPHONE AND DATA SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

Delaware

 

 

36-2669023

(State or other jurisdiction of incorporation or organization)

 

 

(IRS Employer Identification No.)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

(Address of principal executive offices) (Zip code)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Yes

No

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

[x]

[ ]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

[x]

[ ]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Large accelerated filer

[x]

Accelerated filer

[ ]

Non-accelerated filer

[ ]

Smaller reporting company

[ ]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

[ ]

[x]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class

 

 

Outstanding at March 31, 2016

Common Shares, $0.01 par value

 

 

101,822,914 Shares

Series A Common Shares, $0.01 par value

 

 

7,218,406 Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Telephone and Data Systems, Inc.

 

Quarterly Report on Form 10-Q

For the Quarterly Period Ended March 31, 2016

 

Index

 

Page No.

Part I.

Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

1

 

 

Consolidated Statement of Operations

1

 

 

Consolidated Statement of Comprehensive Income

2

 

 

Consolidated Statement of Cash Flows

3

 

 

Consolidated Balance Sheet

4

 

 

Consolidated Statement of Changes in Equity

6

 

 

Notes to Consolidated Financial Statements

8

 

 

 

 

 

 

Item 2.

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

17

 

 

Executive Overview

17

 

 

Terms used by TDS

18

 

 

Results of Operations — TDS Consolidated

20

 

 

U.S. Cellular Operations

23

 

 

TDS Telecom Operations

28

 

 

 

Wireline Operations

30

 

 

 

Cable Operations

33

 

 

 

HMS Operations

36

 

 

Liquidity and Capital Resources

37

 

 

Consolidated Cash Flows

40

 

 

Consolidated Balance Sheet Analysis

41

 

 

Application of Critical Accounting Policies and Estimates

41

 

 

Recent Accounting Pronouncements

41

 

 

Regulatory Matters

42

 

 

Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement

43

 

 

Supplemental Information

46

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

49

 

 

 

 

 

 

Item 4.

Controls and Procedures

50

 

 

 

 

Part II. 

Other Information

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

51

 

 

 

 

 

 

Item1A.

Risk Factors

51

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

51

 

 

 

 

 

 

Item 5.

Other Information

52

 

 

 

 

 

 

Item 6.

Exhibits

53

 

 

 

 

Signatures


Part I.  Financial Information

Item 1.  Financial Statements

Telephone and Data Systems, Inc.

Consolidated Statement of Operations

(Unaudited)

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

2016

 

2015

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

 

 

 

 

 

Operating revenues

 

 

 

 

 

 

Service

$

1,000 

 

$

1,073 

 

Equipment and product sales

 

243 

 

 

179 

 

 

Total operating revenues

 

1,243 

 

 

1,252 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

Cost of services (excluding Depreciation,

  amortization and accretion reported below)

 

288 

 

 

294 

 

Cost of equipment and products

 

291 

 

 

272 

 

Selling, general and administrative

 

431 

 

 

438 

 

Depreciation, amortization and accretion

 

212 

 

 

207 

 

(Gain) loss on asset disposals, net

 

6 

 

 

5 

 

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

 

 

 

 

(124)

 

(Gain) loss on license sales and exchanges, net

 

 

 

 

(123)

 

 

Total operating expenses

 

1,228 

 

 

969 

 

 

 

 

 

 

 

 

 

Operating income

 

15 

 

 

283 

 

 

 

 

 

 

 

 

 

Investment and other income (expense)

 

 

 

 

 

 

Equity in earnings of unconsolidated entities

 

35 

 

 

35 

 

Interest and dividend income

 

14 

 

 

8 

 

Interest expense

 

(41)

 

 

(34)

 

 

Total investment and other income

 

8 

 

 

9 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

23 

 

 

292 

 

Income tax expense

 

13 

 

 

116 

Net income

 

10 

 

 

176 

Less: Net income attributable to noncontrolling

 

 

 

 

 

  interests, net of tax

 

2 

 

 

30 

Net income attributable to TDS shareholders

 

8 

 

 

146 

TDS Preferred dividend requirement

 

 

 

 

 

Net income available to TDS common shareholders

$

8 

 

$

146 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

109 

 

 

108 

Basic earnings per share available to TDS common

  shareholders

$

0.07 

 

$

1.35 

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

110 

 

 

109 

Diluted earnings per share available to TDS common

  shareholders

$

0.07 

 

$

1.33 

 

 

 

 

 

 

 

 

 

Dividends per share to TDS shareholders

$

0.148 

 

$

0.141 

 

 

 

 

 

 

 

 

 

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


Telephone and Data Systems, Inc.

Consolidated Statement of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

2016

 

2015

(Dollars in millions)

 

 

 

 

 

Net income

$

10 

 

$

176 

 

Net change in accumulated other comprehensive income

 

 

 

 

 

 

 

Change related to retirement plan

 

 

 

 

 

 

 

 

Amounts included in net periodic benefit cost for the period

 

 

 

 

 

 

 

 

 

Change in prior service cost

 

 

 

 

(1)

Comprehensive income

 

10 

 

 

175 

 

Less: Net income attributable to noncontrolling interests, net of tax

 

2 

 

 

30 

Comprehensive income attributable to TDS shareholders

$

8 

 

$

145 

 

 

 

 

 

 

 

 

 

 

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


Telephone and Data Systems, Inc.

Consolidated Statement of Cash Flows

(Unaudited)

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

2016

 

2015

(Dollars in millions)

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

 

Net income

$

10 

 

$

176 

 

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

 

 

 

 

 

 

  from operating activities

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

212 

 

 

207 

 

 

 

Bad debts expense

 

19 

 

 

30 

 

 

 

Stock-based compensation expense

 

9 

 

 

8 

 

 

 

Deferred income taxes, net

 

5 

 

 

(47)

 

 

 

Equity in earnings of unconsolidated entities

 

(35)

 

 

(35)

 

 

 

Distributions from unconsolidated entities

 

14 

 

 

13 

 

 

 

(Gain) loss on asset disposals, net

 

6 

 

 

5 

 

 

 

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

 

 

 

 

(124)

 

 

 

(Gain) loss on license sales and exchanges, net

 

 

 

 

(123)

 

 

 

Noncash interest expense

 

1 

 

 

1 

 

Changes in assets and liabilities from operations

 

 

 

 

 

 

 

 

Accounts receivable

 

20 

 

 

21 

 

 

 

Equipment installment plans receivable

 

(41)

 

 

(36)

 

 

 

Inventory

 

(1)

 

 

95 

 

 

 

Accounts payable

 

39 

 

 

(14)

 

 

 

Customer deposits and deferred revenues

 

(6)

 

 

13 

 

 

 

Accrued taxes

 

63 

 

 

252 

 

 

 

Accrued interest

 

9 

 

 

9 

 

 

 

Other assets and liabilities

 

(78)

 

 

(96)

 

 

 

 

Net cash provided by operating activities

 

246 

 

 

355 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

Cash paid for additions to property, plant and equipment

 

(159)

 

 

(166)

 

Cash paid for acquisitions and licenses

 

 

 

 

(281)

 

Cash received from divestitures and exchanges

 

2 

 

 

274 

 

Other investing activities

 

 

 

 

3 

 

 

 

 

Net cash used in investing activities

 

(157)

 

 

(170)

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

Repayment of long-term debt

 

(3)

 

 

 

 

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

 

1 

 

 

 

 

Repurchase of TDS Common Shares

 

(3)

 

 

 

 

Repurchase of U.S. Cellular Common Shares

 

(2)

 

 

(2)

 

Dividends paid to TDS shareholders

 

(16)

 

 

(15)

 

Payment of debt issuance costs

 

 

 

 

(3)

 

Other financing activities

 

3 

 

 

(2)

 

 

 

 

Net cash used in financing activities

 

(20)

 

 

(22)

 

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

69 

 

 

163 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

Beginning of period

 

985 

 

 

472 

 

End of period

$

1,054 

 

$

635 

 

 

 

 

 

 

 

 

 

 

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

 


 

Telephone and Data Systems, Inc.

Consolidated Balance Sheet — Assets

 (Unaudited)

  

 

 

March 31,

 

December 31,

 

2016

 

2015

(Dollars in millions)

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

$

1,054 

 

$

985 

 

Accounts receivable

 

 

 

 

 

 

 

Due from customers and agents, less allowances of $44 and $49, respectively

 

700 

 

 

705 

 

 

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

 

92 

 

 

98 

 

Inventory, net

 

160 

 

 

158 

 

Prepaid expenses

 

130 

 

 

112 

 

Income taxes receivable

 

5 

 

 

70 

 

Other current assets

 

32 

 

 

30 

 

 

 

Total current assets

 

2,173 

 

 

2,158 

 

 

 

 

 

 

 

 

 

Assets held for sale

 

26 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

1,818 

 

 

1,844 

Goodwill

 

766 

 

 

766 

Franchise rights

 

244 

 

 

244 

Other intangible assets, net of accumulated amortization of $148 and $144, respectively

 

43 

 

 

47 

Investments in unconsolidated entities

 

423 

 

 

402 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

 

 

 

 

In service and under construction

 

11,581 

 

 

11,520 

 

Less: Accumulated depreciation and amortization

 

7,902 

 

 

7,756 

 

 

 

Property, plant and equipment, net

 

3,679 

 

 

3,764 

 

 

 

 

 

 

 

 

 

Other assets and deferred charges

 

211 

 

 

197 

 

 

 

 

 

 

 

 

 

Total assets1

$

9,383 

 

$

9,422 

 

 

 

 

 

 

 

 

 

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


 

Telephone and Data Systems, Inc.

Consolidated Balance Sheet — Liabilities and Equity

 (Unaudited)  

 

March 31,

 

December 31,

 

2016

 

2015

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

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Current portion of long-term debt

$

14 

 

$

14 

 

Accounts payable

 

355 

 

 

349 

 

Customer deposits and deferred revenues

 

283 

 

 

288 

 

Accrued interest

 

21 

 

 

12 

 

Accrued taxes

 

36 

 

 

41 

 

Accrued compensation

 

75 

 

 

113 

 

Other current liabilities

 

106 

 

 

127 

 

 

 

Total current liabilities

 

890 

 

 

944 

 

 

 

 

 

 

 

 

 

Deferred liabilities and credits

 

 

 

 

 

 

Net deferred income tax liability

 

905 

 

 

900 

 

Other deferred liabilities and credits

 

441 

 

 

433 

 

 

 

 

 

 

 

 

 

Long-term debt, net

 

2,437 

 

 

2,440 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interests with redemption features

 

2 

 

 

1 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

TDS shareholders’ equity

 

 

 

 

 

 

 

Series A Common and Common Shares

 

 

 

 

 

 

 

 

Authorized 290 shares (25 Series A Common and 265 Common Shares)

 

 

 

 

 

 

 

 

Issued 133 shares (7 Series A Common and 126 Common Shares)

 

 

 

 

 

 

 

 

Outstanding 109 shares (7 Series A Common and 102 Common Shares)

 

 

 

 

 

 

 

 

Par Value ($.01 per share)

 

1 

 

 

1 

 

 

Capital in excess of par value

 

2,372 

 

 

2,365 

 

 

Treasury shares at cost:

 

 

 

 

 

 

 

 

24 and 24 Common Shares, respectively

 

(726)

 

 

(727)

 

 

Accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

Retained earnings

 

2,479 

 

 

2,487 

 

 

 

Total TDS shareholders' equity

 

4,126 

 

 

4,126 

 

 

 

 

 

 

 

 

 

 

Preferred shares

 

1 

 

 

1 

 

Noncontrolling interests

 

581 

 

 

577 

 

 

 

 

 

 

 

 

 

 

 

Total equity

 

4,708 

 

 

4,704 

 

 

 

 

 

 

 

 

 

Total liabilities and equity1

$

9,383 

 

$

9,422 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

The consolidated total assets as of March 31, 2016 and December 31, 2015 include certain assets held by consolidated VIEs of $804 million and $658 million, respectively, which are not available to be used to settle the obligations of TDS.  The consolidated total liabilities as of March 31, 2016 and December 31, 2015 include certain liabilities of consolidated VIEs of $16 million and $1 million, respectively, for which the creditors of the VIEs have no recourse to the general credit of TDS.  See Note 8 — Variable Interest Entities for additional information.

 

 

 

 

 

 


Telephone and Data Systems, Inc.

Consolidated Statement of Changes in Equity

(Unaudited)

 

 

 

 

TDS Shareholders

 

 

 

 

 

 

 

 

 

 

Series A

Common and

Common

shares

 

Capital in

excess of

par value

 

Treasury

shares

 

Accumulated

other

comprehensive

income (loss)

 

Retained

earnings

 

Total TDS

shareholders'

equity

 

Preferred

shares

 

Noncontrolling

interests

 

Total equity

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

$

1 

 

$

2,365 

 

$

(727)

 

$

 

 

$

2,487 

 

$

4,126 

 

$

1 

 

$

577 

 

$

4,704 

Net income attributable to

  TDS shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

8 

 

 

8 

 

 

 

 

 

 

 

 

8 

Net income attributable  

  to noncontrolling interests

  classified as equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 

 

 

1 

TDS Common and Series A  

  Common share dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

(16)

 

 

(16)

 

 

 

 

 

 

 

 

(16)

Repurchase of Common

  shares

 

 

 

 

 

 

 

(3)

 

 

 

 

 

 

 

 

(3)

 

 

 

 

 

 

 

 

(3)

Dividend reinvestment plan

 

 

 

 

1 

 

 

2 

 

 

 

 

 

 

 

 

3 

 

 

 

 

 

 

 

 

3 

Incentive and compensation

  plans

 

 

 

 

(1)

 

 

2 

 

 

 

 

 

 

 

 

1 

 

 

 

 

 

 

 

 

1 

Adjust investment in

  subsidiaries for repurchases,

  issuances and other

  compensation plans

 

 

 

 

2 

 

 

 

 

 

 

 

 

 

 

 

2 

 

 

 

 

 

3 

 

 

5 

Stock-based compensation

  awards

 

 

 

 

4 

 

 

 

 

 

 

 

 

 

 

 

4 

 

 

 

 

 

 

 

 

4 

Tax windfall (shortfall) from

  stock awards

 

 

 

 

1 

 

 

 

 

 

 

 

 

 

 

 

1 

 

 

 

 

 

 

 

 

1 

March 31, 2016

$

1 

 

$

2,372 

 

$

(726)

 

$

 

 

$

2,479 

 

$

4,126 

 

$

1 

 

$

581 

 

$

4,708 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 


 

Telephone and Data Systems, Inc.

Consolidated Statement of Changes in Equity

(Unaudited)

 

 

 

TDS Shareholders

 

 

 

 

 

 

 

 

 

 

Series A

Common and

Common

shares

 

Capital in

excess of

par value

 

Treasury

shares

 

Accumulated

other

comprehensive

income (loss)

 

Retained

earnings

 

Total TDS

shareholders'

equity

 

Preferred

shares

 

Noncontrolling

interests

 

Total equity

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

$

1 

 

$

2,337 

 

$

(748)

 

$

6 

 

$

2,330 

 

$

3,926 

 

$

1 

 

$

528 

 

$

4,455 

Net income attributable to

  TDS shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

146 

 

 

146 

 

 

 

 

 

 

 

 

146 

Net income attributable  

  to noncontrolling interests

  classified as equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24 

 

 

24 

TDS Common and Series A  

  Common share dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

(15)

 

 

(15)

 

 

 

 

 

 

 

 

(15)

Dividend reinvestment plan

 

 

 

 

1 

 

 

1 

 

 

 

 

 

- 

 

 

2 

 

 

 

 

 

 

 

 

2 

Incentive and compensation

  plans

 

 

 

 

 

 

 

1 

 

 

 

 

 

(1)

 

 

 

 

 

 

 

 

 

 

 

 

Adjust investment in

  subsidiaries for repurchases,

  issuances and other

  compensation plans

 

 

 

 

5 

 

 

 

 

 

 

 

 

 

 

 

5 

 

 

 

 

 

(1)

 

 

4 

Stock-based compensation

  awards

 

 

 

 

2 

 

 

 

 

 

 

 

 

- 

 

 

2 

 

 

 

 

 

 

 

 

2 

March 31, 2015

$

1 

 

$

2,345 

 

$

(746)

 

$

6 

 

$

2,460 

 

$

4,066 

 

$

1 

 

$

551 

 

$

4,618 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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


 

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”).  The consolidated financial statements include the accounts of TDS and subsidiaries in which it has a controlling financial interest, including TDS’ 84%-owned wireless telephone subsidiary, United States Cellular Corporation (“U.S. Cellular”) and TDS’ wholly-owned subsidiary, TDS Telecommunications Corporation (“TDS Telecom”).  In addition, the consolidated financial statements include certain entities in which TDS has a variable interest that require consolidation under GAAP.  All material intercompany accounts and transactions have been eliminated.

The unaudited consolidated financial statements included herein have been prepared by TDS pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.  However, TDS believes that the disclosures included herein are adequate to make the information presented not misleading.  Calculated amounts and percentages are based on the underlying actual numbers rather than the numbers rounded to millions as presented.  These unaudited 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, 2015.

TDS’ business segments reflected in this Quarterly Report on Form 10-Q for the period ended March 31, 2016 are U.S. Cellular, Wireline, Cable, and Hosted and Managed Services (“HMS”) operations.  TDS’ non-reportable other business activities are presented as “Corporate, Eliminations and Other”, which includes the operations of TDS’ wholly-owned subsidiary Suttle-Straus, Inc. (“Suttle-Straus”).  Suttle-Straus’ financial results were not significant to TDS’ operations.  All of TDS’ segments operate only in the United States, except for HMS, which includes an insignificant foreign operation.  See Note 10Business Segment Information for summary financial information on each business segment.

The accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring items, unless otherwise disclosed) necessary for the fair statement of TDS’ financial position as of March 31, 2016 and December 31, 2015, and its results of operations, cash flows, comprehensive income and changes in equity for the three months ended March 31, 2016 and 2015.  These results are not necessarily indicative of the results to be expected for the full year.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”).  ASU 2014-09 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers.  In August 2015, the FASB issued Accounting Standards Update 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, requiring the adoption of ASU 2014-09 on January 1, 2018 for TDS.  Early adoption as of January 1, 2017 is permitted; however, TDS does not intend to adopt early.  TDS is evaluating the effects that adoption of ASU 2014-09 will have on its financial position and results of operations.

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

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

In January 2016, the FASB issued Accounting Standards Update 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”).  This ASU introduces changes to current accounting for equity investments and financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments.  TDS is required to adopt ASU 2016-01 on January 1, 2018.  Certain provisions are eligible for early adoption.  TDS is evaluating the effects that adoption of ASU 2016-01 will have on its financial position and results of operations.

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (“ASU 2016-02”).  ASU 2016-02 requires lessees to record a right-of-use asset and lease liability for almost all leases.  This ASU does not substantially impact lessor accounting.  TDS is required to adopt ASU 2016-02 on January 1, 2019.  Early adoption is permitted.  Upon adoption of ASU 2016-02, TDS expects a substantial increase to assets and liabilities on its balance sheet.  TDS is still evaluating the full effects that adoption of ASU 2016-02 will have on its financial position and results of operations.

In March 2016, the FASB issued Accounting Standards Update 2016-04, Liabilities – Extinguishments of Liabilities: Recognition of Breakage from Certain Prepaid Stored-Value Products (“ASU 2016-04”).  ASU 2016-04 requires companies that sell prepaid stored-value products redeemable for goods, services or cash at third-party merchants to recognize breakage (i.e. the value that is ultimately not redeemed by the consumer) in a way that is consistent with how it will be recognized under the new revenue recognition standard.  TDS is required to adopt ASU 2016-04 on January 1, 2018.  Early adoption is permitted.  TDS is evaluating the effects that adoption of ASU 2016-04 will have on its financial position and results of operations.

In March 2016, the FASB issued Accounting Standards Update 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”).  The amendments in ASU 2016-08 clarify the guidance on principal versus agent considerations as it relates to recognizing revenue.  TDS is required to adopt ASU 2016-08 on January 1, 2018 in conjunction with the effective date of ASU 2014-09.  Early adoption as of January 1, 2017 is permitted; however, TDS does not intend to adopt early.  TDS is evaluating the effects that adoption of ASU 2016-08 will have on its financial position and results of operations.

In March 2016, the FASB issued Accounting Standards Update 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”).  ASU 2016-09 intends to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  TDS is required to adopt ASU 2016-09 on January 1, 2017.  Early adoption is permitted.  TDS is evaluating the effects that adoption of ASU 2016-09 will have on its financial position, results of operations and cash flows.

In April 2016, the FASB issued Accounting Standards Update 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing (“ASU 2016-10”).  ASU 2016-10 provides clarification around identifying performance obligations and accounting arrangements whereby a license is granted as it relates to ASC 606 – Revenue from Contracts with Customers.  TDS is required to adopt ASU 2016-10 on January 1, 2018 in conjunction with the effective date of ASU 2014-09.  Early adoption as of January 1, 2017 is permitted; however, TDS does not intend to adopt early.  TDS is evaluating the effects that adoption of ASU 2016-10 will have on its financial position and results of operations.

Amounts Collected from Customers and Remitted to Governmental Authorities

TDS records amounts collected from customers and remitted to governmental authorities net within a tax liability account if the tax is assessed upon the customer and TDS merely acts as an agent in collecting the tax on behalf of the imposing governmental authority.  If the tax is assessed upon TDS, then amounts collected from customers as recovery of the tax are recorded in Service revenues and amounts remitted to governmental authorities are recorded in Selling, general and administrative expenses in the Consolidated Statement of Operations.  The amounts recorded gross in revenues that are billed to customers and remitted to governmental authorities totaled $23 million and $26 million for the three months ended March 31, 2016 and 2015, respectively.

 

Note 2 Fair Value Measurements

As of March 31, 2016 and December 31, 2015, TDS did not have any financial or nonfinancial assets or liabilities that were required to be recorded at fair value in its Consolidated Balance Sheet in accordance with GAAP.

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

TDS has applied the provisions of fair value accounting for purposes of computing the fair value of financial instruments for disclosure purposes as displayed below.

 

 

 

Level within the Fair Value Hierarchy

 

 

 

March 31, 2016

 

December 31, 2015

 

 

 

 

 

 

Book Value

 

Fair Value

 

Book Value

 

Fair Value

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

1

 

 

 

$

1,054 

 

$

1,054 

 

$

985 

 

$

985 

Long-term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

 

2

 

 

 

 

1,753 

 

 

1,778 

 

 

1,753 

 

 

1,766 

 

Institutional

 

 

2

 

 

 

 

533 

 

 

485 

 

 

533 

 

 

501 

 

Other

 

 

2

 

 

 

 

213 

 

 

212 

 

 

216 

 

 

215 

 


The fair value of Cash and cash equivalents approximates the book value due to the short-term nature of these financial instruments.  Long-term debt excludes capital lease obligations and the current portion of Long-term debt.  The fair value of “Retail” Long-term debt was estimated using market prices for TDS’ 7.0% Senior Notes, 6.875% Senior Notes, 6.625% Senior Notes and 5.875% Senior Notes, and U.S. Cellular’s 6.95% Senior Notes, 7.25% Senior Notes due 2063 and 7.25% Senior Notes due 2064.  TDS’ “Institutional” debt consists of U.S. Cellular’s 6.7% Senior Notes which are traded over the counter.  TDS’ “Other” debt consists of a senior term loan credit facility and other borrowings with financial institutions.  TDS estimated the fair value of its Institutional and Other debt through a discounted cash flow analysis using the interest rates or estimated yield to maturity for each borrowing, which ranged from 0.00% to 7.84% and 0.00% to 7.51% at March 31, 2016 and December 31, 2015, respectively.

Note 3 Equipment Installment Plans

TDS offers customers, through its owned and agent distribution channels, the option to purchase certain devices under equipment installment contracts over a specified time period.  For certain equipment installment plans (“EIP”), after a specified period of time or amount of payments, the customer may have the right to upgrade to a new 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.  As of March 31, 2016 and December 31, 2015, the guarantee liability related to these plans was $77 million and $93 million, respectively, and is reflected in Customer deposits and deferred revenues in the Consolidated Balance Sheet. 

TDS equipment installment plans do not provide for explicit interest charges.  For equipment installment plans with a duration of greater than twelve months, TDS imputes interest.  Equipment installment plan receivables had a weighted average effective imputed interest rate of 9.9% and 9.7% as of March 31, 2016 and December 31, 2015, respectively.

The following table summarizes unbilled equipment installment plan receivables as of March 31, 2016 and December 31, 2015.  Such amounts are included in the Consolidated Balance Sheet as Accounts receivable – customers and agents and Other assets and deferred charges, where applicable.

 

March 31, 2016

 

December 31, 2015

(Dollars in millions)

 

 

 

 

 

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

$

300 

 

$

279 

Short-term portion of unbilled deferred interest

 

(23)

 

 

(21)

Short-term portion of unbilled allowance for credit losses

 

(16)

 

 

(14)

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

$

261 

 

$

244 

 

 

 

 

 

 

 

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

$

91 

 

$

76 

Long-term portion of unbilled deferred interest

 

(3)

 

 

(2)

Long-term portion of unbilled allowance for credit losses

 

(7)

 

 

(6)

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

$

81 

 

$

68 

 

TDS assesses the collectability of the equipment installment plan receivables based on historical payment experience, account aging and other qualitative factors and provides an allowance for estimated losses.  The credit profiles of TDS customers on equipment installment plans are similar to those of TDS customers with traditional subsidized plans.  Customers with a higher risk credit profile are required to make a deposit for equipment purchased through an installment contract.

Note 4 Earnings Per Share

Basic earnings per share available to TDS common shareholders is computed by dividing Net income available to TDS common shareholders by the weighted average number of common shares outstanding during the period.  Diluted earnings per share available to TDS common shareholders is computed by dividing Net income available to TDS common shareholders by the weighted average number of common shares outstanding during the period adjusted to include the effects of potentially dilutive securities.  Potentially dilutive securities primarily include incremental shares issuable upon exercise of outstanding stock options and the vesting of restricted stock units.

The amounts used in computing earnings per common share and the effects of potentially dilutive securities on the weighted average number of common shares were as follows:

 

Three Months Ended

 

March 31,

 

2016

 

2015

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

 

 

 

 

 

Basic earnings per share available to TDS common shareholders:

 

 

 

 

 

 

Net income available to TDS common shareholders

    used in basic earnings per share

$

8 

 

$

146 

Adjustments to compute diluted earnings:

 

 

 

 

 

 

Noncontrolling interest adjustment

 

 

 

 

(1)

 

Net income available to TDS common shareholders

 

 

 

 

 

 

 

used in diluted earnings per share

$

8 

 

$

145 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares used in basic

 

 

 

 

 

 

earnings per share:

 

 

 

 

 

 

 

Common Shares

 

102 

 

 

101 

 

 

Series A Common Shares

 

7 

 

 

7 

 

 

 

Total

 

109 

 

 

108 

 

 

 

 

 

 

 

 

 

 

Effects of dilutive securities1

 

1 

 

 

1 

Weighted average number of shares used in diluted

 

 

 

 

 

 

earnings per share

 

110 

 

 

109 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share available to TDS common

 

 

 

 

 

 

shareholders

$

0.07 

 

$

1.35 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share available to TDS common

 

 

 

 

 

 

shareholders

$

0.07 

 

$

1.33 

 

 

 

 

 

 

 

 

 

 

 

1

Includes effects of stock options, restricted stock units and preferred shares.

 

Certain Common Shares issuable upon the exercise of stock options, vesting of restricted stock units or conversion of preferred shares were not included in average diluted shares outstanding for the calculation of Diluted earnings per share available to TDS common shareholders because their effects were antidilutive.  The number of such Common Shares excluded was 7 million shares and 6 million shares for the three months ended March 31, 2016 and 2015, respectively.

Note 5 Acquisitions, Divestitures and Exchanges

In the first quarter of 2016, U.S. Cellular entered into multiple agreements to transfer FCC licenses in non-operating markets and receive FCC licenses in operating markets.  The agreements were with third parties and provide for the transfer of certain AWS and PCS spectrum licenses and approximately $29 million, net, in cash to U.S. Cellular, in exchange for U.S. Cellular transferring certain AWS, PCS and 700 MHz spectrum licenses to the third parties.  The transactions are subject to regulatory approval and other customary closing conditions, and are expected to close in 2016.  Upon closing of each transaction, U.S. Cellular expects to recognize a gain.  As a result of these exchange agreements, licenses with a carrying value of $26 million have been classified as “Assets held for sale” in the Consolidated Balance Sheet as of March 31, 2016.

In 2015 and 2016, U.S. Cellular entered into multiple spectrum license purchase agreements that have not yet closed.  The aggregate purchase price for these spectrum licenses is $54 million.  These agreements are for spectrum licenses located in U.S. Cellular’s existing operating markets and are expected to close in 2016.

Note 6 Intangible Assets

Changes in Licenses at TDS for the three months ended March 31, 2016 are presented below.  There were no significant changes to Franchise rights, Goodwill or Other intangible assets during the three months ended March 31, 2016.

Licenses

 

 

 

 

 

 

 

 

 

 

(Dollars in millions)

 

 

Balance December 31, 2015¹

$

1,844 

 

Transferred to Assets held for sale

 

(26)

Balance March 31, 2016¹

$

1,818 

 

1

Amounts include payments totaling $338 million made by Advantage Spectrum L.P. to the FCC for licenses in which it was the provisional winning bidder in Auction 97.  These licenses have not yet been granted by the FCC.  See Note 8 — Variable Interest Entities for additional information.

 

Note 7 Investments in Unconsolidated Entities

Investments in unconsolidated entities consist of amounts invested in wireless and wireline entities in which TDS holds a noncontrolling interest.  These investments are accounted for using either the equity or cost method.

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 March 31,

 

2016

 

2015

(Dollars in millions)

 

 

 

 

 

Revenues

$ 

1,688 

 

$ 

1,735 

Operating expenses

 

1,236 

 

 

1,291 

Operating income

 

452 

 

 

444 

Other income (expense), net

 

(4)

 

 

4 

Net income

$

448 

 

$

448 

 

Note 8 Variable Interest Entities

In February 2015, the FASB issued Accounting Standards Update 2015-02, Consolidation: Amendments to the Consolidation Analysis (“ASU 2015-02”).  ASU 2015-02 changes consolidation accounting including revising certain criteria for identifying variable interest entities.  TDS adopted the provisions of this standard as of January 1, 2016.  As a result, certain consolidated subsidiaries and unconsolidated entities that were not defined as variable interest entities under previous accounting guidance are defined as variable interest entities under the provisions of ASU 2015-02.  TDS’ modified retrospective adoption of ASU 2015-02 did not change the group of entities which TDS is required to consolidate in its financial statements.  Accordingly, the adoption of ASU 2015-02 did not impact its financial position or results of operations.

Consolidated VIEs

TDS consolidates variable interest entities (“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 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, 2015.

The following VIEs were formed to participate in FCC auctions of wireless spectrum and to fund, establish, and provide wireless service with respect to any FCC licenses won in the auctions:

 

These particular VIEs are collectively referred to as designated entities.  Historically and as of March 31, 2016, TDS consolidated these VIEs. 

The power to direct the activities that most significantly impact the economic performance of these VIEs is shared.  Specifically, the general partner of these VIEs has the exclusive right to manage, operate and control 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 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.

In March 2015, King Street Wireless made a $60 million distribution to its owners.  Of this distribution, $6 million was provided to King Street Wireless, Inc. and $54 million was provided to U.S. Cellular. 

FCC Auction 97 ended in January 2015.  TDS participated in Auction 97 indirectly through its interest in Advantage Spectrum.  An indirect subsidiary of TDS is a limited partner in Advantage Spectrum.  Advantage Spectrum applied as a designated entity, and expects to receive bid credits with respect to spectrum purchased in Auction 97.  Advantage Spectrum was the winning bidder for 124 licenses for an aggregate bid of $338 million, after its expected designated entity discount of 25%.  This amount is classified as Licenses in TDS’ Consolidated Balance Sheet.  Advantage Spectrum’s bid amount, less the initial deposit of $60 million paid in 2014, plus certain other charges totaling $2 million, was paid to the FCC in March 2015.  As of March 31, 2016 and as of the filing date of this Form 10-Q, these licenses have not yet been granted by and are still pending before the FCC. 

The remaining VIEs are comprised of limited partnerships that provide wireless service.  ASU 2015-02 modified the manner in which limited partnerships and similar legal entities are evaluated under the variable interest model.  A limited partnership is a variable interest entity unless the limited partners hold substantive participating rights or kick-out rights over the general partners.  For certain limited partnerships, U.S. Cellular is the 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, beginning January 1, 2016, these limited partnerships are also recognized as VIEs and are consolidated under the variable interest model. Prior to the adoption of ASU 2015-02, these limited partnerships were consolidated under the voting interest model. 

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

 

 

 

March 31,

 

December 31,

 

 

 

2016¹

 

2015¹

(Dollars in millions)

 

 

 

 

 

Assets

 

 

 

 

 

 

Cash and cash equivalents

$

2 

 

$

1 

 

Accounts receivable

 

35 

 

 

 

 

Other current assets

 

6 

 

 

 

 

Licenses2

 

649 

 

 

649 

 

Property, plant and equipment, net

 

103 

 

 

8 

 

Other assets and deferred charges

 

9 

 

 

 

 

 

Total assets

$

804 

 

$

658 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Current liabilities

$

22 

 

$

 

 

Deferred liabilities and credits

 

11 

 

 

1 

 

 

Total liabilities

$

33 

 

$

1 

 

 

 

 

 

 

 

 

1

ASU 2015-02 was adopted on a modified retrospective basis and, accordingly, prior year amounts have not been revised to reflect the change in guidance.

2

Includes payments totaling $338 million made by Advantage Spectrum to the FCC as described above.

 

Unconsolidated VIEs

TDS manages the operations of and holds a variable interest in certain other limited partnerships, but is not the primary beneficiary of these entities and, therefore, does not consolidate them under the variable interest model outlined in ASU 2015-02.

TDS’ total investment in these unconsolidated entities was $5 million at March 31, 2016 and December 31, 2015, 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 $13 million and $281 million during the three months ended March 31, 2016 and March 31, 2015, respectively.  TDS may agree to make additional capital contributions and/or advances to these or other VIEs and/or to their general partners to provide additional funding for operations or the development of licenses 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.

Note 9 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:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

2016

 

2015

(Dollars in millions)

 

 

 

 

 

Net income attributable to TDS shareholders

$

8 

 

$

146 

 

Transfer (to) from the noncontrolling interests

 

 

 

 

 

 

 

Change in TDS' Capital in excess of par value from

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

 

(2)

 

 

 

 

 

Change in TDS' Capital in excess of par value from

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

 

 

 

 

 

 

 

Purchase of ownership in subsidiaries from noncontrolling interests

 

 

 

 

 

 

 

Net transfers (to) from noncontrolling interests

 

(2)

 

 

 

 

Change from net income attributable to TDS and

   transfers (to) from noncontrolling interests

$

6 

 

$

146 

Note 10 Business Segment Information

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

Financial data for TDS’ reportable segments for the three month period ended, or as of March 31, 2016 and 2015, is as follows.  See Note 1Basis of Presentation for additional information.

 

 

 

 

 

 

 

TDS Telecom

 

 

 

 

 

 

Three Months Ended or as of March 31, 2016

 

U.S. Cellular

 

Wireline

 

Cable

 

HMS

 

TDS Telecom Eliminations

 

TDS Telecom Total

 

Corporate, Eliminations and Other

 

Total

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service

 

$

760 

 

$

173 

 

$

45 

 

$

29 

 

$

(1)

 

$

246 

 

$

(6)

 

$

1,000 

 

Equipment and product sales

 

 

198 

 

 

 

 

 

 

 

 

35 

 

 

 

 

 

35 

 

 

10 

 

 

243 

 

 

Total operating revenues

 

 

958 

 

 

173 

 

 

45 

 

 

64 

 

 

(1)

 

 

281 

 

 

4 

 

 

1,243 

Cost of services (excluding Depreciation, amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and accretion reported below)

 

 

184 

 

 

62 

 

 

22 

 

 

21 

 

 

(1)

 

 

104 

 

 

 

 

 

288 

Cost of equipment and products

 

 

256 

 

 

1 

 

 

 

 

 

29 

 

 

 

 

 

30 

 

 

5 

 

 

291 

Selling, general and administrative

 

 

361 

 

 

48 

 

 

12 

 

 

11 

 

 

 

 

 

71 

 

 

(1)

 

 

431 

Depreciation, amortization and accretion

 

 

153 

 

 

42 

 

 

9 

 

 

7 

 

 

 

 

 

58 

 

 

1 

 

 

212 

(Gain) loss on asset disposals, net

 

 

5 

 

 

 

 

 

1 

 

 

 

 

 

 

 

 

1 

 

 

 

 

 

6 

Operating income (loss)

 

 

(1)

 

 

20 

 

 

1 

 

 

(4)

 

 

 

 

 

17 

 

 

(1)

 

 

15 

Equity in earnings of unconsolidated entities

 

 

35 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

35 

Interest and dividend income

 

 

13 

 

 

1 

 

 

 

 

 

 

 

 

 

 

 

1 

 

 

 

 

 

14 

Interest expense

 

 

(28)

 

 

1 

 

 

 

 

 

(1)

 

 

 

 

 

 

 

 

(13)

 

 

(41)

Other, net

 

 

1 

 

 

 

 

 

(1)

 

 

 

 

 

 

 

 

(1)

 

 

 

 

 

 

Income (loss) before income taxes

 

 

20 

 

 

22 

 

 

 

 

 

(5)

 

 

 

 

 

17 

 

 

(14)

 

 

23 

Income tax expense (benefit)1

 

 

11 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7 

 

 

(5)

 

 

13 

Net income (loss)

 

 

9 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10 

 

 

(9)

 

 

10 

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

153 

 

 

42 

 

 

9 

 

 

7 

 

 

 

 

 

58 

 

 

1 

 

 

212 

(Gain) loss on asset disposals, net

 

 

5 

 

 

 

 

 

1 

 

 

 

 

 

 

 

 

1 

 

 

 

 

 

6 

Interest expense

 

 

28 

 

 

(1)

 

 

 

 

 

1 

 

 

 

 

 

 

 

 

13 

 

 

41 

Income tax expense (benefit)1

 

 

11 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7 

 

 

(5)

 

 

13 

Adjusted EBITDA2

 

$

206 

 

$

63 

 

$

10 

 

$

3 

 

$

 

 

$

76 

 

$

 

 

$

282 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in unconsolidated entities

 

$

384 

 

$

4 

 

$

 

 

$

 

 

$

 

 

$

4 

 

$

35 

 

$

423 

Total assets

 

$

7,057 

 

$

1,291 

 

$

581 

 

$

270 

 

$

 

 

$

2,142 

 

$

184 

 

$

9,383 

Capital expenditures

 

$

79 

 

$

27 

 

$

13 

 

$

2 

 

$

 

 

$

42 

 

$

4 

 

$

125 

 

 

 

 

 

 

 

 

 

 

TDS Telecom

 

 

 

 

 

 

Three Months Ended or as of March 31, 2015

 

U.S. Cellular

 

Wireline

 

Cable

 

HMS

 

TDS Telecom Eliminations

 

TDS Telecom Total

 

Corporate, Eliminations and Other

 

Total

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service

 

$

828 

 

$

176 

 

$

44 

 

$

28 

 

$

(1)

 

$

247 

 

$

(2)

 

$

1,073 

 

Equipment and product sales

 

 

137 

 

 

 

 

 

 

 

 

33 

 

 

 

 

 

33 

 

 

9 

 

 

179 

 

 

Total operating revenues

 

 

965 

 

 

176 

 

 

44 

 

 

61 

 

 

(1)

 

 

280 

 

 

7 

 

 

1,252 

Cost of services (excluding Depreciation, amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and accretion reported below)

 

 

191 

 

 

62 

 

 

20 

 

 

20 

 

 

 

 

 

102 

 

 

1 

 

 

294 

Cost of equipment and products

 

 

238 

 

 

1 

 

 

 

 

 

27 

 

 

 

 

 

28 

 

 

6 

 

 

272 

Selling, general and administrative

 

 

369 

 

 

46 

 

 

13 

 

 

13 

 

 

(1)

 

 

71 

 

 

(2)

 

 

438 

Depreciation, amortization and accretion

 

 

147 

 

 

42 

 

 

9 

 

 

6 

 

 

 

 

 

57 

 

 

3 

 

 

207 

(Gain) loss on asset disposals, net

 

 

4 

 

 

 

 

 

1 

 

 

 

 

 

 

 

 

1 

 

 

 

 

 

5 

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

 

 

(111)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13)

 

 

(124)

(Gain) loss on license sales and exchanges, net

 

 

(123)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(123)

Operating income (loss)

 

 

250 

 

 

25 

 

 

1 

 

 

(5)

 

 

 

 

 

21 

 

 

12 

 

 

283 

Equity in earnings of unconsolidated entities

 

 

34 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 

 

 

35 

Interest and dividend income

 

 

8 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8 

Interest expense

 

 

(20)

 

 

1 

 

 

 

 

 

(1)

 

 

 

 

 

 

 

 

(14)

 

 

(34)

Other, net

 

 

 

 

 

1 

 

 

 

 

 

 

 

 

 

 

 

1 

 

 

(1)

 

 

 

Income (loss) before income taxes

 

 

272 

 

 

27 

 

 

1 

 

 

(6)

 

 

 

 

 

22 

 

 

(2)

 

 

292 

Income tax expense (benefit)1

 

 

107 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9 

 

 

 

 

 

116 

Net income (loss)

 

 

165 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 

 

 

(2)

 

 

176 

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

147 

 

 

42 

 

 

9 

 

 

6 

 

 

 

 

 

57 

 

 

3 

 

 

207 

(Gain) loss on asset disposals, net

 

 

4 

 

 

 

 

 

1 

 

 

 

 

 

 

 

 

1 

 

 

 

 

 

5 

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

 

 

(111)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13)

 

 

(124)

(Gain) loss on license sales and exchanges, net

 

 

(123)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(123)

Interest expense

 

 

20 

 

 

(1)

 

 

 

 

 

1 

 

 

 

 

 

 

 

 

14 

 

 

34 

Income tax expense (benefit)1

 

 

107 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9 

 

 

 

 

 

116 

Adjusted EBITDA2

 

$

209 

 

$

68 

 

$

11 

 

$

1 

 

$

 

 

$

80 

 

$

2 

 

$

291 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in unconsolidated entities

 

$

305 

 

$

4 

 

$

 

 

$

 

 

$

 

 

$

4 

 

$

34 

 

$

343 

Total assets

 

$

6,606 

 

$

1,366 

 

$

566 

 

$

275 

 

$

 

 

$

2,207 

 

$

183 

 

$

8,996 

Capital expenditures

 

$

66 

 

$

20 

 

$

12 

 

$

5 

 

$

 

 

$

37 

 

$

2 

 

$

105 

 

 

1

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

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


Telephone and Data Systems, Inc.

Item 2. Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

Executive Overview

The following discussion and analysis should be read in conjunction with Telephone and Data Systems, Inc.’s (“TDS”) interim consolidated financial statements and notes included in Item 1 above, and with the description of TDS’ business, its audited consolidated financial statements and Management's Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations included in TDS’ Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2015.  Analysis of TDS’ financial results compares the three months ended March 31, 2016 to the three months ended March 31, 2015.  Calculated amounts and percentages are based on the underlying actual numbers rather than the numbers rounded to millions as presented.

This report contains statements that are not based on historical facts, including the words “believes,” “anticipates,” “intends,” “expects” and similar words.  These statements constitute and represent “forward looking statements” as this term is defined in the Private Securities Litigation Reform Act of 1995.  Such forward looking statements involve known and unknown risks, uncertainties and other 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.

TDS uses certain “non-GAAP financial measures” throughout the MD&A.  A discussion of the reason TDS uses these measures 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 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 customers nationwide.  TDS provides wireless services through its 84%-owned subsidiary, United States Cellular Corporation (“U.S. Cellular”).  TDS also provides wireline services, cable services and hosted and managed services (“HMS”), through its wholly-owned subsidiary, TDS Telecommunications Corporation (“TDS Telecom”).  TDS’ segments operate almost entirely in the United States.  See Note 10Business Segment Information in the Notes to Consolidated Financial Statements for summary financial information on each business segment.

*Represents a non-GAAP financial measure.  Refer to Supplemental Information within this MD&A for a reconciliation of this measure.

 

TDS Mission and Strategy

TDS’ mission is to provide outstanding communications services to its customers and meet the needs of its shareholders, its people, and its communities.  In pursuing this mission, TDS seeks to profitably grow its businesses, create opportunities for its associates and employees, and steadily build value over the long-term for its shareholders.  Across all of its businesses, TDS is focused on providing exceptional customer experiences through best-in-class services and products and superior customer service.

TDS’ long-term strategy calls for the majority of its capital to be reinvested in its operating businesses to strengthen their competitive positions, while still returning value to TDS shareholders through the payment of a regular quarterly cash dividend and share repurchases. 

In 2016, TDS is working to build shareholder value by continuing to execute on its strategies to build strong, competitive businesses providing high-quality, data-focused services and products.  Strategic efforts include:

Terms Used by TDS

All defined terms in this MD&A are used as defined in the Notes to Consolidated Financial Statements, and additional terms are defined below:


Results of Operations TDS Consolidated

 

 

 

 

 

Three Months Ended March 31,

 

 

2016

 

2015

 

2016 vs. 2015

(Dollars in millions)

 

 

 

 

 

 

 

 

Operating revenues

 

 

 

 

 

 

 

 

 

U.S. Cellular

 

$

958 

 

$

965 

 

(1)%

 

TDS Telecom

 

 

281 

 

 

280 

 

-

 

All other1

 

 

4 

 

 

7 

 

(51)%

 

 

Total operating revenues

 

 

1,243 

 

 

1,252 

 

(1)%

Operating expenses

 

 

 

 

 

 

 

 

 

U.S. Cellular

 

 

959 

 

 

715 

 

34%

 

TDS Telecom

 

 

264 

 

 

259 

 

2%

 

All other1 2

 

 

5 

 

 

(5)

 

>100%

 

 

Total operating expenses

 

 

1,228 

 

 

969 

 

27%

Operating income

 

 

 

 

 

 

 

 

 

U.S. Cellular

 

 

(1)

 

 

250 

 

>(100)%

 

TDS Telecom

 

 

17 

 

 

21 

 

(21)%

 

All other1 2

 

 

(1)

 

 

12 

 

>(100)%

 

 

Total operating income

 

 

15 

 

 

283 

 

(95)%

Other income (expenses)

 

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated entities

 

 

35 

 

 

35 

 

2%

 

Interest and dividend income

 

 

14 

 

 

8 

 

65%

 

Interest expense

 

 

(41)

 

 

(34)

 

(24)%

 

 

Total investment and other income (expense)

 

 

8 

 

 

9 

 

(22)%

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

23 

 

 

292 

 

(92)%

 

Income tax expense

 

 

13 

 

 

116 

 

(89)%

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

10 

 

 

176 

 

(94)%

 

Less: Net income attributable to

  noncontrolling interests, net of tax

 

 

2 

 

 

30 

 

(94)%

Net income attributable to TDS shareholders

 

$

8 

 

$

146 

 

(94)%

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

125 

 

$

105 

 

19%

 

 

 

 

 

 

 

 

 

 

 

 

1

Consists of corporate and other operations and intercompany eliminations.

 

 

 

 

 

 

 

 

 

 

 

 

2

In 2015, TDS recognized an incremental gain compared to U.S. Cellular of $12 million on a tower sale as a result of lower asset basis in the assets disposed.

 

 

Commentary

 

TDS’ 1% decrease in operating revenues was due primarily to a decrease in retail service revenues at U.S. Cellular.  Retail service revenues continue to be impacted by industry-wide price competition.  The decrease was partially offset by increases in equipment sales revenues which is attributable to increased activity in equipment installment plans.

 

Operating expenses

The increase was due primarily to the absence of significant offsetting gains recognized from sales and exchanges of businesses and licenses in 2016.  Such gains were $247 million in 2015.

Refer to individual segment discussions in this MD&A for additional details on operating expenses at the segment level.

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 $19 million and $20 million to Equity in earnings of unconsolidated entities in 2016 and 2015, respectively.  See Note 7 Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.

Interest and dividend income

Interest and dividend income increased due to imputed interest income recognized on equipment installment plans of $11 million and $7 million in 2016 and 2015, respectively.  See Note 3  Equipment Installment Plans in the Notes to Consolidated Financial Statements for additional information.

Interest expense

Interest expense increased due primarily to U.S. Cellular’s issuance of $300 million of 7.25% Senior Notes due 2064 in November 2015 and borrowing of $225 million on U.S. Cellular’s senior term loan facility that was drawn in July 2015.

Income tax expense

TDS' effective tax rate on Income before income taxes in 2016 and 2015 was 55.7% and 39.8%, respectively.  The higher rate for 2016 is due primarily to discrete tax adjustments that have a disproportionate impact on the tax rate because of the relatively low pretax income in the quarter.  As discrete items are not annualized, this rate may not be indicative of the annual rate for 2016.

Net income attributable to noncontrolling interests, net of tax

Net income attributable to noncontrolling interests, net of tax includes the noncontrolling public shareholders’ share of U.S. Cellular’s net income and the noncontrolling shareholders’ or partners’ share of certain U.S. Cellular subsidiaries’ net income (loss).  The decrease is due to lower income from U.S. Cellular and certain other partnerships in 2016.

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

2016

 

2015

(Dollars in millions)

 

 

 

 

 

Net income attributable to noncontrolling interests, net of tax

 

 

 

 

 

 

U.S. Cellular noncontrolling public shareholders’

$

1 

 

$

25 

 

Noncontrolling shareholders’ or partners’

 

1 

 

 

5 

 

 

 

 

$

2 

 

$

30 

 

 

Commentary

 

Net income decreased due primarily to the absence of significant gains from sales and exchanges of businesses and licenses in 2016.

*Represents a non-GAAP measure.  Refer to Supplemental Information within this MD&A for a reconciliation of this measure.


 

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 84%-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 approximately 4.9 million customers including 4.5 million postpaid and 0.4 million prepaid customers
  • Operates in 23 states
  • Employs approximately 6,500 employees
  • Headquartered in Chicago, Illinois
  • 6,306 cell sites including 3,989 owned towers in service

 

 


Operational Overview

 

Postpaid Customer Results

 

 

 

Q1 2015

Q1 2016

 

 

Gross Additions

200,000

215,000

 

 

Net Additions

9,000

45,000

 

 

Churn

1.48%

1.28%

 

 

Postpaid customers

end of period

4,307,000

4,454,000

 

 

Retail customers –

end of period

4,667,000

4,853,000

 

Commentary

U.S. Cellular believes the increase in net additions in 2016 is a result of competitive services and products priced to offer the best value to customers and expanded equipment installment plan offerings.  Postpaid churn continued to decline due to enhancements in the customer experience, targeted retention programs and improvement in the overall credit mix of gross additions.

 

 

 

 


Commentary

Smartphone penetration increased to 75% of the postpaid handset customer base in the first quarter of 2016, up from 67% in the same period a year ago. 

Smartphones represented 92% and 86% of total handset sales during the first quarter of 2016 and 2015, respectively.  This contributed to increased service revenues from data.

Continued growth in revenues and costs related to data services and products may result in increased operating expenses and the need for additional investment in spectrum, network capacity and network enhancements.

 

 

 

Commentary

Postpaid ARPU and Postpaid ARPA decreased in 2016 driven by industry-wide price competition, together with discounts on shared data plans provided to customers on equipment installment plans and those providing their own device at the time of activation or renewal.  Postpaid ARPU also decreased due to net additions of connected devices, which on a per unit basis contribute less revenue than handsets.  These factors were partially offset by the impacts of continued adoption of smartphones and shared data plans. 

Equipment installment plans increase equipment sales revenue as customers pay for their wireless devices in installments at a total device price that is generally higher than the device price offered to customers in conjunction with alternative plans that are subject to a service contract.  Equipment installment plans also have the impact of reducing service revenues as many equipment installment plans provide for reduced monthly access charges.  In order to show the trends in total service and equipment revenues received from customers, U.S. Cellular has presented Postpaid ABPU and Postpaid ABPA, which are calculated as Postpaid ARPU and Postpaid ARPA plus average monthly equipment installment plan billings per customer and account, respectively.  Equipment installment plan billings increased in 2016 due to increased adoption of equipment installment plans by postpaid customers.  Postpaid ABPU decreased in 2016 as the increase in equipment installment plan billings was more than offset by the Postpaid ARPU drivers discussed above. Postpaid ABPA, however, increased in 2016 due to the increase in equipment installment plan billings and an increase in device connections per account, partially offset by the Postpaid ARPU and Postpaid ARPA drivers discussed above.


Financial Overview

Components of Operating Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

2016 vs.

 

 

 

 

 

2016

 

2015

 

2015

(Dollars in millions)

 

  

  

  

  

  

  

  

Retail service

 

$

682 

 

$

747 

 

(9)%

Inbound roaming

 

 

36 

 

 

40 

 

(11)%

Other

 

 

42 

 

 

41 

 

1%

  

Service revenues

 

 

760 

 

 

828 

 

(8)%

Equipment sales

 

 

198 

 

 

137 

 

45%

  

Total operating revenues

 

 

958 

 

 

965 

 

(1)%

  

  

 

 

 

 

 

 

 

 

 

 

System operations (excluding Depreciation, amortization and accretion reported

  below)

 

  

184 

  

  

191 

  

(4)%

Cost of equipment sold

 

 

256 

 

 

238 

 

8%

Selling, general and administrative

 

 

361 

 

 

369 

 

(2)%

 

 

 

 

 

 

801 

 

 

798 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flow*

 

 

157 

 

 

167 

 

(6)%

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

153 

 

 

147 

 

4%

(Gain) loss on asset disposals, net

 

 

5 

 

 

4 

 

19%

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

 

 

 

 

 

(111)

 

100%

(Gain) loss on license sales and exchanges

 

 

 

 

 

(123)

 

N/M

  

Total operating expenses

 

 

959 

 

 

715 

 

34%

Operating income (loss)

 

$

(1)

 

$

250 

 

>(100)%

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA*

 

$

206 

 

$

209 

 

(2)%

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

79 

 

$

66 

 

19%

  

  

  

  

 

  

  

  

  

  

  

  

*

Represents a non-GAAP financial measure.  Refer to Supplemental Information within this MD&A for a reconciliation of this measure.

 

 

 

 

 

 

 

 

 

 

 

 

N/M - Percentage change not meaningful

 

 

 

Service revenues consist of:

  • Charges for access, airtime, roaming, recovery of regulatory costs and value added services, including data services and products (“retail service”)
  • Charges to other wireless carriers whose customers use U.S. Cellular’s wireless systems when roaming (“inbound roaming”)
  • Amounts received from the Federal USF
  • Tower rental 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:

Commentary

Total operating revenues

Service revenues decreased as a result of (i) a decrease in retail service revenues driven by industry-wide price competition, including discounts on shared data plans provided to customers on equipment installment plans and those providing their own device at the time of activation or renewal; and (ii) reductions in inbound roaming revenue driven by lower roaming ratesSuch reductions were partially offset by an increase in the average customer base and continued adoption of shared data plans.

Federal USF revenue was $23 million in 2016, which remained flat year over year.  Pursuant to the FCC's Reform Order (“Reform Order”), U.S. Cellular’s Federal USF support was to be phased down at the rate of 20% per year beginning July 1, 2012.  The Phase II Mobility Fund was not operational as of July 2014 and, therefore, as provided by the Reform Order, the phase down was suspended at 60% of the baseline amount.  U.S. Cellular will continue to receive USF support at the 60% level until the FCC takes further action.  At this time, U.S. Cellular cannot predict what changes that the FCC might make to the USF high cost support program and, accordingly, cannot predict whether such changes will have a material adverse effect on U.S. Cellular’s business, financial condition or results of operations.

Equipment sales revenues increased due primarily to an increase in average revenue per device sold from sales under equipment installment plans, an increase in the number of devices sold, an increase in accessory sales, and a mix shift to smartphones and connected devices.  Equipment installment plan sales contributed $147 million and $68 million in 2016 and 2015, respectively.

System operations expenses

Maintenance, utility and cell site expenses increased 6% to $97 million reflecting higher support costs for the expanded 4G LTE network, increased cell site rent, the completion of certain tower maintenance and repair projects, and other maintenance activities.

Expenses incurred when U.S. Cellular’s customers used other carriers’ networks while roaming decreased 13% to $42 million driven primarily by lower rates for both voice and data traffic, partially offset by increased data roaming usage.

Customer usage expenses decreased 13% to $45 million driven by lower fees for platform and content providers, a decrease in long distance charges driven by rate reductions, and a decrease in circuit costs from the migration to LTE.

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

Cost of equipment sold

The increase in Cost of equipment sold is a result of a 9% increase in devices sold and a mix shift to higher cost devices.  Cost of equipment sold in 2016 included $160 million related to equipment installment plan sales compared to $87 million in 2015Loss on equipment, representing Equipment sales revenues less Cost of equipment sold, was $57 million and $101 million in 2016 and 2015, respectively.

Selling, general and administrative expenses

Selling expenses increased 6% to $177 million due primarily to higher retail and agent commissions expense driven by higher accessory sales and increased activations and renewals, higher retail bonus expense, and increased advertising spend.

General and administrative expenses decreased 8% to $185 million due primarily to lower bad debts expense driven by improved receivables collectability, lower consulting expenses related to the billing system, and reduced expense of customer service operations.

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

The net gain in 2015 was due primarily to a $108 million gain recognized on the sale of towers and certain related contracts, assets and liabilities. 

(Gain) loss on license sales and exchanges, net

The net gain in 2015 was due primarily to a $125 million gain recognized on the exchanges of certain of U.S. Cellular’s unbuilt PCS licenses for certain other PCS licenses and cash.


TDS TELECOM OPERATIONS

 

Business Overview

TDS Telecom operates in three reportable segments: Wireline, Cable and HMS. The overall strategy for the Wireline and Cable businesses is to own the best data pipes in each market in order to capitalize on data growth and the need for higher broadband speeds and leverage that growth across bundled services with video and voice.  In addition, through its HMS business, TDS Telecom provides a wide range of Information Technology (“IT”) services including colocation, dedicated hosting, hosted application management, cloud computing services and planning, engineering, procurement, installation, sales and management of  IT infrastructure hardware solutions.

OPERATIONS

 

  • Wireline and Cable serve approximately 1.2 million broadband, video and voice connections in 34 states.
  • Wireline operates 105 incumbent local exchange carriers (“ILEC”) in 25 states and competitive local exchange carriers (“CLEC”) in 4 states.
  • Cable operates primarily in Oregon, Utah, Colorado, New Mexico and Texas.
  • HMS operates a total of eight data centers.  It owns two data centers in Iowa, and one each in Minnesota, Wisconsin, Colorado and Oregon and it leases two data centers in Arizona.

 

Financial Overview

Components of Operating Income

 

 

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

2016 vs.

 

 

2016

 

2015

 

2015

(Dollars in millions)

 

 

 

 

 

 

 

 

Operating revenues

 

 

 

 

 

 

 

 

 

Wireline

 

$

173 

 

$

176 

 

(2)%

 

Cable

 

 

45 

 

 

44 

 

3%

 

HMS

 

 

64 

 

 

61 

 

5%

 

Intra-company elimination

 

 

(1)

 

 

(1)

 

(47)%

 

 

TDS Telecom operating revenues

 

 

281 

 

 

280 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

Wireline

 

 

153 

 

 

151 

 

1%

 

Cable

 

 

44 

 

 

43 

 

5%

 

HMS

 

 

68 

 

 

66 

 

3%

 

Intra-company elimination

 

 

(1)

 

 

(1)

 

(47)%

 

 

TDS Telecom operating expenses

 

 

264 

 

 

259 

 

2%

 

 

 

 

 

 

 

 

 

 

 

 

TDS Telecom operating income

 

$

17 

 

$

21 

 

(21)%

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA*

 

$

76 

 

$

80 

 

(4)%

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

42 

 

$

37 

 

15%

 

 

 

 

 

 

 

 

 

 

 

 

*

Represents a non-GAAP financial measure.  Refer to Supplemental information within this MD&A for a reconciliation of this measure.

 

 

Commentary

Operating revenues were unchanged from the prior year as increases in revenues from HMS and Cable operations were offset by decreases in Wireline commercial and wholesale revenues.

 

Total operating expenses

Operating expenses increased to support growth in HMS and Cable and due to higher employee-related expenses in Wireline.


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 strategic focus is on small- to medium-sized businesses and its sales efforts emphasize advanced IP-based voice and data services.

Operational Overview

Wireline residential broadband customers, comprised mainly of ILEC customers, are increasingly choosing higher speeds.  In total, Wireline increased average revenue per connection by 2%.

 

Total connections were flat as a 12,800 increase in IPTV customers was offset by a 3% decline in voice connections, excluding the impact of 2015 divestitures.

TDS managedIP connections grew 4%; however, this did not completely offset the decline in voice connections.

 

 

Financial Overview Wireline

Components of Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2016

 

2015

 

2016 vs. 2015

(Dollars in millions)

 

 

 

 

 

 

 

 

Service revenues

 

 

 

 

 

 

 

 

 

Residential

 

$

76 

 

$

75 

 

2%

 

Commercial

 

 

54 

 

 

56 

 

(4)%

 

Wholesale

 

 

43 

 

 

45 

 

(5)%

 

 

Total service revenues

 

 

173 

 

 

176 

 

(2)%

Equipment and product sales

 

 

 

 

 

 

 

19%

 

 

 

Total operating revenues

 

 

173 

 

 

176 

 

(2)%

 

 

 

 

 

 

 

 

 

Cost of services (excluding Depreciation,

 

 

 

 

 

 

 

 

  amortization and accretion reported below)

 

 

62 

 

 

62 

 

(1)%

Cost of equipment and products

 

 

1 

 

 

1 

 

(8)%

Selling, general and administrative

 

 

48 

 

 

46 

 

6%

 

 

 

 

 

 

 

111 

 

 

109 

 

2%

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flow*

 

 

62 

 

 

67 

 

(8)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

42 

 

 

42 

 

(1)%

 

 

 

Total operating expenses

 

 

153 

 

 

151 

 

1%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating income

 

$

20 

 

$

25 

 

(19)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA*

 

$

63 

 

$

68 

 

(8)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

27 

 

$

20 

 

35%

 

 

 

 

 

 

 

 

 

 

 

 

 

*

Represents a non-GAAP financial measure.  Refer to Supplemental Information within this MD&A for a reconciliation of this measure.

 

 

Residential revenues consist of:

 

  • Broadband services, including fiber-based and other digital, premium and enhanced data services
  • IPTV and satellite video
  • Voice services

 

Commercial revenues consist of:

 

  • TDS managedIP voice and data services
  • High-speed and dedicated business internet services
  • Voice services

 

Wholesale revenues consist of:

 

  • Network access services to interexchange carriers for the origination and termination of interstate and intrastate long distance phone calls on TDS Telecom’s network and special access services to carriers and others
  • Amounts received from state and Federal USF

 

Key components of changes in the statement of operations items were as follows:

Total operating revenues

Residential revenues increased in 2016 as growth in data and IPTV more than offset the decline in legacy voice services.  IPTV average connections grew 49%, offset by a 3% decline in average voice connections, excluding the impact of 2015 divestitures.

Commercial revenues decreased in 2016 as declining legacy voice and data connections reduced revenues, partially offset by a 4% growth in average managedIP connections.

Wholesale revenues decreased in 2016 due primarily to a reduction in special access revenues and by a 15% reduction in intra-state minutes-of-use.

Cost of services

Cost of services were relatively flat in 2016 as reduced costs of provisioning circuits, purchasing unbundled network elements and providing long-distance services were offset by increased charges related to the growth in IPTV.

Selling, general and administrative expenses

Selling, general and administrative expenses increased in 2016 due to growth in employee-related expenses.


CABLE OPERATIONS

 

Business Overview

TDS Telecom’s cable strategy is to expand its broadband services while leveraging its core competencies in network management and customer focus.  TDS Telecom seeks to be the leading provider of broadband services in its targeted markets. 

Operational Overview

Cable connections grew 5% in 2016 with increases in voice and broadband outpacing declines in video.

 

Financial Overview Cable

Components of Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2016

 

2015

 

2016 vs. 2015

(Dollars in millions)

 

 

 

 

 

 

 

 

Service revenues

 

 

 

 

 

 

 

 

 

Residential

 

$

35 

 

$

35 

 

1%

 

Commercial

 

 

10 

 

 

9 

 

10%

 

 

 

Total operating revenues

 

 

45 

 

 

44 

 

3%

 

 

 

 

 

 

 

 

 

Cost of services (excluding Depreciation,

  amortization and accretion reported below)

 

 

22 

 

 

20 

 

12%

Selling, general and administrative

 

 

12 

 

 

13 

 

(4)%

 

 

 

 

 

 

 

34 

 

 

33 

 

6%

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flow*

 

 

11 

 

 

11 

 

(5)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

9 

 

 

9 

 

5%

(Gain) loss on asset disposals, net

 

 

1 

 

 

1 

 

(20)%

 

 

 

Total operating expenses

 

 

44 

 

 

43 

 

5%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating income

 

$

1 

 

$

1 

 

(56)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA*

 

$

10 

 

$

11 

 

(5)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

13 

 

$

12 

 

11%

 

 

 

 

 

 

 

 

 

 

 

 

 

*

Represents a non-GAAP financial measure.  Refer to Supplemental Information within this MD&A for a reconciliation of this measure.

 

 

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 revenues remained flat in 2016 due primarily to a 6% increase in average residential connections offset by a decrease in revenue caused by promotional pricing.

Commercial revenues increased in 2016 due primarily to increases in pricing.

Cost of services

Cost of services increased in 2016 due primarily to increases in programming content costs.

Selling, general and administrative

Selling, general and administrative expenses remained relatively flat in 2016 due to lower employee costs and other synergies from acquisitions, offset by an increase in property taxes.


HMS OPERATIONS

Business Overview

Under TDS Telecom’s OneNeck IT Solutions brand, TDS Telecom offers a full-suite of IT solutions ranging from equipment resale to full management and hosting of a customer’s IT infrastructure and applications.  The goal of HMS operations is to create, deliver, and support a platform of IT products and services tailored for mid-market business customers.

Financial Overview HMS

Components of Operating Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2016

 

2015

 

2016 vs. 2015

(Dollars in millions)

 

 

 

 

 

 

 

 

Service revenues

 

$

29 

 

$

28 

 

2%

Equipment and product sales

 

 

35 

 

 

33 

 

8%

 

 

 

Total operating revenues

 

 

64 

 

 

61 

 

5%

 

 

 

 

 

 

 

 

 

Cost of services (excluding Depreciation,

  amortization and accretion reported below)

 

 

21 

 

 

20 

 

6%

Cost of equipment and products

 

 

29 

 

 

27 

 

8%

Selling, general and administrative

 

 

11 

 

 

13 

 

(16)%

 

 

 

 

 

 

 

61 

 

 

60 

 

2%

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flow*

 

 

3 

 

 

1 

 

>100%

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

7 

 

 

6 

 

13%

 

 

 

Total operating expenses

 

 

68 

 

 

66 

 

3%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating loss

 

$

(4)

 

$

(5)

 

21%

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA*

 

$

3 

 

$

1 

 

>100%

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

2 

 

$

5 

 

(63)%

 

 

 

 

 

 

 

 

 

 

 

 

 

*

 

Represents a non-GAAP financial measure.  Refer to Supplemental Information within this MD&A for a reconciliation of this measure.

 

 

Service revenues consist of:

 

  • Cloud and hosting solutions
  • Managed services
  • Enterprise Resource Planning (“ERP”) application management
  • Professional services
  • Co-location services
  • IT hardware maintenance services

 

Equipment revenues consist of:

  • IT hardware sales

 

Key components of changes in the statement of operations items were as follows:

Growth in professional services and recurring services resulted in an increase in Service revenues in 2016.  Equipment and product sales revenues from sales of IT infrastructure hardware solutions increased in 2016 due primarily to higher spending by existing customers.  There was a corresponding increase in Cost of services and Cost of equipment and products needed to support revenue growth.  Selling, general and administrative expenses decreased due primarily to reduced employee and advertising expenses.

Liquidity and Capital Resources

Sources of Liquidity

TDS believes that existing cash and investment balances, funds available under its revolving credit facilities, and expected cash flows from operating and investing activities provide liquidity for TDS to meet its normal day-to-day operating needs and debt service requirements for the coming year. 

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 facilities, funds from other financing sources, including a term loan and other long-term debt, and cash flows from operating, investing and financing activities, including sales of assets or businesses, provided sufficient liquidity and financial flexibility for TDS to meet its normal day-to-day operating needs and debt service requirements, to finance the build-out and enhancement of markets and to fund acquisitions.  There is no assurance that this will be the case in the future.  It may be necessary from time to time to increase the size of the existing revolving credit facilities, to put in place new credit facilities, or to obtain other forms of financing in order to fund potential expenditures.  TDS’ liquidity would be adversely affected if, among other things, TDS is unable to obtain short or long-term financing on acceptable terms, TDS makes significant spectrum license purchases in FCC auctions or from other parties, the LA Partnership does not resume or reduces distributions compared to historical levels, or Federal USF and/or other regulatory support payments continue to decline.  In addition, although sales of assets or businesses by TDS have been an important source of liquidity in recent periods, TDS does not expect a similar level of such sales in the future, which will reduce a source of liquidity.  In recent years, TDS’ credit rating has declined to sub-investment grade.   

Although TDS currently has a significant cash balance, in certain recent periods, TDS has incurred negative free cash flow (defined as Cash flows from operating activities less Cash paid for additions to property, plant and equipment) and this will continue in the future if operating results do not improve or capital expenditures are not reduced.  TDS currently expects to have negative free cash flow in 2016 due to anticipated growth in equipment installment plan receivables combined with significant capital expenditures.  TDS may require substantial additional capital for, among other uses, funding day-to-day operating needs, working capital, acquisitions of providers of wireless or wireline telecommunications services, cable markets, IT services or other businesses, spectrum license or system acquisitions, system development and network capacity expansion, debt service requirements, the repurchase of shares, the payment of dividends, or making additional investments.  There can be no assurance that sufficient funds will continue to be available to TDS or its subsidiaries on terms or at prices acceptable to TDS.  Insufficient cash flows from operating activities, changes in its credit ratings, defaults of the terms of debt or credit agreements, uncertainty of access to capital, deterioration in the capital 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 spectrum licenses, and/or reduce or cease share repurchases and/or the payment of dividends.  TDS cannot provide assurance that circumstances that could have a material adverse effect on its liquidity or capital resources will not occur.  Any of the foregoing would have an adverse impact on TDS’ businesses, financial condition or results of operations.


Cash and Cash Equivalents

Cash and cash equivalents include cash and money market investments.  The primary objective of TDS’ Cash and cash equivalents investment activities is to preserve principal.  Cash held by U.S. Cellular is for its operational needs and 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.

At March 31, 2016, TDS’ consolidated cash and cash equivalents totaled $1,054 million compared to $985 million at December 31, 2015.  The majority of TDS’ Cash and cash equivalents was held in bank deposit accounts and in money market funds that invest exclusively in U.S. Treasury Notes or in repurchase agreements fully collateralized by such obligations. TDS monitors the financial viability of the money market funds and direct investments in which it invests and believes that the credit risk associated with these investments is low.

 

Financing

As of March 31, 2016, TDS and U.S. Cellular’s unused capacity under their revolving credit facilities was $399 million and $282 million, respectively.  These credit facilities mature in December 2017.  TDS and U.S. Cellular believe they were in compliance with all of the financial covenants and requirements set forth in their revolving credit facilities as of March 31, 2016.

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

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

The long-term debt payments due for the remainder of 2016 and the next four years represent less than 3% of TDS’ total long-term debt obligation measured as of March 31, 2016.

Capital Expenditures

Capital expenditures (i.e., additions to property, plant and equipment and system development expenditures), which include accruals and capitalized interest, in 2016 and 2015 were as follows:

U.S. Cellular’s capital expenditures for 2016 are expected to be approximately $500 million.  These expenditures are expected to be for the following general purposes: 

  • Expand and enhance network coverage, including construction of a new regional connectivity center and providing additional capacity to accommodate increased network usage, principally data usage, by current customers;
  • Deploy VoLTE technology;
  • Expand and enhance the retail store network; and
  • Develop and enhance office systems.

TDS Telecom’s capital expenditures for 2016 are expected to be $180 million.  These expenditures are expected to be for the following general purposes:

  • Maintain and enhance existing infrastructure at Wireline, Cable and HMS;
  • Complete planned fiber expansion in Wireline markets and upgrades in Cable markets to support video and super high-speed data; and
  • Success-based spending to sustain managedIP, IPTV, Cable and HMS growth.

 

TDS plans to finance its capital expenditures program for 2016 using primarily Cash flows from operating activities and, as necessary, existing cash balances and borrowings under its revolving credit agreements and/or other long-term debt.

Acquisitions, Divestitures and Exchanges

TDS may be engaged from time-to-time in negotiations relating to the acquisition, divestiture or exchange of companies, properties, wireless spectrum and other possible businesses.  In general, TDS may not disclose such transactions until there is a definitive agreement.  TDS assesses its business interests on an ongoing basis with a goal of improving the competitiveness of its operations and maximizing its long-term return on capital.  As part of this strategy, TDS reviews attractive opportunities to acquire additional wireless operating markets and wireless spectrum; and telecommunications, cable, HMS or other possible businesses.  TDS also may seek to divest outright or include in exchanges for other interests those interests that are not strategic to its long-term success. 

On March 18, 2016, the FCC released a list of applicants that successfully completed applications for the forward  auction of 600 MHz spectrum licenses, referred to as Auction 1000, including U.S. Cellular.  Auction 1000 has commenced with the beginning of the reverse auction on March 29, 2016.  Forward auction bidding is likely to begin a couple of months later, and could continue for three months or longer.  See “Regulatory Matters — FCC Auction 1000.”  Prior to becoming a qualified bidder, U.S. Cellular must make an upfront payment, the size of which establishes its initial bidding eligibility.  If U.S. Cellular is a winning bidder in the auction, it may be required to make additional payments to the FCC that may be substantial.  In such event, U.S. Cellular plans to finance such payments from its existing cash balances, borrowings under its revolving credit agreement and/or additional long-term debt.

In 2015 and in 2016, U.S. Cellular entered into multiple spectrum license purchase agreements that have not yet closed.  The aggregate purchase price for these spectrum licenses is $54 million. In the first quarter of 2016, U.S. Cellular also entered into multiple agreements to transfer FCC licenses in non-operating markets and receive FCC licenses in operating markets.  The agreements were with third parties and provide for the transfer of certain AWS and PCS spectrum licenses and approximately $29 million, net, in cash to U.S. Cellular, in exchange for U.S. Cellular transferring certain AWS, PCS and 700 MHz spectrum licenses to the third parties.  These license purchase and exchange transactions are expected to close in 2016.

Variable Interest Entities

TDS consolidates certain entities as “variable interest entities” under GAAP.  See Note 8Variable Interest Entities in the Notes to Consolidated Financial Statements for additional information related to these variable interest entities.  TDS may elect to make capital contributions and/or advances to variable interest entities in order to fund their operations.

Common Share Repurchase Programs

TDS and U.S. Cellular have repurchased and expect to continue to repurchase their Common Shares, in each case subject to any available repurchase program.  For additional information related to the current TDS repurchase authorization, see Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

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

Share repurchases made under these authorizations in 2016 and 2015 were as follows:

 

Number of

 

Average Cost

 

Dollar Amount

Three Months Ended March 31,

Shares

 

Per Share

 

(in millions)

2016

 

 

 

 

 

 

 

 

TDS Common Shares

111,700 

 

$

22.56 

 

$

3 

 

U.S. Cellular Common Shares

46,861 

 

$

34.77 

 

$

2 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

TDS Common Shares

 

 

$

 

 

$

 

 

U.S. Cellular Common Shares

66,209 

 

$

34.77 

 

$

2 

 

 

Contractual and Other Obligations

There were no material changes outside the ordinary course of business between December 31, 2015 and March 31, 2016 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, 2015.

Off-Balance Sheet Arrangements

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

Consolidated Cash Flows

TDS operates a capital- and marketing-intensive business.  TDS makes substantial investments to acquire wireless licenses and properties and to construct and upgrade communications networks and facilities as a basis for creating long-term value for shareholders. In recent years, rapid changes in technology and new opportunities have required substantial investments in potentially revenueenhancing and cost-reducing upgrades to TDS’ networks.  TDS utilizes cash on hand, cash from operating activities, cash proceeds from divestitures and dispositions of investments, short-term credit facilities and long-term debt financing to fund its acquisitions (including licenses), construction costs, operating expenses and share repurchases.  Cash flows may fluctuate from quarter-to-quarter and year-to-year due to seasonality, the timing of acquisitions and divestitures, capital expenditures and other factors.  The following discussion summarizes TDS' cash flow activities for the three months ended March 31, 2016 and 2015.

2016 Commentary

TDS’ Cash and cash equivalents increased $69 million in 2016.  Net cash provided by operating activities was $246 million in 2016 due to net income of $10 million as adjusted for non-cash items of $217 million.  Changes in working capital items provided net cash of $5 million.  TDS received a federal tax refund of $63 million related to an overpayment of the 2015 expected tax liability.  This was partially offset by a use of cash of $41 million due to an increase in equipment installment plan receivables, which are expected to continue to increase and further require the use of working capital in the near term.  The net cash provided by operating activities was partially offset by Cash flows used for investing activities of $157 million.  Cash paid in 2016 for additions to property, plant and equipment totaled $159 million and is reported in the Consolidated Statement of Cash Flows.

2015 Commentary

Cash flows from operating activities were $355 million in 2015, contributing to a net increase in Cash and cash equivalents of $163 million for the period.  Changes in working capital items provided net cash of $244 million.  As a result of increased focus by U.S. Cellular to sell through inventory of wireless devices on hand in 2015, inventory levels decreased.  During 2015, TDS received tax refunds of $100 million related to an overpayment of the 2014 expected tax liability and the carryback of its 2014 net operating loss to the 2012 and 2013 tax years.  In addition, income taxes incurred on the sale of towers and on the license exchange in 2015 were not payable until periods after March 31, 2015, resulting in increased income tax payable amounts included in Accrued taxes.

Cash flows used for investing activities were $170 million in 2015.  Cash paid for additions to property, plant and equipment totaled $166 million in 2015 and is reported in the Consolidated Statement of Cash Flows.  During 2015, a $278 million payment was made by Advantage Spectrum L.P. to the FCC for licenses for which it was the provisional winning bidder in Auction 97.  Cash received from divestitures and exchanges in 2015 included $117 million related to licenses and $141 million related to the sale of 359 towers and certain related contracts, assets and liabilities.

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 2016 are as follows:

Cash and cash equivalents

Cash and cash equivalents increased $69 million.  See the Consolidated Cash Flows discussion above for an analysis of cash and cash equivalents. 

Income tax receivable

Income tax receivable decreased $65 million due primarily to the receipt of a federal income tax refund of $63 million in March 2016.

Assets held for sale

Assets held for sale increased $26 million due to reclassification of Licenses to this account as a result of exchange agreements with third parties.  The license exchange agreements are expected to close in 2016.  See Note 5 – Acquisitions, Divestitures and Exchanges for additional information.

Accrued compensation

Accrued compensation decreased $38 million due primarily to bonus payments in March 2016.

Application of Critical Accounting Policies and Estimates

TDS prepares its consolidated financial statements in accordance with GAAP.  TDS’ significant accounting policies are discussed in detail in Note 1 — Summary of Significant Accounting Policies and Recent Accounting Pronouncements in the Notes to Consolidated Financial Statements and TDS’ Application of Critical Accounting Policies and Estimates is discussed in detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are included in TDS’ Form 10-K for the year ended December 31, 2015.  There were no material changes to TDS’ application of critical accounting policies and estimates during the three months ended March 31, 2016.

Recent Accounting Pronouncements

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


Regulatory Matters

The discussion below includes updates related to recent regulatory developments.  These updates should be read in conjunction with the disclosures previously provided under “Regulatory Matters” in TDS’ Form 10-K for the year ended December 31, 2015.

FCC Auction 1000

On March 18, 2016, the FCC released a list of applicants that successfully completed applications for the forward auction of 600 MHz spectrum licenses, referred to as Auction 1000, which included U.S. Cellular.  Auction 1000 has commenced with the beginning of the reverse auction on March 29, 2016.  Forward auction bidding is likely to begin a couple of months later, and could continue for three months or longer.  As a result of the participation of U.S. Cellular, since February 10, 2016, TDS has been subject to FCC anti-collusion rules that place certain restrictions on public disclosures and business communications with other companies relating to U.S. Cellular’s participation.  These restrictions will continue until the down payment deadline for Auction 1000, which will be ten business days after release of the FCC’s Channel Reassignment Public Notice, following the end of the forward auction.  These anti-collusion rules, which could last six months or more from February 10, 2016, may restrict the conduct of certain TDS activities with other applicants in Auction 1000 as well as with nationwide providers of wireless services which are not applicants in Auction 1000.  The restrictions could have an adverse effect on TDS’ business, financial condition or results of operations.

FCC Connect America Fund (CAF)

On March 30, 2016, the FCC released an order modifying the USF program to extend the Connect America Fund (CAF) program to rate-of-return incumbent local exchange carriers for the purpose of extending broadband services, including standalone broadband, in underserved rural areas.  The FCC is providing rate-of-return carriers with two paths to receive funds from the CAF.  The first path includes a voluntary model-based approach and includes support for a ten-year period in exchange for meeting defined build-out obligations.  This election must be done at the state level.  The second path is based on existing rate-of-return mechanisms, but with substantial modifications.  This path also includes defined build-out obligations.  TDS Telecom is reviewing the order and is considering its options under the two paths.  There is no assurance that either of the new CAF options will provide TDS Telecom with the level of support TDS Telecom had received under previous federal support mechanisms.

 


Private Securities Litigation Reform Act of 1995

Safe Harbor Cautionary Statement

 

This Form 10-Q, including exhibits, contains statements that are not based on historical facts and represent forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act of 1995.  All statements, other than statements of historical facts, that address activities, events or developments that TDS intends, expects, projects, believes, estimates, plans or anticipates will or may occur in the future are forward-looking statements.  The words “believes,” “anticipates,” “estimates,” “expects,” “plans,” “intends,” “projects” and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them.  Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward-looking statements.  Such risks, uncertainties and other factors include those set forth below, as more fully described under “Risk Factors” in TDS’ Form 10-K for the year ended December 31, 2015.  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, 2015, the following factors and other information contained in, or incorporated by reference into, this Form 10-Q to understand the material risks relating to TDS’ business.


Supplemental Information

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.  Certain of these measures are considered “non-GAAP financial measures” under U.S. Securities and Exchange Commission Rules.  Specifically, TDS has referred to the following measures in this Form 10-Q Report:

Below is a reconciliation of each of these measures.

Adjusted EBITDA and Operating Cash Flow

Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization and accretion), is defined as net income adjusted for the items set forth in the reconciliation.  Operating cash flow is defined as net income adjusted for the items set forth in the reconciliation.  Adjusted EBITDA and Operating cash flow exclude these items in order to show operating results on a more comparable basis from period-to-period.  From time-to-time, TDS may exclude other items from Adjusted EBITDA and/or Operating cash flow if such items help reflect operating results on a more comparable basis.  TDS does not intend to imply that any such items that are excluded are non-recurring, infrequent or unusual; such items may occur in the future.  Adjusted EBITDA and Operating cash flow are not measures of financial performance under GAAP and should not be considered as alternatives to net income as indicators of the company’s operating performance or as alternatives to cash flows from operating activities, determined in accordance with GAAP, as indicators of cash flows or as measures of liquidity.  TDS believes Adjusted EBITDA and Operating cash flow are useful measures of TDS' operating results before significant recurring non-cash charges, gains and losses, and other items as indicated below.

 

 

 

Three Months Ended March 31,

TDS - CONSOLIDATED

2016

 

2015

(Dollars in millions)

 

 

 

 

 

Net income (GAAP)

$

10 

 

$

176 

Add back:

 

 

 

 

 

 

Income tax expense

 

13 

 

 

116 

 

Interest expense

 

41 

 

 

34 

 

Depreciation, amortization and accretion

 

212 

 

 

207 

EBITDA

 

276 

 

 

533 

Add back or deduct:

 

 

 

 

 

 

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

 

 

 

 

(124)

 

(Gain) loss on license sales and exchanges, net

 

 

 

 

(123)

 

(Gain) loss on asset disposals, net

 

6 

 

 

5 

Adjusted EBITDA

 

282 

 

 

291 

Deduct:

 

 

 

 

 

 

Equity in earnings of unconsolidated entities

 

35 

 

 

35 

 

Interest and dividend income

 

14 

 

 

8 

 

Other, net

 

 

 

 

 

Operating cash flow

 

233 

 

 

248 

Deduct:

 

 

 

 

 

 

Depreciation, amortization and accretion

 

212 

 

 

207 

 

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

 

 

 

 

(124)

 

(Gain) loss on license sales and exchanges, net

 

 

 

 

(123)

 

(Gain) loss on asset disposals, net

 

6 

 

 

5 

Operating income (GAAP)

$

15 

 

$

283 

 

 

 

 

 

Three Months Ended March 31,

U.S. CELLULAR

2016

 

2015

(Dollars in millions)

 

 

 

 

 

Net income (GAAP)

$

9 

 

$

165 

Add back:

 

 

 

 

 

 

Income tax expense

 

11 

 

 

107 

 

Interest expense

 

28 

 

 

20 

 

Depreciation, amortization and accretion

 

153 

 

 

147 

EBITDA

 

201 

 

 

439 

Add back or deduct:

 

 

 

 

 

 

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

 

 

 

 

(111)

 

(Gain) loss on license sales and exchanges, net

 

 

 

 

(123)

 

(Gain) loss on asset disposals, net

 

5 

 

 

4 

Adjusted EBITDA

 

206 

 

 

209 

Deduct:

 

 

 

 

 

 

Equity in earnings of unconsolidated entities

 

35 

 

 

34 

 

Interest and dividend income

 

13 

 

 

8 

 

Other, net

 

1 

 

 

 

Operating cash flow

 

157 

 

 

167 

Deduct:

 

 

 

 

 

 

Depreciation, amortization and accretion

 

153 

 

 

147 

 

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

 

 

 

 

(111)

 

(Gain) loss on license sales and exchanges, net

 

 

 

 

(123)

 

(Gain) loss on asset disposals, net

 

5 

 

 

4 

Operating income (loss) (GAAP)

$

(1)

 

$

250 

 

 

 

 

 

Three Months Ended March 31,

TDS TELECOM

2016

 

2015

(Dollars in millions)

 

 

 

 

 

Net income (GAAP)

$

10 

 

$

13 

Add back:

 

 

 

 

 

 

Income tax expense

 

7 

 

 

9 

 

Depreciation, amortization and accretion

 

58 

 

 

57 

EBITDA

 

75 

 

 

79 

Add back or deduct:

 

 

 

 

 

 

(Gain) loss on asset disposals, net

 

1 

 

 

1 

Adjusted EBITDA

 

76 

 

 

80 

Deduct:

 

 

 

 

 

 

Interest and dividend income

 

1 

 

 

 

 

Other, net

 

(1)

 

 

1 

Operating cash flow

 

76 

 

 

79 

Deduct:

 

 

 

 

 

 

Depreciation, amortization and accretion

 

58 

 

 

57 

 

(Gain) loss on asset disposals, net

 

1 

 

 

1 

Operating income (GAAP)

$

17 

 

$

21 

 

 

 

 

 

Three Months Ended March 31,

WIRELINE

2016

 

2015

(Dollars in millions)

 

 

 

 

 

Income before income taxes (GAAP)¹

$

22 

 

$

27 

Add back:

 

 

 

 

 

 

Interest expense

 

(1)

 

 

(1)

 

Depreciation, amortization and accretion

 

42 

 

 

42 

EBITDA

 

63 

 

 

68 

Add back or deduct:

 

 

 

 

 

 

(Gain) loss on asset disposals, net

 

 

 

 

 

Adjusted EBITDA

 

63 

 

 

68 

Deduct:

 

 

 

 

 

 

Interest and dividend income

 

1 

 

 

 

 

Other, net

 

 

 

 

1 

Operating cash flow

 

62 

 

 

67 

Deduct:

 

 

 

 

 

 

Depreciation, amortization and accretion

 

42 

 

 

42 

 

(Gain) loss on asset disposals, net

 

 

 

 

 

Operating income (GAAP)

$

20 

 

$

25 

 

 

 

 

 

Three Months Ended March 31,

CABLE

2016

 

2015

(Dollars in millions)

 

 

 

 

 

Income before income taxes (GAAP)¹

$

 

 

$

1 

Add back:

 

 

 

 

 

 

Depreciation, amortization and accretion

 

9 

 

 

9 

EBITDA

 

9 

 

 

10 

Add back or deduct:

 

 

 

 

 

 

(Gain) loss on asset disposals, net

 

1 

 

 

1 

Adjusted EBITDA

 

10 

 

 

11 

Deduct:

 

 

 

 

 

 

Other, net

 

(1)

 

 

 

Operating cash flow

 

11 

 

 

11 

Deduct:

 

 

 

 

 

 

Depreciation, amortization and accretion

 

9 

 

 

9 

 

(Gain) loss on asset disposals, net

 

1 

 

 

1 

Operating income (GAAP)

$

1 

 

$

1 

 

 

 

 

 

Three Months Ended March 31,

HMS

2016

 

2015

(Dollars in millions)

 

 

 

 

 

Loss before income taxes (GAAP)¹

$

(5)

 

$

(6)

Add back:

 

 

 

 

 

 

Interest expense

 

1 

 

 

1 

 

Depreciation, amortization and accretion

 

7 

 

 

6 

EBITDA

 

3 

 

 

1 

Add back or deduct:

 

 

 

 

 

 

(Gain) loss on asset disposals, net

 

 

 

 

 

Adjusted EBITDA

 

3 

 

 

1 

Deduct:

 

 

 

 

 

 

Other, net

 

 

 

 

 

Operating cash flow

 

3 

 

 

1 

Deduct:

 

 

 

 

 

 

Depreciation, amortization and accretion

 

7 

 

 

6 

 

(Gain) loss on asset disposals, net

 

 

 

 

 

Operating loss (GAAP)

$

(4)

 

$

(5)

 

 

 

 

 

 

 

 

1

Income tax expense is not provided at the individual segment level for Wireline, Cable and HMS.  TDS calculates income tax expense for TDS Telecom in total.

 

 

Free Cash Flow and Adjusted Free Cash Flow

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

 

 

 

Three Months Ended March 31,

 

2016

 

2015

(Dollars in millions)

 

 

 

 

 

Cash flows from operating activities

$

246 

 

$

355 

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

 

159 

 

 

166 

 

Free cash flow

$

87 

 

$

189 

Add: Sprint Cost Reimbursement1

 

2 

 

 

16 

 

Adjusted free cash flow

$

89 

 

$

205 

 

 

 

 

 

 

 

 

1

On May 16, 2013, pursuant to a Purchase and Sale Agreement, U.S. Cellular sold customers and certain PCS spectrum licenses to subsidiaries of Sprint Corp. fka Sprint Nextel Corporation (“Sprint”) in U.S. Cellular’s Chicago, central Illinois, St. Louis and certain Indiana/Michigan/Ohio markets in consideration for $480 million in cash.  The Purchase and Sale Agreement also contemplated certain other agreements.  These agreements require Sprint to reimburse U.S. Cellular up to $200 million (the “Sprint Cost Reimbursement”) for certain network decommissioning costs, network site lease rent and termination costs, network access termination costs, and employee termination benefits for specified engineering employees.

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

MARKET RISK

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

See Note 2Fair Value Measurements in the Notes to Consolidated Financial Statements for additional information related to the fair value of TDS’ Long-term debt as of March 31, 2016.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

TDS maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in its reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the 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 Rule 13a-15(b), TDS carried out an evaluation, under the supervision and with the participation of management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of TDS’ disclosure controls and procedures as of the end of the period covered by this Quarterly Report.  Based on this evaluation, TDS’ principal executive officer and principal financial officer concluded that TDS' disclosure controls and procedures were effective as of March 31, 2016, at the reasonable assurance level. 

Changes in Internal Control Over Financial Reporting

There have been no changes in internal controls over financial reporting that have occurred during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, TDS’ internal control over financial reporting.


Part IIOther Information

Item 1.  Legal Proceedings

Refer to the disclosure under Legal Proceedings in TDS’ Form 10-K for the year ended December 31, 2015.  There have been no material changes to such information since December 31, 2015.

Item 1A.  Risk Factors

In addition to the information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in TDS’ Annual Report on Form 10-K for the year ended December 31, 2015, which could materially affect TDS’ business, financial condition or future results. The risks described in this Form 10-Q and the Form 10-K for the year ended December 31, 2015, may not be the 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, 2015.

Item 2.  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 first quarter of 2016.

The following table provides certain information with respect to all purchases made by or on behalf of TDS, and any open market purchases made by any “affiliated purchaser” (as defined by the SEC) of TDS, of TDS Common Shares during the quarter covered by this Form 10-Q.

 

 

 

 

 

 

 

 

Total Number of

 

Maximum Dollar

 

 

 

 

 

Average

 

Shares Purchased

 

Value of Shares that

 

 

 

Total Number

 

Price

 

as Part of Publicity

 

May Yet Be

 

 

 

of Shares

 

Paid per

 

Announced Plans or

 

Purchased Under the

Period

 

Purchased

 

Share

 

Programs

 

Plans or Programs

January 1 – 31, 2016

 

110,900 

 

$

22.56 

 

110,900 

 

$

198,709,599 

February 1 – 29, 2016

 

800 

 

 

22.80 

 

800 

 

 

198,691,355 

March 1 – 31, 2016

 

 

 

 

 

 

 

 

 

198,691,355 

 

Total for or as of the end of the

 

 

 

 

 

 

 

 

 

 

 

quarter ended March 31, 2016

 

111,700 

 

$

22.56 

 

111,700 

 

$

198,691,355 

 


Item 5.  Other Information

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

Neither TDS nor U.S. Cellular borrowed or repaid any cash amounts under their revolving credit facilities in the first quarter of 2016 or through the filing date of this Form 10-Q, and had no cash borrowings outstanding under their revolving credit facilities as of March 31, 2016 or as of the filing date of this Form 10-Q. 

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

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


Item 6.  Exhibits

Exhibit 10.1

 

Form of U.S. Cellular 2013 Long-Term Incentive Plan Stock Option Award Agreement for the President and Chief Executive Officer of U.S. Cellular, is hereby incorporated by reference to Exhibit 10.3 to U.S. Cellular’s Current Report on Form 8-K dated March 14, 2016.

 

 

 

Exhibit 10.2

 

Form of U.S. Cellular 2013 Long-Term Incentive Plan Restricted Stock Unit Award Agreement for the President and Chief Executive Officer of U.S. Cellular, is hereby incorporated by reference to Exhibit 10.4 to U.S. Cellular’s Current Report on Form 8-K dated March 14, 2016.

 

 

 

Exhibit 10.3

 

Form of TDS Long-Term Incentive Plan Stock Option Award Agreement for Officers

 

 

 

Exhibit 11

 

Statement regarding computation of per share earnings is included herein as Note 4 — Earnings Per Share in the Notes to Consolidated Financial Statements.

 

 

 

Exhibit 12

 

Statement regarding computation of ratio of earnings to fixed charges.

 

 

 

Exhibit 31.1

 

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

 

 

 

Exhibit 31.2

 

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

 

 

 

Exhibit 32.1

 

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

 

 

 

Exhibit 32.2

 

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

 

 

 

Exhibit 101.INS

 

XBRL Instance Document

 

 

 

Exhibit 101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

Exhibit 101.PRE

 

XBRL Taxonomy Presentation Linkbase Document

 

 

 

Exhibit 101.CAL

 

XBRL Taxonomy Calculation Linkbase Document

 

 

 

Exhibit 101.LAB

 

XBRL Taxonomy Label Linkbase Document

 

 

 

Exhibit 101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

The foregoing exhibits include only the exhibits that relate specifically to this Form 10-Q or that supplement the exhibits identified in TDS’ Form 10-K for the year ended December 31, 2015.  Reference is made to TDS’ Form 10-K for the year ended December 31, 2015 for a complete list of exhibits, which are incorporated herein except to the extent supplemented or superseded above.


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:

May 6, 2016

 

/s/ LeRoy T. Carlson, Jr.

 

 

 

LeRoy T. Carlson, Jr.,

President and Chief Executive Officer

(principal executive officer)

 

 

 

 

 

 

Date:

May 6, 2016

 

/s/ Douglas D. Shuma

 

 

 

Douglas D. Shuma,

Senior Vice President - Finance and Chief Accounting Officer

(principal financial officer and principal accounting officer)

 

 

 

 

 

 

Date:

May 6, 2016

 

/s/ Douglas W. Chambers

 

 

 

Douglas W. Chambers,

Vice President and Controller