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UNITED STATES
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SECURITIES AND EXCHANGE COMMISSION |
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Washington, D.C. 20549 |
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FORM 10-Q |
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(Mark One) |
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[x] |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended March 31, 2016 |
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OR |
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[ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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Commission file number 001-14157 |
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Quarterly Report on Form 10-Q |
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For the Quarterly Period Ended March 31, 2016 |
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Index |
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Page No. |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Private Securities Litigation Reform Act of 1995 S afe Harbor Cautionary Statement |
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Telephone and Data Systems, Inc.
Consolidated Statement of Operations
(Unaudited)
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Three Months Ended |
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March 31, |
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2016 |
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2015 |
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(Dollars and shares in millions, except per share amounts) |
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Operating revenues |
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Service |
$ |
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$ |
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Equipment and product sales |
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Total operating revenues |
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Operating expenses |
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Cost of services (excluding Depreciation, amortization and accretion reported below) |
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Cost of equipment and products |
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Selling, general and administrative |
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Depreciation, amortization and accretion |
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(Gain) loss on asset disposals, net |
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(Gain) loss on sale of business and other exit costs, net |
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(Gain) loss on license sales and exchanges, net |
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Total operating expenses |
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Operating income |
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Investment and other income (expense) |
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Equity in earnings of unconsolidated entities |
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Interest and dividend income |
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Interest expense |
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Total investment and other income |
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Income before income taxes |
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Income tax expense |
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Net income |
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Less: Net income attributable to noncontrolling |
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interests, net of tax |
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Net income attributable to TDS shareholders |
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TDS Preferred dividend requirement |
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Net income available to TDS common shareholders |
$ |
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$ |
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Basic weighted average shares outstanding |
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Basic earnings per share available to TDS common shareholders |
$ |
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$ |
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Diluted weighted average shares outstanding |
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Diluted earnings per share available to TDS common shareholders |
$ |
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$ |
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Dividends per share to TDS shareholders |
$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements. |
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Telephone and Data Systems, Inc.
Consolidated Statement of Comprehensive Income
(Unaudited)
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Three Months Ended |
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March 31, |
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2016 |
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2015 |
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(Dollars in millions) |
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Net income |
$ |
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$ |
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Net change in accumulated other comprehensive income |
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Change related to retirement plan |
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Amounts included in net periodic benefit cost for the period |
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Change in prior service cost |
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Comprehensive income |
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Less: Net income attributable to noncontrolling interests, net of tax |
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Comprehensive income attributable to TDS shareholders |
$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements. |
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Telephone and Data Systems, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
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Three Months Ended |
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March 31, |
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2016 |
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2015 |
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(Dollars in millions) |
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Cash flows from operating activities |
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Net income |
$ |
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$ |
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Add (deduct) adjustments to reconcile net income to net cash flows |
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from operating activities |
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Depreciation, amortization and accretion |
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Bad debts expense |
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Stock-based compensation expense |
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Deferred income taxes, net |
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Equity in earnings of unconsolidated entities |
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Distributions from unconsolidated entities |
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(Gain) loss on asset disposals, net |
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(Gain) loss on sale of business and other exit costs, net |
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(Gain) loss on license sales and exchanges, net |
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Noncash interest expense |
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Changes in assets and liabilities from operations |
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Accounts receivable |
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Equipment installment plans receivable |
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Inventory |
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Accounts payable |
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Customer deposits and deferred revenues |
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Accrued taxes |
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Accrued interest |
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Other assets and liabilities |
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Net cash provided by operating activities |
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Cash flows from investing activities |
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Cash paid for additions to property, plant and equipment |
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Cash paid for acquisitions and licenses |
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Cash received from divestitures and exchanges |
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Other investing activities |
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Net cash used in investing activities |
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Cash flows from financing activities |
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Repayment of long-term debt |
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U.S. Cellular Common Shares reissued for benefit plans, net of tax payments |
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Repurchase of TDS Common Shares |
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Repurchase of U.S. Cellular Common Shares |
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Dividends paid to TDS shareholders |
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Payment of debt issuance costs |
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Other financing activities |
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Net cash used in financing activities |
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Net increase in cash and cash equivalents |
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Cash and cash equivalents |
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Beginning of period |
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End of period |
$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements. |
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Telephone and Data Systems, Inc.
Consolidated Balance Sheet — Assets
March 31, |
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December 31, |
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2016 |
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2015 |
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(Dollars in millions) |
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Current assets |
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Cash and cash equivalents |
$ |
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$ |
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Accounts receivable |
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Due from customers and agents, less allowances of $44 and $49, respectively |
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Other, less allowances of $1 and $1, respectively |
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Inventory, net |
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Prepaid expenses |
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Income taxes receivable |
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Other current assets |
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Total current assets |
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Assets held for sale |
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Licenses |
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Goodwill |
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Franchise rights |
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Other intangible assets, net of accumulated amortization of $148 and $144, respectively |
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Investments in unconsolidated entities |
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Property, plant and equipment |
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In service and under construction |
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Less: Accumulated depreciation and amortization |
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Property, plant and equipment, net |
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Other assets and deferred charges |
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Total assets 1 |
$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements. |
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Telephone and Data Systems, Inc.
Consolidated Balance Sheet — Liabilities and Equity
(Unaudited)
March 31, |
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December 31, |
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2016 |
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2015 |
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(Dollars and shares in millions, except per share amounts) |
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Current liabilities |
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Current portion of long-term debt |
$ |
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$ |
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Accounts payable |
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||||
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Customer deposits and deferred revenues |
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||||
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Accrued interest |
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Accrued taxes |
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Accrued compensation |
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||||
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Other current liabilities |
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Total current liabilities |
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Deferred liabilities and credits |
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Net deferred income tax liability |
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Other deferred liabilities and credits |
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Long-term debt, net |
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Commitments and contingencies |
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Noncontrolling interests with redemption features |
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Equity |
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TDS shareholders’ equity |
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Series A Common and Common Shares |
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Authorized 290 shares (25 Series A Common and 265 Common Shares) |
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Issued 133 shares (7 Series A Common and 126 Common Shares) |
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Outstanding 109 shares (7 Series A Common and 102 Common Shares) |
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Par Value ($.01 per share) |
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Capital in excess of par value |
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Treasury shares at cost: |
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24 and 24 Common Shares, respectively |
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Accumulated other comprehensive income (loss) |
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Retained earnings |
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Total TDS shareholders' equity |
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Preferred shares |
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Noncontrolling interests |
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Total equity |
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Total liabilities and equity 1 |
$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements. |
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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. |
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Telephone and Data Systems, Inc.
Consolidated Statement of Changes in Equity
(Unaudited)
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TDS Shareholders |
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Series A Common and Common shares |
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Capital in excess of par value |
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Treasury shares |
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Accumulated other comprehensive income (loss) |
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Retained earnings |
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Total TDS shareholders' equity |
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Preferred shares |
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Noncontrolling interests |
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Total equity |
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(Dollars in millions) |
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December 31, 2015 |
$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
||||||||||
Net income attributable to TDS shareholders |
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Net income attributable to noncontrolling interests classified as equity |
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||||||||||
TDS Common and Series A Common share dividends |
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Repurchase of Common shares |
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Dividend reinvestment plan |
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Incentive and compensation plans |
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||||||||||
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans |
|
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||||||||||
Stock-based compensation awards |
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||||||||||
Tax windfall (shortfall) from stock awards |
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|
||||||||||
March 31, 2016 |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
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The accompanying notes are an integral part of these consolidated financial statements. |
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Telephone and Data Systems, Inc.
Consolidated Statement of Changes in Equity
(Unaudited)
|
TDS Shareholders |
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|||||||||||||||||
|
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 |
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(Dollars in millions) |
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|
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|
|
December 31, 2014 |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
Net income attributable to TDS shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
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||||||||||
Net income attributable to noncontrolling interests classified as equity |
|
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|
||||||||||
TDS Common and Series A Common share dividends |
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||||||||||
Dividend reinvestment plan |
|
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||||||||||
Incentive and compensation plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans |
|
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Stock-based compensation awards |
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||||||||||
March 31, 2015 |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
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The accompanying notes are an integral part of these consolidated financial statements. |
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Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
The accounting policies of Telephone and Data Systems, Inc. (“TDS”) conform to accounting principles generally accepted in the United States of America (“GAAP”) as set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The consolidated financial statements include the accounts of TDS and subsidiaries in which it has a controlling financial interest, including TDS’ 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 10 — Business Segment Information for summary financial information on each business segment.
The accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring items, unless otherwise disclosed) 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.
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Level within the Fair Value Hierarchy |
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March 31, 2016 |
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December 31, 2015 |
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Book Value |
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Fair Value |
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Book Value |
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Fair Value |
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(Dollars in millions) |
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Cash and cash equivalents |
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1 |
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$ |
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$ |
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$ |
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$ |
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Long-term debt |
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Retail |
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2 |
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Institutional |
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2 |
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Other |
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2 |
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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.
March 31, 2016 |
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December 31, 2015 |
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(Dollars in millions) |
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Short-term portion of unbilled equipment installment plan receivables, gross |
$ |
$ |
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Short-term portion of unbilled deferred interest |
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Short-term portion of unbilled allowance for credit losses |
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Short-term portion of unbilled equipment installment plan receivables, net |
$ |
$ |
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Long-term portion of unbilled equipment installment plan receivables, gross |
$ |
$ |
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Long-term portion of unbilled deferred interest |
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Long-term portion of unbilled allowance for credit losses |
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|||||
Long-term portion of unbilled equipment installment plan receivables, net |
$ |
$ |
||||
TDS assesses the collectability of the equipment installment plan receivables based on historical payment experience, account aging and other qualitative factors and provides an allowance for estimated losses. The credit profiles of TDS customers on 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 .
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 |
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March 31, |
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2016 |
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2015 |
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(Dollars and shares in millions, except per share amounts) |
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||||
Basic earnings per share available to TDS common shareholders: |
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|
Net income available to TDS common shareholders used in basic earnings per share |
$ |
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$ |
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Adjustments to compute diluted earnings: |
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Noncontrolling interest adjustment |
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Net income available to TDS common shareholders |
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used in diluted earnings per share |
$ |
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$ |
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Weighted average number of shares used in basic |
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earnings per share: |
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Common Shares |
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Series A Common Shares |
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Total |
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Effects of dilutive securities 1 |
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Weighted average number of shares used in diluted |
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earnings per share |
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Basic earnings per share available to TDS common |
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shareholders |
$ |
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$ |
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Diluted earnings per share available to TDS common |
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shareholders |
$ |
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$ |
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1 |
Includes effects of stock options, restricted stock units and preferred shares. |
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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 .
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(Dollars in millions) |
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Balance December 31, 2015¹ |
$ |
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|
Transferred to Assets held for sale |
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Balance March 31, 2016¹ |
$ |
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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.
Three Months Ended March 31, |
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2016 |
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2015 |
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(Dollars in millions) |
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Revenues |
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Operating expenses |
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Operating income |
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Other income (expense), net |
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Net income |
$ |
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$ |
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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, a n 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. A n 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.
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.
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
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Three Months Ended March 31, |
2016 |
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2015 |
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(Dollars in millions) |
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|
||||
Net income attributable to TDS shareholders |
$ |
|
$ |
||||||
|
Transfer (to) from the noncontrolling interests |
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|
Change in TDS' Capital in excess of par value from U.S. Cellular's issuance of U.S. Cellular shares |
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||||
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Change in TDS' Capital in excess of par value from U.S. Cellular's repurchases of U.S. Cellular shares |
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Purchase of ownership in subsidiaries from noncontrolling interests |
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Net transfers (to) from noncontrolling interests |
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||||
|
Change from net income attributable to TDS and transfers (to) from noncontrolling interests |
$ |
|
$ |
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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.
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TDS Telecom |
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Three Months Ended or as of March 31, 2016 |
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U.S. Cellular |
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Wireline |
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Cable |
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HMS |
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TDS Telecom Eliminations |
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TDS Telecom Total |
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Corporate, Eliminations and Other |
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Total |
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(Dollars in millions) |
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Operating revenues |
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Service |
|
$ |
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$ |
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$ |
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$ |
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$ |
|
$ |
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$ |
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$ |
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|
Equipment and product sales |
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Total operating revenues |
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||||||||
Cost of services (excluding Depreciation, amortization |
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and accretion reported below) |
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Cost of equipment and products |
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Selling, general and administrative |
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Depreciation, amortization and accretion |
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(Gain) loss on asset disposals, net |
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Operating income (loss) |
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|
|
|
||||||||||
Equity in earnings of unconsolidated entities |
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest and dividend income |
|
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|
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|
|
|
|
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|
|
||||||||||
Interest expense |
|
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|
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|
||||||||||
Other, net |
|
|
|
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|
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|
|
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||||||||||
Income (loss) before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Income tax expense (benefit) 1 |
|
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|
|
|
|
|
|
|
|
|
|
|
||||||||||
Net income (loss) |
|
|
|
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|
|
|
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|
|
|
|
|
|
||||||||||
Add back: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Depreciation, amortization and accretion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
(Gain) loss on asset disposals, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Income tax expense (benefit) 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Adjusted EBITDA 2 |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Investments in unconsolidated entities |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
Total assets |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
Capital expenditures |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
|
|
|
|
|
|
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 |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|||||||||
|
Equipment and product sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
Total operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Cost of services (excluding Depreciation, amortization |
|
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|
|
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|
||||||||||
|
and accretion reported below) |
|
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|
|
|
|
|
|
|
|||||||||
Cost of equipment and products |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Depreciation, amortization and accretion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
(Gain) loss on asset disposals, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
(Gain) loss on sale of business and other exit costs, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
(Gain) loss on license sales and exchanges, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Equity in earnings of unconsolidated entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest and dividend income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Other, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Income (loss) before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Income tax expense (benefit) 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Add back: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Depreciation, amortization and accretion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
(Gain) loss on asset disposals, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
(Gain) loss on sale of business and other exit costs, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
(Gain) loss on license sales and exchanges, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Income tax expense (benefit) 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Adjusted EBITDA 2 |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Investments in unconsolidated entities |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
Total assets |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
Capital expenditures |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||||||
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 |
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 Unit ed States of America (“GAAP”) are included in the Supplemental Information section w ithin 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 10 — Business 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:
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 |
|
$ |
|
$ |
|
(1)% |
||||
|
TDS Telecom |
|
|
|
|
|
- |
||||
|
All other 1 |
|
|
|
|
|
(51)% |
||||
|
|
Total operating revenues |
|
|
|
|
|
(1)% |
|||
Operating expenses |
|
|
|
|
|
|
|||||
|
U.S. Cellular |
|
|
|
|
|
34% |
||||
|
TDS Telecom |
|
|
|
|
|
2% |
||||
|
All other 1 2 |
|
|
|
|
|
>100% |
||||
|
|
Total operating expenses |
|
|
|
|
|
27% |
|||
Operating income |
|
|
|
|
|
|
|||||
|
U.S. Cellular |
|
|
|
|
|
>(100)% |
||||
|
TDS Telecom |
|
|
|
|
|
(21)% |
||||
|
All other 1 2 |
|
|
|
|
|
>(100)% |
||||
|
|
Total operating income |
|
|
|
|
|
(95)% |
|||
Other income (expenses) |
|
|
|
|
|
|
|||||
|
Equity in earnings of unconsolidated entities |
|
|
|
|
|
2% |
||||
|
Interest and dividend income |
|
|
|
|
|
65% |
||||
|
Interest expense |
|
|
|
|
|
(24)% |
||||
|
|
Total investment and other income (expense) |
|
|
|
|
|
(22)% |
|||
|
|
|
|
|
|
|
|
|
|
||
Income before income taxes |
|
|
|
|
|
(92)% |
|||||
|
Income tax expense |
|
|
|
|
|
(89)% |
||||
|
|
|
|
|
|
|
|
|
|
||
Net income |
|
|
|
|
|
(94)% |
|||||
|
Less: Net income attributable to noncontrolling interests, net of tax |
|
|
|
|
|
(94)% |
||||
Net income attributable to TDS shareholders |
|
$ |
|
$ |
|
(94)% |
|||||
|
|
|
|
|
|
|
|
|
|
||
Capital expenditures |
|
$ |
|
$ |
|
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 enti ties 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, t his 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’ |
$ |
$ |
|||||
|
Noncontrolling shareholders’ or partners’ |
|
|
|||||
|
|
|
|
$ |
$ |
|||
|
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. |
|
|
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 compr ised of a high-quality network, outstanding customer service, and competitive devices, plans, and pricing, all provided with a local focus.
OPERATIONS |
|
|
|
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 n et additions in 2016 is a result of competitive services and products priced to offer the best value to customers and expanded equipment installment plan offerings. Postpaid churn continued to decline due to enhancements in the customer experience, targeted retention programs and improvement in the overall credit mix of gross additions. |
|||||
Commentary Smartphone penetration increased to 75% of the post paid 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.
|
|
|
|
|
|||||||
|
|
|
|
|
Three Months Ended March 31, |
||||||
|
|
|
|
|
|
|
|
|
2016 vs. |
||
|
|
|
|
|
2016 |
|
2015 |
|
2015 |
||
(Dollars in millions) |
|
|
|
|
|
|
|
|
|||
Retail service |
|
$ |
|
$ |
|
(9)% |
|||||
Inbound roaming |
|
|
|
|
|
(11)% |
|||||
Other |
|
|
|
|
|
1% |
|||||
|
Service revenues |
|
|
|
|
|
(8)% |
||||
Equipment sales |
|
|
|
|
|
45% |
|||||
|
Total operating revenues |
|
|
|
|
|
(1)% |
||||
|
|
|
|
|
|
|
|
|
|
||
System operations (excluding Depreciation, amortization and accretion reported below) |
|
|
|
|
|
(4)% |
|||||
Cost of equipment sold |
|
|
|
|
|
8% |
|||||
Selling, general and administrative |
|
|
|
|
|
(2)% |
|||||
|
|
|
|
|
|
|
|
|
- |
||
|
|
|
|
|
|
|
|
|
|
||
Operating cash flow* |
|
|
|
|
|
(6)% |
|||||
|
|
|
|
|
|
|
|
|
|
||
Depreciation, amortization and accretion |
|
|
|
|
|
4% |
|||||
(Gain) loss on asset disposals, net |
|
|
|
|
|
19% |
|||||
(Gain) loss on sale of business and other exit costs, net |
|
|
|
|
|
100% |
|||||
(Gain) loss on license sales and exchanges |
|
|
|
|
|
N/M |
|||||
|
Total operating expenses |
|
|
|
|
|
34% |
||||
Operating income (loss) |
|
$ |
|
$ |
|
>(100)% |
|||||
|
|
|
|
|
|
|
|
|
|
||
Adjusted EBITDA* |
|
$ |
|
$ |
|
(2)% |
|||||
|
|
|
|
|
|
|
|
|
|
||
Capital expenditures |
|
$ |
|
$ |
|
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 |
|||||||||||
|
S ervice revenues consist of:
Equipment revenues consist of:
|
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 rates . Such reductions were partially offset by a n 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 2015 . Loss 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, low er 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 exchange s of certain of U.S. Cellular’s unbuilt PCS licenses for cert ain other PCS licenses and cash.
Business Overview
TDS Telecom operates in three reportable segments: Wireline, Cable and HMS. The overall strategy for the W ireline and C able businesses is to own the best data pipe s in each market in order to capitalize on data growth and the need for higher broadband speeds and leverage that growth 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 |
|
|
Financial Overview
|
|
|
|
|
Three Months Ended March 31, |
||||||
|
|
|
|
|
|
|
|
|
|
|
2016 vs. |
|
|
2016 |
|
2015 |
|
2015 |
|||||
(Dollars in millions) |
|
|
|
|
|
|
|
|
|||
Operating revenues |
|
|
|
|
|
|
|
|
|||
|
Wireline |
|
$ |
|
$ |
|
(2)% |
||||
|
Cable |
|
|
|
|
|
3% |
||||
|
HMS |
|
|
|
|
|
5% |
||||
|
Intra-company elimination |
|
|
|
|
|
(47)% |
||||
|
|
TDS Telecom operating revenues |
|
|
|
|
|
- |
|||
|
|
|
|
|
|
|
|
|
|
||
Operating expenses |
|
|
|
|
|
|
|||||
|
Wireline |
|
|
|
|
|
1% |
||||
|
Cable |
|
|
|
|
|
5% |
||||
|
HMS |
|
|
|
|
|
3% |
||||
|
Intra-company elimination |
|
|
|
|
|
(47)% |
||||
|
|
TDS Telecom operating expenses |
|
|
|
|
|
2% |
|||
|
|
|
|
|
|
|
|
|
|
||
TDS Telecom operating income |
|
$ |
|
$ |
|
(21)% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA* |
|
$ |
|
$ |
|
(4)% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
|
$ |
|
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.
Business Overview
TDS Telecom’s W ireline business provides broadband, video and voice services. These services are provided to residential, commercial, and wholesale customers in a mix of rural, small town and suburban markets, with the largest concentration of its customers in the Uppe r Midwest and the Southeast. TDS Telecom’s strategy is to offer its residential customers broadband, video, and voice services throu gh value-added bundling. In its commercial business, TDS Telecom’s strategic focus is on small - to medium - sized business es and its sales efforts emphasize advanced IP-based voice and data services.
Operational Overview
|
|
Wireline residential broadband customers, comprised mainly of ILEC 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
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
Three Months Ended March 31, |
||||||
|
|
2016 |
|
2015 |
|
2016 vs. 2015 |
||||||
(Dollars in millions) |
|
|
|
|
|
|
|
|
||||
Service revenues |
|
|
|
|
|
|
|
|
||||
|
Residential |
|
$ |
|
$ |
|
2% |
|||||
|
Commercial |
|
|
|
|
|
(4)% |
|||||
|
Wholesale |
|
|
|
|
|
(5)% |
|||||
|
|
Total service revenues |
|
|
|
|
|
(2)% |
||||
Equipment and product sales |
|
|
|
|
|
19% |
||||||
|
|
|
Total operating revenues |
|
|
|
|
|
(2)% |
|||
|
|
|
|
|
|
|
||||||
Cost of services (excluding Depreciation, |
|
|
|
|
|
|
||||||
amortization and accretion reported below) |
|
|
|
|
|
(1)% |
||||||
Cost of equipment and products |
|
|
|
|
|
(8)% |
||||||
Selling, general and administrative |
|
|
|
|
|
6% |
||||||
|
|
|
|
|
|
|
|
|
|
2% |
||
|
|
|
|
|
|
|
|
|
|
|
||
Operating cash flow* |
|
|
|
|
|
(8)% |
||||||
|
|
|
|
|
|
|
|
|
|
|
||
Depreciation, amortization and accretion |
|
|
|
|
|
(1)% |
||||||
|
|
|
Total operating expenses |
|
|
|
|
|
1% |
|||
|
|
|
|
|
|
|
|
|
|
|
||
Total operating income |
|
$ |
|
$ |
|
(19)% |
||||||
|
|
|
|
|
|
|
|
|
|
|
||
Adjusted EBITDA* |
|
$ |
|
$ |
|
(8)% |
||||||
|
|
|
|
|
|
|
|
|
|
|
||
Capital expenditures |
|
$ |
|
$ |
|
35% |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Represents a non-GAAP financial measure. Refer to Supplemental Information within this MD&A for a reconciliation of this measure. |
|||||||||||
Key components of changes in the statement of operations items were as follows:
Total operating revenues
Residential revenues increased in 201 6 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 201 6 as d eclining legacy voice and data connections reduced revenues, partially offset by a 4% growth in average managedIP connections .
Wholesale revenues decreased in 201 6 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 201 6 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 i ncreased in 201 6 due to growth in employee-related expenses .
Business Overview
TDS Telecom’s cable strategy is to expand its broadba nd services while leveraging its core competencies in network m anagement and customer focus. TDS Telecom seek s to be the leading provider of bro adband 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
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
Three Months Ended March 31, |
||||||
|
|
2016 |
|
2015 |
|
2016 vs. 2015 |
||||||
(Dollars in millions) |
|
|
|
|
|
|
|
|
||||
Service revenues |
|
|
|
|
|
|
|
|
||||
|
Residential |
|
$ |
|
$ |
|
1% |
|||||
|
Commercial |
|
|
|
|
|
10% |
|||||
|
|
|
Total operating revenues |
|
|
|
|
|
3% |
|||
|
|
|
|
|
|
|
||||||
Cost of services (excluding Depreciation, amortization and accretion reported below) |
|
|
|
|
|
12% |
||||||
Selling, general and administrative |
|
|
|
|
|
(4)% |
||||||
|
|
|
|
|
|
|
|
|
|
6% |
||
|
|
|
|
|
|
|
|
|
|
|
||
Operating cash flow* |
|
|
|
|
|
(5)% |
||||||
|
|
|
|
|
|
|
|
|
|
|
||
Depreciation, amortization and accretion |
|
|
|
|
|
5% |
||||||
(Gain) loss on asset disposals, net |
|
|
|
|
|
(20)% |
||||||
|
|
|
Total operating expenses |
|
|
|
|
|
5% |
|||
|
|
|
|
|
|
|
|
|
|
|
||
Total operating income |
|
$ |
|
$ |
|
(56)% |
||||||
|
|
|
|
|
|
|
|
|
|
|
||
Adjusted EBITDA* |
|
$ |
|
$ |
|
(5)% |
||||||
|
|
|
|
|
|
|
|
|
|
|
||
Capital expenditures |
|
$ |
|
$ |
|
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:
|
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 in crease s 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.
Business Overview
Under TDS Telecom’s OneNeck IT Solutions brand, TDS Telecom offer s a full-s uite of IT solutions ranging from equipment resale to full management and hosting of a customer’s IT infrastructure and applications. The goal of HMS operations is to create, deliver, and support a platform of IT products and services tailored for mid- market business customers.
Financial Overview — HMS
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
Three Months Ended March 31, |
||||||
|
|
2016 |
|
2015 |
|
2016 vs. 2015 |
||||||
(Dollars in millions) |
|
|
|
|
|
|
|
|
||||
Service revenues |
|
$ |
|
$ |
|
2% |
||||||
Equipment and product sales |
|
|
|
|
|
8% |
||||||
|
|
|
Total operating revenues |
|
|
|
|
|
5% |
|||
|
|
|
|
|
|
|
||||||
Cost of services (excluding Depreciation, amortization and accretion reported below) |
|
|
|
|
|
6% |
||||||
Cost of equipment and products |
|
|
|
|
|
8% |
||||||
Selling, general and administrative |
|
|
|
|
|
(16)% |
||||||
|
|
|
|
|
|
|
|
|
|
2% |
||
|
|
|
|
|
|
|
|
|
|
|
||
Operating cash flow* |
|
|
|
|
|
>100% |
||||||
|
|
|
|
|
|
|
|
|
|
|
||
Depreciation, amortization and accretion |
|
|
|
|
|
13% |
||||||
|
|
|
Total operating expenses |
|
|
|
|
|
3% |
|||
|
|
|
|
|
|
|
|
|
|
|
||
Total operating loss |
|
$ |
|
$ |
|
21% |
||||||
|
|
|
|
|
|
|
|
|
|
|
||
Adjusted EBITDA* |
|
$ |
|
$ |
|
>100% |
||||||
|
|
|
|
|
|
|
|
|
|
|
||
Capital expenditures |
|
$ |
|
$ |
|
(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:
Equipment revenues consist of:
|
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 201 6 . Equipment and product sales revenues from sales of IT infrastructure hardware solutions increased in 201 6 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, i n certain recent periods, TDS has incurred negative free cash flow (defined as Cash flows from operating activities less Cash paid for additions to property, plant and equipment) and this will continue in the future if operating results do not 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 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 (i.e., additions to property, plant and equipment and system development expenditures), which in clude accruals and capitalized interest , in 2016 and 2015 were as follows:
|
U.S. Cellular’s capital expenditures for 2016 are expected to be approximately $500 million. These expenditures are expected to be for the following general purposes:
TDS Telecom’s capital expenditures for 2016 are expected to be $180 million. These expenditures are expected to be for the following general purposes:
|
TDS plans to finance its capital expenditures program for 2016 using primarily Cash flows from operating activities and, as necessary, existing cash balances and borrowings under 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.
TDS consolidates certain entities as “variable interest entities” under GAAP. See Note 8 — Variable Interest Entities in the Notes to Consolidated Financial Statements for additional information related to these variable interest entities. TDS may elect to make capital contributions and/or advances to variable interest entities in order to fund their operations.
Common Share Repurchase Programs
TDS and U.S. Cellular have 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 |
|
$ |
|
$ |
|||
|
U.S. Cellular Common Shares |
|
$ |
|
$ |
|||
|
|
|
|
|
||||
2015 |
|
|
|
|
||||
|
TDS Common Shares |
|
$ |
|
$ |
|||
|
U.S. Cellular Common Shares |
|
$ |
|
$ |
|||
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.
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 revenue ‑ enhancing and cost-reducing upgrades to TDS’ networks. TDS utilizes cash on hand, cash from operating activities, cash proceeds from divestitures and dispositions of 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 .
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 w orking capital items provided net cash of $ 244 million. A s a result of increased focus by U.S. Cellular to sell through inventory of wireless devices on hand in 2015, inventory levels decreased. 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 P olicies and Estimates
TDS prepares its consolidated financial statements in accordance with GAAP. TDS’ significant accounting policies are discussed in detail in Note 1 — Summary of Significant 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 1 — Basis of Presentation in the Notes to Consolidated Financial Statements for information on recent accounting pronouncements.
The discussion below includes updates related to recent regulatory developments. These updates should be read in conjunction with the disclosures previously provided under “Regulatory Matters” in TDS’ Form 10-K for the year ended December 31, 2015 .
FCC Auction 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.
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) |
$ |
|
$ |
||||
Add back: |
|
|
|
||||
|
Income tax expense |
|
|
|
|||
|
Interest expense |
|
|
|
|||
|
Depreciation, amortization and accretion |
|
|
|
|||
EBITDA |
|
|
|
||||
Add back or deduct: |
|
|
|
||||
|
(Gain) loss on sale of business and other exit costs, net |
|
|
|
|||
|
(Gain) loss on license sales and exchanges, net |
|
|
|
|||
|
(Gain) loss on asset disposals, net |
|
|
|
|||
Adjusted EBITDA |
|
|
|
||||
Deduct: |
|
|
|
||||
|
Equity in earnings of unconsolidated entities |
|
|
|
|||
|
Interest and dividend income |
|
|
|
|||
|
Other, net |
|
|
|
|||
Operating cash flow |
|
|
|
||||
Deduct: |
|
|
|
||||
|
Depreciation, amortization and accretion |
|
|
|
|||
|
(Gain) loss on sale of business and other exit costs, net |
|
|
|
|||
|
(Gain) loss on license sales and exchanges, net |
|
|
|
|||
|
(Gain) loss on asset disposals, net |
|
|
|
|||
Operating income (GAAP) |
$ |
|
$ |
||||
|
|
Three Months Ended March 31, |
|||||
U.S. CELLULAR |
2016 |
|
2015 |
||||
(Dollars in millions) |
|
|
|
|
|
||
Net income (GAAP) |
$ |
|
$ |
||||
Add back: |
|
|
|
||||
|
Income tax expense |
|
|
|
|||
|
Interest expense |
|
|
|
|||
|
Depreciation, amortization and accretion |
|
|
|
|||
EBITDA |
|
|
|
||||
Add back or deduct: |
|
|
|
||||
|
(Gain) loss on sale of business and other exit costs, net |
|
|
|
|||
|
(Gain) loss on license sales and exchanges, net |
|
|
|
|||
|
(Gain) loss on asset disposals, net |
|
|
|
|||
Adjusted EBITDA |
|
|
|
||||
Deduct: |
|
|
|
||||
|
Equity in earnings of unconsolidated entities |
|
|
|
|||
|
Interest and dividend income |
|
|
|
|||
|
Other, net |
|
|
|
|||
Operating cash flow |
|
|
|
||||
Deduct: |
|
|
|
||||
|
Depreciation, amortization and accretion |
|
|
|
|||
|
(Gain) loss on sale of business and other exit costs, net |
|
|
|
|||
|
(Gain) loss on license sales and exchanges, net |
|
|
|
|||
|
(Gain) loss on asset disposals, net |
|
|
|
|||
Operating income (loss) (GAAP) |
$ |
|
$ |
||||
|
|
Three Months Ended March 31, |
|||||
TDS TELECOM |
2016 |
|
2015 |
||||
(Dollars in millions) |
|
|
|
|
|
||
Net income (GAAP) |
$ |
|
$ |
||||
Add back: |
|
|
|
||||
|
Income tax expense |
|
|
|
|||
|
Depreciation, amortization and accretion |
|
|
|
|||
EBITDA |
|
|
|
||||
Add back or deduct: |
|
|
|
||||
|
(Gain) loss on asset disposals, net |
|
|
|
|||
Adjusted EBITDA |
|
|
|
||||
Deduct: |
|
|
|
||||
|
Interest and dividend income |
|
|
|
|||
|
Other, net |
|
|
|
|||
Operating cash flow |
|
|
|
||||
Deduct: |
|
|
|
||||
|
Depreciation, amortization and accretion |
|
|
|
|||
|
(Gain) loss on asset disposals, net |
|
|
|
|||
Operating income (GAAP) |
$ |
|
$ |
||||
|
|
Three Months Ended March 31, |
|||||
WIRELINE |
2016 |
|
2015 |
||||
(Dollars in millions) |
|
|
|
|
|
||
Income before income taxes (GAAP)¹ |
$ |
|
$ |
||||
Add back: |
|
|
|
||||
|
Interest expense |
|
|
|
|||
|
Depreciation, amortization and accretion |
|
|
|
|||
EBITDA |
|
|
|
||||
Add back or deduct: |
|
|
|
||||
|
(Gain) loss on asset disposals, net |
|
|
|
|||
Adjusted EBITDA |
|
|
|
||||
Deduct: |
|
|
|
||||
|
Interest and dividend income |
|
|
|
|||
|
Other, net |
|
|
|
|||
Operating cash flow |
|
|
|
||||
Deduct: |
|
|
|
||||
|
Depreciation, amortization and accretion |
|
|
|
|||
|
(Gain) loss on asset disposals, net |
|
|
|
|||
Operating income (GAAP) |
$ |
|
$ |
||||
|
|
Three Months Ended March 31, |
|||||
CABLE |
2016 |
|
2015 |
||||
(Dollars in millions) |
|
|
|
|
|
||
Income before income taxes (GAAP)¹ |
$ |
|
$ |
||||
Add back: |
|
|
|
||||
|
Depreciation, amortization and accretion |
|
|
|
|||
EBITDA |
|
|
|
||||
Add back or deduct: |
|
|
|
||||
|
(Gain) loss on asset disposals, net |
|
|
|
|||
Adjusted EBITDA |
|
|
|
||||
Deduct: |
|
|
|
||||
|
Other, net |
|
|
|
|||
Operating cash flow |
|
|
|
||||
Deduct: |
|
|
|
||||
|
Depreciation, amortization and accretion |
|
|
|
|||
|
(Gain) loss on asset disposals, net |
|
|
|
|||
Operating income (GAAP) |
$ |
|
$ |
||||
|
|
Three Months Ended March 31, |
|||||
HMS |
2016 |
|
2015 |
||||
(Dollars in millions) |
|
|
|
|
|
||
Loss before income taxes (GAAP)¹ |
$ |
|
$ |
||||
Add back: |
|
|
|
||||
|
Interest expense |
|
|
|
|||
|
Depreciation, amortization and accretion |
|
|
|
|||
EBITDA |
|
|
|
||||
Add back or deduct: |
|
|
|
||||
|
(Gain) loss on asset disposals, net |
|
|
|
|||
Adjusted EBITDA |
|
|
|
||||
Deduct: |
|
|
|
||||
|
Other, net |
|
|
|
|||
Operating cash flow |
|
|
|
||||
Deduct: |
|
|
|
||||
|
Depreciation, amortization and accretion |
|
|
|
|||
|
(Gain) loss on asset disposals, net |
|
|
|
|||
Operating loss (GAAP) |
$ |
|
$ |
||||
|
|
|
|
|
|
|
|
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 |
$ |
|
$ |
||||
Less: Cash paid for additions to property, plant and equipment |
|
|
|
||||
|
Free cash flow |
$ |
|
$ |
|||
Add: Sprint Cost Reimbursement 1 |
|
|
|
||||
|
Adjusted free cash flow |
$ |
|
$ |
|||
|
|
|
|
|
|
|
|
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’ L ong-term debt. There have been no material changes to such information since December 31, 2015 .
See Note 2 — Fair Value Measurements in the Notes to Consolidated Financial Statements for additional information related to the fa ir value of TDS’ L ong-term debt as of 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 e xecutive o fficer and principal f inancial o fficer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the 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 e xecutive o fficer and principal f inancial o fficer, of the effectiveness of the design and operation of TDS’ disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on this evaluation, TDS’ principal e xecutive o fficer and principal f inancial o fficer concluded that TDS' disclosure controls and procedures were 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 ma terially affect, TDS’ internal control over financial reporting.
Part II . Other Information
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 .
In addition to the information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in TDS’ Annual Report on Form 10-K for the year ended December 31, 2015 , which could materially affect TDS’ business, financial condition or future results. The risks described in this Form 10-Q and the Form 10-K for the year ended December 31, 2015 , may not be the onl y risks that could affect TDS. Additional unidentified or unrecognized risks and uncertainties could materially adversely affect TDS’ business, financial condi tion 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 $250 million stock repurchase program for TDS Common Shares. Depending on market conditions, such shares may be repurchased in compliance with Rule 10b-18 of the Exchange Act, pursuant to Rule 10b5-1 under the Exchange Act, or pursuant to accelerated share repurchase arrangements, prepaid share repurchases, private transactions or as otherwise authorized. This authorization does not have an expiration date. TDS did not determine to terminate the foregoing Common Share repurchase program, or cease making further purchases thereunder, during the first quarter of 2016 .
The following table provides certain information with respect to all purchases made by or on behalf of TDS, and any open market purchases made by any “affiliated purchaser” (as defined by the SEC) of TDS, of TDS Common Shares during the quarter covered by this Form 10-Q.
|
|
|
|
|
|
|
Total Number of |
|
Maximum Dollar |
||
|
|
|
|
|
Average |
|
Shares Purchased |
|
Value of Shares that |
||
|
|
|
Total Number |
|
Price |
|
as Part of Publicity |
|
May Yet Be |
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of Shares |
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Paid per |
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Announced Plans or |
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Purchased Under the |
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Period |
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Purchased |
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Share |
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Programs |
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Plans or Programs |
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January 1 – 31, 2016 |
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$ |
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$ |
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February 1 – 29, 2016 |
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March 1 – 31, 2016 |
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Total for or as of the end of the |
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quarter ended March 31, 2016 |
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$ |
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$ |
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The following information is being provided to update prior disclosures made pursuant to the requirements of Form 8-K, Item 2.03 — Creation of a Direct Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement of a Registrant.
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.
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Form of U.S. Cellular 2013 Long-Term Incentive Plan Stock Option Award Agreement for the President and Chief Executive Officer of U.S. Cellular, is hereby incorporated by reference to Exhibit 10.3 to U.S. Cellular’s Current Report on Form 8-K dated March 14, 2016. |
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Exhibit 10.2 |
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Form of U.S. Cellular 2013 Long-Term Incentive Plan Restricted Stock Unit Award Agreement for the President and Chief Executive Officer of U.S. Cellular, is hereby incorporated by reference to Exhibit 10.4 to U.S. Cellular’s Current Report on Form 8-K dated March 14, 2016. |
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Exhibit 10.3 |
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Form of TDS Long-Term Incentive Plan Stock Option Award Agreement for Officers |
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Exhibit 11 |
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Statement regarding computation of per share earnings is included herein as Note 4 — Earnings Per Share in the Notes to Consolidated Financial Statements. |
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Exhibit 12 |
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Statement regarding computation of ratio of earnings to fixed charges. |
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Exhibit 31.1 |
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Principal executive officer certification pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. |
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Exhibit 31.2 |
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Principal financial officer certification pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. |
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Exhibit 32.1 |
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Principal executive officer certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. |
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Exhibit 32.2 |
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Principal financial officer certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. |
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Exhibit 101.INS |
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XBRL Instance Document |
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Exhibit 101.SCH |
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XBRL Taxonomy Extension Schema Document |
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Exhibit 101.PRE |
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XBRL Taxonomy Presentation Linkbase Document |
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Exhibit 101.CAL |
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XBRL Taxonomy Calculation Linkbase Document |
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Exhibit 101.LAB |
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XBRL Taxonomy Label Linkbase Document |
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Exhibit 101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document |
The foregoing exhibits include only the exhibits that relate specifically to this Form 10-Q or that supplement the exhibits identified in TDS’ Form 10-K for the year ended December 31, 2015 . Reference is made to 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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TELEPHONE AND DATA SYSTEMS, INC. |
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(Registrant) |
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Date: |
May 6, 2016 |
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/s/ LeRoy T. Carlson, Jr. |
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LeRoy T. Carlson, Jr., President and Chief Executive Officer (principal executive officer) |
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Date: |
May 6, 2016 |
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/s/ Douglas D. Shuma |
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Douglas D. Shuma, Senior Vice President - Finance and Chief Accounting Officer (principal financial officer and principal accounting officer) |
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Date: |
May 6, 2016 |
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/s/ Douglas W. Chambers |
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Douglas W. Chambers, Vice President and Controller |
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TELEPHONE AND DATA SYSTEMS, INC.
2011 LONG-TERM INCENTIVE PLAN
<<YEAR>> STOCK OPTION AWARD AGREEMENT
Telephone and Data Systems, Inc., a Delaware corporation (the “Company”), hereby grants to <<FNAME>> <<LNAME>> (the “Optionee”), as of << GRANT DATE>> (the “Option Date”), pursuant to the provisions of the Telephone and Data Systems, Inc. 2011 Long-Term Incentive Plan, as amended (the “Plan”), a Non-Qualified Stock Option (the “Option”) to purchase from the Company <<STKO>> sh ares of Common Stock at the price of $<<PRICE>> per share upon and subject to the terms and conditions set forth below. Capitalized terms not defined herein shall have the meanings specified in the Plan.
1. Time and Manner of Exercise of Option .
1.1. Exercise of Optio n . (a) In General . Except as otherwise provided in this Award Agreement, the Option shall become exercisable in its entirety on the third annual anniversary of the Option Date. The Option may not be exercised, in whole or in part, after the tenth annua l anniversary of the Option Date (the “Expiration Date”).
(b) Disability . If the Optionee ceases to be employed by the Employers and Affiliates by reason of Disability (as defined below), the Option immediately shall become exercisable in its entirety, a nd after such date may be exercised by the Optionee (or the Optionee’s Legal Representative) for a period of 12 months after the effective date of the Optionee’s termination of employment or until the Expiration Date, whichever period is shorter. If the O ptionee shall die within such exercise period, the Option shall be exercisable by the beneficiary or beneficiaries duly designated by the Optionee, to the same extent the Option was exercisable by the Optionee on the date of the Optionee’s death, for a per iod ending on the later of (i) the last day of such exercise period and (ii) the 180 day anniversary of the Optionee’s death (but in no event later than the Expiration Date). For purposes of this Award Agreement, “Disability” shall mean a total physical disability which, in the Committee’s judgment, prevents the Optionee from performing substantially such Optionee’s employment duties and responsibilities for a continuous period of at least six months.
(c) Special Retirement . If the Optionee ceases to be employed by the Employers and Affiliates by reason of Special Retirement (as defined below), the Option immediately shall become exercisable in its entirety if (i) the Optionee has attained age 66 as of the effective date of the Optionee’s Special Retirem ent and (ii) the effective date of the Optionee’s Special Retirement occurs on or after January 1, <<YEAR AFTER YEAR OF GRANT>>. If the Optionee ceases to be employed by the Employers and Affiliates by reason of Special Retirement and either (i) the Optio nee has not attained age 66 as of the effective date of the Optionee’s Special Retirement or (ii) the effective date of the Optionee’s Special Retirement occurs before January 1, <<YEAR AFTER YEAR OF GRANT>>, the Option shall be exercisable only to the ext ent it is exercisable on the effective date of the Optionee’s Special Retirement. The Option, to the extent then exercisable, may be exercised by the Optionee (or the Optionee’s Legal Representative) for a period of 12 months after the effective date of t he Optionee’s Special Retirement or until the Expiration Date, whichever period is shorter. If the Optionee shall die within such exercise period, the Option shall be exercisable by the beneficiary or beneficiaries duly designated by the Optionee, to the same extent the Option was exercisable by the Optionee on the date of the Optionee’s death, for a period ending on the later of (i) the last day of such exercise period and (ii) the 180 day anniversary of the Optionee’s death (but in no event later than th e Expiration Date). For purposes of this Award Agreement, “Special Retirement” shall mean an Optionee’s termination of employment with the Employers and Affiliates on or after the later of (i) the Optionee’s attainment of age 62 and (ii) the Optionee’s Ea rly Retirement Date or Normal Retirement Date, as such terms are defined in the Telephone and Data Systems, Inc. Pension Plan.
(d) Retirement . If the Optionee ceases to be employed by the Employers and Affiliates by reason of Retirement (as defined below ), the Option immediately shall become exercisable in its entirety if (i) the Optionee has attained age 66 as of the effective date of the Optionee’s Retirement and (ii) the effective date of the Optionee’s Retirement occurs on or after January 1, <<YEAR A FTER YEAR OF GRANT>>. If the Optionee ceases to be employed by the Employers and Affiliates by reason of Retirement and either (i) the Optionee has not attained age 66 as of the effective date of the Optionee’s Retirement or (ii) the effective date of the Optionee’s Retirement occurs before January 1, <<YEAR AFTER YEAR OF GRANT>>, the Option shall be exercisable only to the extent it is exercisable on the effective date of the Optionee’s Retirement. The Option, to the extent then exercisable, may be exerc ised by the Optionee (or the Optionee’s Legal Representative) for a period of 90 days after the effective date of the Optionee’s Retirement or until the Expiration Date, whichever period is shorter. If the Optionee shall die within such exercise period, t he Option shall be exercisable by the beneficiary or beneficiaries duly designated by the Optionee, to the same extent the Option was exercisable by the Optionee on the date of the Optionee’s death, for a period ending on the earlier of (i) the 180 day ann iversary of the Optionee’s death and (ii) the Expiration Date. For purposes of this Award Agreement, “Retirement” shall mean an Optionee’s termination of employment with the Employers and Affiliates on or after the Optionee’s attainment of age 65 that doe s not satisfy the definition of “Special Retirement” set forth in Section 1.1(c).
(e) Resignation with Prior Consent of the Board . If the Optionee ceases to be employed by the Employers and Affiliates by reason of the Optionee’s resignation of employment with the prior consent of the board of directors of such Optionee’s Employer (as evidenced in the Employer’s minute book), the Option shall be exercisable only to the extent it is exercisable on the effective date of the Optionee’s resignation, and after such date may be exercised by the Optionee (or the Optionee’s Legal
Representative) for a period of 90 days after such effective date or until the Expiration Date, whichever period is shorter. If the Optionee shall die within such exercise period, the Opt ion shall be exercisable by the beneficiary or beneficiaries duly designated by the Optionee, to the same extent the Option was exercisable by the Optionee on the date of the Optionee’s death, for a period ending on the earlier of (i) the 180 day anniversa ry of the Optionee’s death and (ii) the Expiration Date.
(f) Death . If the Optionee ceases to be employed by the Employers and Affiliates by reason of death, the Option immediately shall become exercisable in its entirety, and may be exercised by the ben eficiary or beneficiaries duly designated by the Optionee for a period ending on the earlier of (i) the 180 day anniversary of the Optionee’s death and (ii) the Expiration Date.
(g) Other Termination of Employment . If the Optionee ceases to be employed b y the Employers and Affiliates for any reason other than Disability, Special Retirement, Retirement, resignation of employment with the prior consent of the board of directors of the Optionee’s Employer (as evidenced in the Employer’s minute book) or death , the Option shall be exercisable only to the extent it is exercisable on the effective date of the Optionee’s termination of employment, and may be exercised by the Optionee (or the Optionee’s Legal Representative) for a period of 30 days after the effect ive date of the Optionee’s termination of employment or until the Expiration Date, whichever period is shorter. If the Optionee shall die within such exercise period, the Option shall be exercisable only to the extent it is exercisable on the date of deat h and may be exercised by the beneficiary or beneficiaries duly designated by the Optionee for a period ending on the earlier of (i) the 180 day anniversary of the Optionee’s death and (ii) the Expiration Date. Notwithstanding subsections (c) and (d) of t his Section 1.1 and any other provision in this Award Agreement to the contrary, if the Optionee ceases to be employed by the Employers and Affiliates on account of the Optionee’s negligence or willful misconduct, in each case as determined by the Company in its sole discretion, the Option shall terminate immediately upon such termination of employment, unless such Option terminates earlier pursuant to Section 1.2.
(h) Expiration of Option during Blackout Period . If the Option shall expire under any of su bsections (b) through (g) of this Section 1.1 during a period when the Optionee and family members or other persons living in the household of such persons are prohibited from trading in securities of the Company pursuant to the Telephone and Data Systems, Inc. Policy Regarding Insider Trading and Confidentiality (or any successor policy thereto) (a “Blackout Period”), the period during which the Option is exercisable shall be extended to the date that is 30 days after the date of the termination of the Bla ckout Period (but in no event later than the Expiration Date).
(i) Expiration of Option during Suspension Period . If the Option shall expire under any of subsections (b) through (g) of this Section 1.1 during a period when the exercise of the Option woul d violate applicable securities laws (a “Suspension Period”), the period during which the Option is exercisable shall be extended to the date that is 30 days after the date of the termination of the Suspension Period (but in no event later than the Expirat ion Date).
1.2. Termination of Option and Forfeiture of Option Gain upon Competition, Misappropriation, Solicitation or Disparagement . (a) Notwithstanding any other provision herein, if the Optionee engages in (i) Competition (as defined in this Section 1.2 below), (ii) Misappropriation (as defined in this Section 1.2 below), (iii) Solicitation (as defined in this Section 1.2 below), or (iv) Disparagement (as defined in this Section 1.2 below), in each case as determined by the Company in its sole discret ion, then (i) as of the date of such Competition, Misappropriation, Solicitation, or Disparagement, the Option granted pursuant to this Award Agreement immediately shall terminate and thereby be forfeited to the extent it has not been exercised and (ii) th e Optionee shall pay the Company, within five business days of receipt by the Optionee of a written demand therefore, an amount in cash determined by multiplying the number of shares of Common Stock purchased pursuant to each exercise of the Option within the twelve months immediately preceding such Competition, Misappropriation, Solicitation, or Disparagement (without reduction for any shares of Common Stock delivered by the Optionee or withheld by the Company pursuant to Section 1.3 or Section 2.4) by the difference between (i) the Fair Market Value of a share of Common Stock on the date of such exercise and (ii) the purchase price per share of Common Stock set forth in the first paragraph of this Award Agreement. The Optionee acknowledges and agrees that the Option, by encouraging stock ownership and thereby increasing an employee’s proprietary interest in the Company’s success, is intended as an incentive to participating employees to remain in the employ of the Company or an Affiliate. The Optionee ack nowledges and agrees that this Section 1.2(a) is therefore fair and reasonable, and not a penalty.
(b) The Optionee may be released from the Optionee’s obligation under this Section 1.2 only if and to the extent the Committee determines in its sole disc retion that such release is in the best interests of the Company.
(c) The Optionee agrees that by executing this Award Agreement the Optionee authorizes the Employers and any Affiliate to deduct any amount owed by the Optionee pursuant to Section 1.2(a) f rom any amount payable by the Employers or any Affiliate to the Optionee, including, without limitation, any amount payable to the Optionee as salary, wages, vacation pay or bonus. The Optionee further agrees to execute any documents at the time of setoff required by the Employers and any Affiliate in order to effectuate the setoff. Should the Optionee fail to do so and the Employers and/or any Affiliate institute a legal action against the Optionee to recover the amounts due, the Optionee agrees to reimb urse the Employers and/or any Affiliate for their reasonable attorneys’ fees and litigation costs incurred in recovering such amounts from the Optionee. This right of setoff shall not be an exclusive remedy and an Employer’s or an Affiliate’s election not to exercise this right of setoff with respect to any amount payable to the Optionee shall not constitute a waiver of this right of setoff with respect to any other amount payable to the Optionee or any other remedy.
For the purposes of this Award Agreeme nt, “Competition” shall mean that the Optionee directly or indirectly, individually or in conjunction with any Person, during the Optionee’s employment with the Employers and the Affiliates and for the twelve months after the termination of that employment for any reason, other than on any Employer’s or Affiliate’s behalf (i) has contact with any customer of an Employer or Affiliate or with any prospective customer which has been contacted or solicited by or on behalf of an Employer or Affiliate for the pur pose of soliciting or selling to such customer or prospective customer the same or similar (such that it could substitute for) product or service provided by an Employer or Affiliate during the Optionee’s employment with the Employers and the Affiliates; o r (ii) becomes employed in the business or engages in the business of providing wireless, telephone or broadband products or services in any county or county contiguous to a county in which an Employer or Affiliate provided such products or services during the Optionee’s employment with the Employers and the Affiliates or had plans to do so within the twelve month period immediately following the Optionee’s termination of employment.
For the purposes of this Award Agreement, “Misappropriation” shall mean t hat the Optionee (i) uses Confidential Information (as defined below) for the benefit of anyone other than the Employers or an Affiliate, as the case may be, or discloses the Confidential Information to anyone not authorized by the Employers or an Affiliat e, as the case may be, to receive such information; (ii) upon termination of employment, makes any summaries of, takes any notes with respect to, or memorizes any Confidential Information or takes any Confidential Information or reproductions thereof from the facilities of the Employers or an Affiliate, or (iii) upon termination of employment or upon the request of the Employers or an Affiliate, fails to return all Confidential Information then in the Optionee’s possession. “Confidential Information” shall mean any confidential and proprietary drawings, reports, sales and training manuals, customer lists, computer programs, and other material embodying trade secrets or confidential technical, business, or financial information of the Employers or an Affilia te.
For the purposes of this Award Agreement, “Solicitation” shall mean that the Optionee, directly or indirectly, individually or in conjunction with any Person, during the Optionee’s employment with the Employers and the Affiliates and for the twelve mon ths after the termination of that employment for any reason, other than on any Employer’s or Affiliate’s behalf, solicits, induces or encourages (or attempts to solicit, induce or encourage) any individual away from any Employer’s or Affiliate’s employ or from the faithful discharge of such individual’s contractual and fiduciary obligations to serve the Employers’ and Affiliates’ interests with undivided loyalty.
For the purposes of this Award Agreement, “Disparagement” shall mean that the Optionee has made a statement (whether oral, written or electronic) to any Person other than to an officer of an Employer or an Affiliate that disparages or demeans the Employers, any Affiliate, or any of their respective owners, directors, officers, employees, products or services.
1.3. Method of Exercise . The Option may be exercised by the holder of the Option (1) by giving written notice or notice by electronic means approved by the Company to the Vice President-Human Resources of the Company (or such other Person as ma y be designated by the Vice President-Human Resources) specifying the number of whole shares of Common Stock to be purchased and by accompanying such notice with payment therefor in full (unless another arrangement for such payment which is satisfactory to the Company has been made) and (2) by executing such documents and taking any other actions as the Company may reasonably request. Payment made be made either (i) in cash, (ii) by delivery (either actual delivery or by attestation procedures established by the Company) of previously-owned whole shares of Common Stock having an aggregate Fair Market Value, determined as of the date of exercise, equal to the aggregate purchase price payable by reason of such exercise, (iii) by authorizing the Company to wit hhold whole shares of Common Stock which otherwise would be delivered having an aggregate Fair Market Value, determined as of the date of exercise, equal to the aggregate purchase price payable by reason of such exercise, (iv) to the extent legally permiss ible, in cash by a broker-dealer acceptable to the Company to whom the holder has submitted an irrevocable notice of exercise or (v) by a combination of (i), (ii) and (iii). If payment of the purchase price is made pursuant to clause (ii) or (iii) of the second sentence of this Section 1.3, then any fraction of a share of Common Stock which would be required to satisfy the aggregate of such purchase price and the withholding taxes with respect to the Option, as described in Section 2.4, shall be disregarde d and the remaining amount due shall be paid in cash by the holder. No share of Common Stock shall be delivered until the full purchase price therefor and the withholding taxes thereon have been paid (or arrangement has been made for such payment to the C ompany’s satisfaction).
2. Additional Terms and Conditions of Option .
2.1. Option subject to Acceptance . The Option shall become null and void unless the Optionee accepts this Award Agreement by executing it in the space provided at the end hereof and r eturning it to the Vice President-Human Resources of the Company.
2.2. Nontransferability of Option . The Option may not be transferred other than (i) to a beneficiary upon the Optionee’s death (as designated on a form prescribed by the Company or under the terms of the Plan) or (ii) by gift by the Optionee to a Permitted Transferee. Except as permitted by the foregoing, the Option may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of the Option, the Option and all rights hereunder shall immediately become null and void.
By accepting the Option, the Optionee agrees that if all beneficiaries designated on a beneficiary designation form prescribed by the Company predecease the Optionee or, in the case of corporations, partnerships, trusts or other entities which are designated beneficiaries, are terminated, dissolved, become insolvent or are adjudicated bankrupt prior to the date of the Optionee’s death, or if the Optionee fails to properly designate a beneficiary on a beneficiary designation form prescribed by t he Company, then the Optionee hereby designates the following Persons in the order set forth herein as the Optionee’s beneficiary or beneficiaries: (i) the Optionee’s spouse, if living, or if none, (ii) the Optionee’s then living descendants, per stirpes, or if none, (iii) the Optionee’s estate.
2.3. Agreement by Optionee . As a condition precedent to any exercise of the Option, the holder shall comply with all regulations and requirements of any regulatory authority having control of or supervision over the issuance or delivery of shares of Common Stock and, in connection therewith, shall execute any documents which the Committee shall in its sole discretion deem necessary or advisable.
2.4. Withholding Taxes . (a) As a condition precedent to any issuanc e or delivery of shares of Common Stock upon exercise of the Option, the holder shall, upon request by the Company, pay to the Company in addition to the purchase price of the shares of Common Stock, such amount as the Company may be required, under all ap plicable federal, state, local or other laws or regulations, to withhold and pay over as income or other withholding taxes (the “Required Tax Payments”) with respect to such exercise of the Option. If the holder shall fail to advance the Required Tax Paym ents after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to the holder.
(b) The holder may elect to satisfy his or her obligation to advance the Requi red Tax Payments by any of the following means: (1) a cash payment to the Company, (2) delivery (either actual delivery or by attestation procedures established by the Company) to the Company of previously-owned whole shares of Common Stock, the Fair Mark et Value of which shall be determined as of the date the obligation to withhold or pay taxes first arises in connection with the Option (the “Tax Date”), (3) authorizing the Company to withhold whole shares of Common Stock which would otherwise be delivere d to the holder upon exercise of the Option, the Fair Market Value of which shall be determined as of the Tax Date, (4) to the extent legally permissible, a cash payment by a broker-dealer acceptable to the Company to whom the holder has submitted an irrev ocable notice of exercise or (5) any combination of (1), (2) and (3). Shares of Common Stock to be delivered or withheld may not have an aggregate Fair Market Value in excess of the minimum amount of the Required Tax Payments. Any fraction of a share of Common Stock which would be required to satisfy the aggregate of such tax withholding obligation and the purchase price of the Option shall be disregarded and the remaining amount due shall be paid in cash by the holder. The Optionee agrees that if by the pay period that immediately follows the date that the Option is exercised, no cash payment attributable to any such fractional share shall have been received by the Company, then the Optionee hereby authorizes the Company to deduct such cash payment from any amount payable by the Company or any Affiliate to the Optionee, including without limitation any amount payable to the Optionee as salary or wages. The Optionee agrees that this authorization may be reauthorized via electronic means determined by the Company. The Optionee may revoke this authorization by written notice to the Company prior to any such deduction. No share of Common Stock shall be delivered until the Required Tax Payments have been satisfied in full (or arrangement has been made for su ch payment to the Company’s satisfaction).
2.5. Adjustment . In the event of any conversion, stock split, stock dividend, recapitalization, reclassification, reorganization, merger, consolidation, spin-off, combination, exchange of shares, liquidation or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a regular cash dividend, the number and class of shares subject to the Option and the purchase price per share shall be appropriately and equitably a djusted by the Committee, such adjustment to be made without an increase in the aggregate purchase price. Such adjustment shall be made in compliance with the requirements of Section 409A of the Code applicable to stock rights, including without limitatio n the requirements of Treasury Regulation §1.409A-1(b)(5)(v)(D), and shall be final, binding and conclusive. If such adjustment would result in a fractional security being subject to the Option, the Company shall pay the holder, in connection with the fir st exercise of the Option occurring after such adjustment, an amount in cash determined by multiplying (i) the fraction of such security (rounded to the nearest hundredth) by (ii) the excess, if any, of (A) the Fair Market Value on the exercise date over ( B) the purchase price of the Option.
2.6. Change in Control . (a) Notwithstanding any provision of the Plan or any other provision of this Award Agreement, in the event of a Change in Control, the Board (as constituted prior to such Change in Control) may in its discretion, but shall not be required to, make such adjustments to the Option as it deems appropriate, including, without limitation:
(1) causing the Option to immediately become exercisable in whole or in part; and/or
(2) substituting for som e or all of the shares of Common Stock subject to the Option, the number and class of shares into which each outstanding share of Common Stock shall be converted pursuant to such Change in Control; provided , however , that in the event of such a substitutio n, the purchase price per share of stock then subject to the Option shall be appropriately adjusted by the Committee (whose determination shall be final, binding and conclusive), but in no event shall the aggregate purchase price for such shares be greater than the aggregate purchase price for the shares of Common Stock subject to the Option prior to the Change in Control; and/or
(3) requiring that the Option, in whole or in part, be surrendered to the Company by the holder, and be immediately cancelled by the Company, and providing for the holder to receive (i) a cash payment in an amount equal to the number of shares of Common Stock then subject to the portion of the Option surrendered, to the extent the Option is then exercisable or becomes exercisable pursuant to this Section 2.6(a), multiplied by the excess, if any, of the Fair Market Value of a share of Common Stock as of the date of the Change in Control, over the purchase price per share of Common Stock subject to the Option, (ii) shares of capital stock of the corporation resulting from or succeeding to the business of the Company pursuant to such Change in Control, or a parent corporation thereof, having a fair market value not less than the amount determined under clause (i) above; or (iii) a com bination of the payment of cash pursuant to clause (i) above and the issuance of shares pursuant to clause (ii) above.
(b) For purposes of the Plan and this Award Agreement, “Change in Control” shall mean:
(1) the acquisition by any Person, including an y “person” within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act, of beneficial ownership within the meaning of Rule 13(d)(3) promulgated under the Exchange Act, of the then outstanding securities of the Company (the “Outstanding Voting Se curities”) (x) having sufficient voting power of all classes of capital stock of the Company to elect at least 50% or more of the members of the Board or (y) having 50% or more of the combined voting power of the Outstanding Voting Securities entitled to v ote generally on matters (without regard to the election of directors), excluding, however, the following: (i) any acquisition directly from the Company or an Affiliate (excluding any acquisition resulting from the exercise of an exercise, conversion or e xchange privilege, unless the security being so exercised, converted or exchanged was acquired directly from the Company or an Affiliate), (ii) any acquisition by the Company or an Affiliate, (iii) any acquisition by an employee benefit plan (or related tr ust) sponsored or maintained by the Company or an Affiliate, (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (3) of this Section 2.6(b), or (v) any acquisition by the following Persons: (A) LeRoy T. Carlson or his spouse, (B) any child of LeRoy T. Carlson or the spouse of any such child, (C) any grandchild of LeRoy T. Carlson, including any child adopted by any child of LeRoy T. Carlson, or the spouse of any such grandchild, (D ) the estate of any of the Persons described in clauses (A)-(C), (E) any trust or similar arrangement (including any acquisition on behalf of such trust or similar arrangement by the trustees or similar Persons) provided that all of the current beneficiari es of such trust or similar arrangement are Persons described in clauses (A)-(C) or their lineal descendants, or (F) the voting trust which expires on June 30, 2035, or any successor to such voting trust, including the trustees of such voting trust on beha lf of such voting trust (all such Persons, collectively, the “Exempted Persons”);
(2) individuals who, as of July 29, 2011, constituted the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of such Board; provided that any individual who becomes a director of the Company after July 29, 2011, whose election, or nomination for election by the Company’s stockholders, was approved by the vote of at least a majority of the directors then comprising the Incumbent Board shall b e deemed a member of the Incumbent Board; and provided further , that any individual who was initially elected as a director of the Company as a result of an actual or threatened solicitation by a Person other than the Board for the purpose of opposing a so licitation by any other Person with respect to the election or removal of directors or any other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board shall not be deemed a member of the Incumbent Board ;
(3) consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Corporate Transaction”), excluding, however, a Corporate Transaction pursuant to which (i) all or su bstantially all of the Persons who are the beneficial owners of the Outstanding Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, (x) sufficient voting power to elect at least a majority of the members of the board of directors of the corporation resulting from the Corporate Transaction and (y) more than 50% of the combined voting power of the outstanding securities which are entitled to vote generally on matters (without regard to the election of directors) of the corporation resulting from such Corporate Transaction (including in each of clauses (x) and (y), without limitation, a corporation which as a result of such transaction owns, either directly or indirectly, the Company or all or substan tially all of the Company’s assets), in substantially the same proportions relative to each other as the shares of Outstanding Voting Securities are owned immediately prior to such Corporate Transaction, (ii) no Person (other than the following Persons: ( v) the Company or an Affiliate, (w) any employee benefit plan (or related trust) sponsored or maintained by the Company or an Affiliate, (x) the corporation resulting from such Corporate Transaction, (y) the Exempted Persons, and (z) any Person which beneficially owned, immediately prior to such Corporate Transaction, directly or indirectly, 50% or more of the Outstanding Voting Securities) will beneficially own, directly or indirectly, 50% or more of the combined voting power of the outstanding securi ties of such corporation entitled to vote generally on matters (without regard to the election of directors) and (iii) individuals who were members of the Incumbent Board will constitute at least a majority of the members of the board of directors of the c orporation resulting from such Corporate Transaction; or
(4) approval by the stockholders of the Company of a plan of complete liquidation or dissolution of the Company.
2.7. Compliance with Applicable Law . The Option is subject to the condition that if the listing, registration or qualification of the shares of Common Stock subject to the Option upon any securities exchange or under any law, or the consent or approval of any governmental body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the delivery of shares hereunder, such shares will not be delivered unless such listing, registration, qualification, consent, approval or other action shall have been effected or obtained, free of any conditions n ot acceptable to the Company. The Company agrees to use reasonable efforts to effect or obtain any such listing, registration, qualification, consent, approval or other action.
2.8. Delivery of Shares . Upon the exercise of the Option, in whole or in par t, the Company shall, subject to Section 2.4, deliver or cause to be delivered the shares of Common Stock purchased against full payment therefor. The holder of the Option shall pay all original issue or transfer taxes and all fees and expenses incident t o such delivery, unless the Company in its discretion elects to make such payment.
2.9. Option Confers No Rights as Stockholder . The holder of the Option shall not be entitled to any privileges of ownership with respect to shares of Common Stock subject to the Option unless and until such shares are purchased and delivered upon an exercise of the Option and the holder becomes a stockholder of record with respect to such delivered shares.
2.10. Company to Reserve Shares . The Company shall at all times prior to the expiration or termination of the Option reserve and keep available, either in its treasury or out of its authorized but unissued shares of Common Stock, the full number of shares subject to the Option from time to time.
2.11. Option subject t o Clawback . The Option and any shares of Common Stock delivered pursuant to the Option are subject to forfeiture, recovery by the Company or other action pursuant to any clawback or recoupment policy which the Company may adopt from time to time, includin g without limitation any such policy which the Company may be required to adopt under the Dodd-Frank Wall Street Reform and Consumer Protection Act and implementing rules and regulations thereunder, or as otherwise required by law.
3. Miscellaneous Provi sions .
3.1. Option Confers No Rights to Continued Employment or Service . In no event shall the granting of the Option or the acceptance of this Award Agreement and the Option by the Optionee give or be deemed to give the Optionee any right to continued e mployment by or service with any Employer or any subsidiary or affiliate of an Employer.
3.2. Decisions of Committee . The Committee or its delegate shall have the right to resolve all questions which may arise in connection with the Option or its exercis e. Any interpretation, determination or other action made or taken by the Committee or its delegate regarding the Plan or this Award Agreement shall be final, binding and conclusive.
3.3. Award Agreement subject to the Plan . This Award Agreement is subj ect to the provisions of the Plan, as it may be amended from time to time, and shall be interpreted in accordance therewith. The Optionee hereby acknowledges receipt of a copy of the Plan.
3.4. Successors . This Award Agreement shall be binding upon and inure to the benefit of any successor or successors of the Company and any Person or Persons who shall acquire any rights hereunder in accordance with this Award Agreement or the Plan.
3.5. Notices . All notices, requests or other communications provided for in this Award Agreement shall be made in writing either (a) by actual delivery to the party entitled thereto, (b) by mailing in the United States mails to the last known address of the party entitled thereto, via certified or registered mail, postage p repaid and return receipt requested, (c) by telecopy with confirmation of receipt or (d) by electronic mail, utilizing notice of undelivered electronic mail features. The notice, request or other communication shall be deemed to be received (a) in the cas e of delivery, on the date of its actual receipt by the party entitled thereto, (b) in the case of mailing by certified or registered mail, five days following the date of such mailing, (c) in the case of telecopy, on the date of confirmation of receipt or (d) in the case of electronic mail, on the date of mailing, but only if a notice of undelivered electronic mail is not received.
3.6. Governing Law . The Option, this Award Agreement, and all determinations made and actions taken pursuant thereto and her eto, to the extent otherwise not governed by the Code or the laws of the United States, shall be governed by the laws of the State of Delaware and construed in accordance therewith without regard to principles of conflicts of laws.
3.7. Counterparts . This Award Agreement may be executed in counterparts each of which shall be deemed an original and both of which together shall constitute one and the same instrument.
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TELEPHONE AND DATA SYSTEMS, INC. |
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By: |
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LeRoy T. Carlson, Jr. |
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President and CEO |
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Accepted this ___ day of ______ |
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___________________ , 2016. |
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Optionee |
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TELEPHONE AND DATA SYSTEMS, INC.
RATIO OF EARNINGS TO FIXED CHA RGES
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Three Months Ended |
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March 31, |
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2016 |
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2015 |
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(Dollars in millions) |
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EARNINGS: |
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Income before income taxes 1 |
$ |
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$ |
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Add (deduct): |
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Equity in earnings of unconsolidated entities |
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Distributions from unconsolidated entities |
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Amortization of capitalized interest |
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Income attributable to noncontrolling interests in subsidiaries that do not have fixed charges |
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Add fixed charges: |
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Consolidated interest expense 2 |
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Interest portion (1/3) of consolidated rent expense |
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$ |
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$ |
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FIXED CHARGES: |
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Consolidated interest expense 2 |
$ |
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$ |
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Capitalized interest |
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Interest portion (1/3) of consolidated rent expense |
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$ |
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$ |
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RATIO OF EARNINGS TO FIXED CHARGES 3 |
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1 |
Includes Gain on sale of business and other exit costs, net of $124 million in 2015. Additionally, includes $123 million of Gain on license sales and exchanges, net in 2015. |
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2 |
Interest expense on income tax contingencies is not included in fixed charges. |
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3 |
Ratio of earnings to fixed charges and preferred dividends was also 1.03 and 6.18 for the three months ended March 31, 2016 and 2015, respectively. |
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Certification of principal executive officer
I, LeRoy T. Carlson, Jr., certify that:
Date: May 6, 2016
/s/ LeRoy T. Carlson, Jr. |
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LeRoy T. Carlson, Jr. President and Chief Executive Officer (principal executive officer) |
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Certification of principal financial officer
I, Douglas D. Shuma, certify that:
Date: May 6, 2016
/s/ Douglas D. Shuma |
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Douglas D. Shuma Senior Vice President - Finance and Chief Accounting Officer (principal financial officer and principal accounting officer) |
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Certification Pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code
I, LeRoy T. Carlson, Jr., the principal executive officer of Telephone and Data Systems, Inc., certify that (i) the quarterly report on Form 10-Q for the first quarter of 2016 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Te lephone and Data Systems, Inc.
/s/ LeRoy T. Carlson, Jr. |
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LeRoy T. Carlson, Jr. |
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May 6, 2016 |
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A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Telephone and Data Systems, Inc. and will be retained by Telephone and Data Systems, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Certification Pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code
I, Douglas D. Shuma, the principal financial officer of Telephone and Data Systems, Inc., certify that (i) the quarterly report on Form 10-Q for the first quarter of 2016 f ully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Telepho ne and Data Systems, Inc.
/s/ Douglas D. Shuma |
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Douglas D. Shuma |
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May 6, 2016 |
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A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Telephone and Data Systems, Inc. and will be retained by Telephone and Data Systems, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.