2012 Annual Report
www.teldta.com
2012 Performance Highlights
Operating Revenues
by Business Unit
(in billions)
$5.1
$5.0
$5.0
$5.2
$5.3
Capital Expenditures
by Business Unit
(in millions)
$987
$1,005
$1,000
$800
$735
$755
$671
$600
$400
$200
0
08
09
10
11
12
08
09
10
11
12
U.S. Cellular
TDS Telecom
Other
U.S. Cellular
TDS Telecom
Other
Cash Flows from
Operating Activities
(in millions)
$1,256
$1,105
$1,097
$1,076
Annual Dividends Per Share
$.43
$.45
$.41
$.47
$.49
$.50
$.40
$.30
$.20
$.10
0
09
10
11
12
08
09
10
11
12
$6.0
$5.0
$4.0
$3.0
$2.0
$1.0
0
$1,400
$1,200
$1,000
$800
$600
$400
$200
0
To Our Shareholders
TDS’ mission is to provide outstanding communication services to our customers and meet
the needs of our shareholders, our people and our communities. In pursuing this mission,
we seek to continuously grow our businesses, create opportunities for our associates and
employees, and steadily build value over the long term for our shareholders.
Consolidated Operating Results
Building Value for Shareholders
TDS increased revenues in 2012, though profi tability
was impacted by wireless equipment subsidies, reduced
regulatory support and initiative spending. our primary
business units—U.S. Cellular and TDS Telecom—made
solid progress during the year on their strategic initiatives.
• U.S. Cellular improved gross customer additions
through more effective marketing, advertising and
in-store execution, and by offering prepaid and
postpaid service in Walmart stores nationwide.
postpaid churn remained high, however.
• U.S. Cellular successfully transitioned more customers
to the expanded 4G LTE network, reducing the need for
capital expenditures on legacy networks.
• U.S. Cellular drove smartphone penetration and data
use, and increased average revenue per postpaid
customer with a strong device portfolio, though higher
subsidies for 4G LTE devices impacted profi tability.
• U.S. Cellular agreed to divest certain underperforming
markets in the Midwest to focus resources on markets
with stronger growth potential.
• TDS Telecom increased ILEC residential broadband
speeds and penetration, and offered TDS TV® in a
total of 10 markets by year end. Seventy percent of
ILEC residential customers had double- or triple-play
bundles at the end of 2012.
• TDS Telecom increased total commercial managedIp
connections 77 percent and expanded the product
portfolio.
• TDS Hosted and Managed Services acquisitions drove
commercial revenue growth for TDS Telecom.
• Both U.S. Cellular and TDS Telecom continued to be
impacted by reduced regulatory revenues in 2012,
and we continued to advocate to maintain the support
that helps us to provide outstanding service to our
customers.
TDS is committed to growing shareholder value over the
long term, and to maintaining an open dialogue with our
investors. We continue to evaluate operational, structural
and fi nancial opportunities to strengthen the company
and use our resources to support profi table growth.
To simplify our capital structure and increase fi nancial
fl exibility, we implemented a Share Consolidation that was
approved by shareholders and went into effect in January
of 2012. The Share Consolidation reclassifi ed each
Special Common Share as a Common Share on a one-
for-one basis, and reclassifi ed each Common Share
and Series A Common Share as 1.087 Common Shares
and 1.087 Series A Common Shares, respectively.
Divesting certain underperforming U.S. Cellular markets
(Divestiture Markets), as announced in November 2012,
will strengthen our competitive position by enabling us
to invest in our Core Markets that have stronger growth
potential. We expect the transaction to close by mid-
2013. We also expect to generate substantial proceeds
from the eventual sale of assets related to the transaction,
including spectrum and towers.
We maintained a strong balance sheet in 2012, giving us
the fl exibility to invest in business infrastructure, and in
operational and growth initiatives. For example, the Baja
Broadband acquisition, announced in early 2013, allows
us to leverage TDS Telecom’s capabilities to achieve
higher returns over time. We also continued to expand
our TDS Hosted and Managed Services business
to build value in a high-growth industry.
Liquidity
(in millions)
$741
Cash and cash equivalents
$700
Available credit facilities
$116
Short-term government-backed securities
$50
Long-term government-backed securities
TELEpHoNE AND DATA SySTEMS 1
J.D. Power Customer
Service Champion, 2012
Differentiating through the Customer Experience
U.S. Cellular is more committed than ever to
differentiating in the marketplace through outstanding
customer experiences. In 2012, the company enhanced
the areas that matter most to its customers—with a
wider range of devices, expanded 4G LTE access, and
more service plans—and communicated U.S. Cellular’s
unique benefi ts more effectively.
Through the Hello Better advertising campaign,
U.S. Cellular leveraged both traditional and social media
to deliver messages that encouraged dissatisfi ed wireless
consumers to switch to a better wireless experience with
U.S. Cellular. The company also added comprehensive
online sales and service capabilities, enhanced the
retail store customer experience, and expanded its
distribution through Walmart. In addition, U.S. Cellular
targeted key postpaid customer segments, like families
and small and medium businesses, with relevant offers
and plans.
Through these initiatives, U.S. Cellular increased gross
postpaid customer additions compared to 2011, and
achieved positive net prepaid additions. The company is
working to improve retention by using customer analytics
to more effectively identify customers at risk of leaving
and deliver timely and targeted messages and offers.
Best Customer Experience
Among Wireless Carriers,
The Customer Experience Index, 2013
Forrester Research, Inc.,
January 2013
Increasing Smartphone Sales and Data Use
U.S. Cellular drove smartphone sales in 2012 with its
strongest ever range of smartphones, tablets and feature
phones, and improved launch timing that enabled the
company to introduce iconic 4G LTE devices at the same
time as its national competitors.
At the end of 2012, smartphone customers were
42 percent of the postpaid base, compared to 30 percent
at the end of 2011. Smartphones were 56 percent of all
devices sold in the year, and 4G LTE smartphones in
particular were 22 percent of all devices sold in the year.
To better monetize the resulting growth in data traffi c,
U.S. Cellular introduced a range of tiered data plans.
The growth in smartphone penetration and data use
increased average revenue per postpaid customer by
four percent in 2012, to $54.32.
While profi tability was impacted by higher subsidies for
4G LTE devices, U.S. Cellular expects to realize more of
the network capacity benefi ts of 4G LTE as the majority of
its customers migrate to the faster network. This will also
result in lower capital expenditures on legacy networks.
2 TELEpHoNE AND DATA SySTEMS
“Highest Network Quality
Performance Among
Wireless Cell Phone Users
in North Central Region”
– J.D. Power and Associates
Investing for the Future
U.S. Cellular expanded 4G LTE access to 61 percent
of postpaid customers in 2012, in conjunction with its
partner King Street Wireless, and plans to reach 87
percent of postpaid customers by the end of 2013.
The company also increased network capacity in 2012
with 146 additional cell sites. At the same time,
U.S. Cellular launched initiatives to empower customers
to better manage their data use, and to reduce data
costs. For example, the company began preloading its
Wi-Fi Now application on most Android® devices in the
fourth quarter. The application enables customers to
automatically connect to available Wi-Fi networks
and hotspots, reducing the data traffi c demands on
U.S. Cellular’s network.
To support our long-term growth strategies and increase
operational effi ciency, we prepared to roll out our new
billing and operational support system in 2013. While
this initiative will increase operating expenses in 2013,
it will begin providing cost benefi ts and operating
effi ciencies in 2014.
Average Revenue
Per Postpaid Customer
$51.20
$51.22
$50.77
$52.20
$54.32
08
09
10
11
12
Smartphone Customers
as a Percentage of Postpaid
Customers
42%
30%
17%
7%
4%
08
09
10
11
12
$60
$50
$40
$30
$20
$10
0
45%
40%
35%
30%
25%
20%
15%
10%
5%
0
TELEpHoNE AND DATA SySTEMS 3
TDS Telecom
Driving Broadband Growth
TDS Telecom made progress on its broadband
strategy in 2012, increasing penetration by offering
competitive data speeds, and by bundling broadband
service with video and voice services. At the end of the
year, ILEC residential broadband penetration was
65 percent of primary residential lines, with 71 percent
of ILEC residential broadband customers having 5 Mbps
or faster speeds, and 26 percent having 10 Mbps or
faster speeds. TDS Telecom also made progress on
its stimulus projects to bring broadband access to
underserved rural communities.
Increasing Residential Customer Loyalty
Customers with two or more services from TDS
Telecom are much less likely to churn than customers
with only one service. That’s why the company offers
a wide range of value-oriented bundles that include
combinations of broadband and voice services, and
TDS TV® or DISH Network™ video services. TDS
Telecom strengthened its bundling strategy by
expanding TDS TV to new markets in 2012, bringing a
high-quality video experience and outstanding support
to more of its customers. By the end of the year,
70 percent of ILEC residential customers had double- or
triple-play bundles, compared to 67 percent in 2011.
ILEC Residential Customers by
Broadband Speed
5 Mbps or faster
10 Mbps or faster
71%
62%
41%
14%
19%
8%
8%
26%
09
10
11
12
ILEC Residential Bundle Penetration
Triple Play
Double Play
67%
70%
62%
56%
48%
08
09
10
11
12
80%
70%
60%
50%
40%
30%
20%
10%
0
80%
70%
60%
50%
40%
30%
20%
10%
0
4 TELEpHoNE AND DATA SySTEMS
Building a Strong Commercial Base
Attracting small and midsized commercial customers is
a key growth focus for TDS Telecom, and the company
made substantial progress in 2012.
TDS Telecom achieved a 77 percent increase in
customers for its managedIp voice and data
communications solution, which enables business
customers to improve productivity without making a
large capital investment. The company expanded the
portfolio in 2012 with managedIp Hosted, which
provides fully managed services at a fl at rate.
As more midsized businesses outsource their IT
functions, TDS Hosted and Managed Services (HMS) is
integrating its capabilities to provide comprehensive
solutions for this growing market. Following the
acquisition of solution provider Vital Support Systems in
2012, TDS HMS introduced ReliaCloud™, an enterprise
cloud solution housed in TDS’ Tier III data centers. TDS
HMS will continue to strengthen its position as a trusted
provider to businesses—and drive commercial revenue
growth—by building a robust portfolio of secure and
reliable outsourced IT services.
managedIP Connections
(in thousands)
95
54
30
15
3
08
09
10
11
12
100
90
80
70
60
50
40
30
20
10
0
Leveraging Expertise to Grow in New Markets
TDS’ acquisition of Baja Broadband, expected to close
later in 2013, supports TDS Telecom’s residential and
commercial strategies. The combination of cable and
broadband is a natural extension of TDS Telecom’s
business, enabling the company to leverage its expertise,
platform and technologies. There is strong potential to
increase residential and commercial penetration in
Baja’s markets, and achieve higher returns over the
long term.
oTHeR TDS SUBSIDIARIeS
Suttle-Straus
Airadigm Communications
Suttle-Straus, a marketing and graphic
communications solutions provider, continued to
improve its performance in 2012, increasing its
commercial client base and enhancing its bundled
packages of marketing services, from creative
development through print and distribution.
Suttle-Straus also improved margins and increased
effi ciency through continuous improvement initiatives.
Airadigm Communications, Inc. offers advance
pay mobile services to customers in Wisconsin
through its AirFire Mobile brand. Airadigm operates
independently of U.S. Cellular.
TELEpHoNE AND DATA SySTEMS 5
looKING FoRWARD
our companies’ highest priorities in 2013 are to accelerate customer and revenue growth
and maintain effi cient cost structures. We’re competing aggressively to attract new customers, and
we’re building loyalty with high-quality services and products, and outstanding experiences.
U.S. Cellular
TDS Telecom
In 2013, U.S. Cellular plans to:
In 2013, TDS Telecom plans to:
• Increase subscriber growth through effective
advertising, marketing and retention strategies
• Enhance the effectiveness of its distribution channels
to improve sales and service
• Build residential market share by increasing data
speeds, offering attractive service bundles and
gaining loyalty through superior customer service
• Increase TDS TV® penetration in existing markets
• Attract small and medium businesses and other key
• Make signifi cant progress toward completing
postpaid customer segments with highly targeted and
relevant solutions
broadband stimulus projects
• Continue to expand the managedIp customer base
• Broaden its distribution network by being in more
and product portfolio to drive strong growth
places customers want to shop
• Drive smartphone penetration and data use with
a highly competitive portfolio of devices, including
Android® and Windows® devices
• Encourage migration to 4G LTE by bringing access
to at least 87 percent of postpaid customers and
introducing at least 11 new 4G LTE devices
• Better manage equipment subsidies and data
use costs
• Implement the new billing and operational
support system
• Increase effi ciency and reduce complexity and cost
across the company
• Successfully transition the Divestiture Markets
• Further integrate the TDS Hosted and Managed
Services business to develop comprehensive end-
to-end IT solutions
• Drive residential and commercial customer
and revenue growth through the Baja
Broadband acquisition
We want to take this opportunity to thank the
associates and employees of the TDS companies for
their dedication to providing outstanding services,
products and experiences to our customers.
Thank you also to our shareholders and debt holders
for your continuing support of our long-term strategies.
Sincerely,
LeRoy T. Carlson, Jr.
President and Chief
Executive Offi cer
Walter C.D. Carlson
Chairman of the Board
6 TELEpHoNE AND DATA SySTEMS
TELEPHONE AND DATA SYSTEMS, INC.
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 2012
Pursuant to SEC Rule 14a-3
The following audited financial statements and certain other financial information for the year ended
December 31, 2012, represent Telephone and Data Systems’ annual report to shareholders as required
by the rules and regulations of the Securities and Exchange Commission (‘‘SEC’’).
The following information was filed with the SEC on February 26, 2013 as Exhibit 13 to Telephone
and Data Systems’ Annual Report on Form 10-K for the year ended December 31, 2012. Such
information has not been updated or revised since the date it was originally filed with the SEC.
Accordingly, you are encouraged to review such information together with any subsequent information
that we have filed with the SEC and other publicly available information.
Telephone and Data Systems, Inc. and Subsidiaries
Exhibit 13
Financial Reports Contents
Management’s Discussion and Analysis of Results of Operations and Financial Condition . . . . . . .
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Divestiture Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Results of Operations—Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Results of Operations—U.S. Cellular
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Results of Operations—TDS Telecom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recent Accounting Pronouncements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Application of Critical Accounting Policies and Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement . . . . . . . . . . .
Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheet—Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheet—Liabilities and Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reports of Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Quarterly Information (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholder Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
1
7
10
14
16
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109
111
112
113
115
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
Telephone and Data Systems, Inc. (‘‘TDS’’) is a diversified telecommunications company providing
high-quality telecommunications services to approximately 5.8 million wireless customers and 1.0 million
wireline customer connections at December 31, 2012. TDS conducts substantially all of its wireless
operations through its 84%-owned subsidiary, United States Cellular Corporation (‘‘U.S. Cellular’’). TDS
provides wireline services through its incumbent local exchange carrier (‘‘ILEC’’) and competitive local
exchange carrier (‘‘CLEC’’), and provides hosted and managed services (‘‘HMS’’), under its wholly-
owned subsidiary, TDS Telecommunications Corporation (‘‘TDS Telecom’’). TDS conducts printing and
distribution services through its majority-owned subsidiary, Suttle-Straus, Inc. (‘‘Suttle-Straus’’) and
provides wireless services through its majority-owned subsidiary, Airadigm Communications, Inc.
(‘‘Airadigm’’), a Wisconsin-based service provider. Airadigm operates independently from U.S. Cellular
and at this time there are no plans to combine the operations of these subsidiaries. Suttle-Straus and
Airadigm’s financial results were not significant to TDS’ operations for the year ended December 31,
2012.
The following discussion and analysis should be read in conjunction with TDS’ audited consolidated
financial statements and the description of TDS’ business included in Item 1 of the TDS Annual Report
on Form 10-K (‘‘Form 10-K’’) for the year ended December 31, 2012. The discussion and analysis
contained herein refers to consolidated data and results of operations, unless otherwise noted.
OVERVIEW
The following is a summary of certain selected information contained in the comprehensive
Management’s Discussion and Analysis of Financial Condition and Results of Operations that follows.
The overview does not contain all of the information that may be important. You should carefully read the
entire Management’s Discussion and Analysis of Financial Condition and Results of Operations and not
rely solely on the overview.
Historically, TDS has reported the following business segments: U.S. Cellular, ILEC (which included HMS
operations), CLEC, and Non-Reportable Segment which includes Suttle-Straus and, as of September 23,
2011, Airadigm. TDS’ Corporate operations and intercompany eliminations have been included in ‘‘Other
Reconciling Items’’ for purposes of business segment disclosure. As a result of recent acquisitions and
changes in TDS’ strategy, operations, personnel and internal reporting, TDS reevaluated and changed its
reportable business segments in the quarter ended March 31, 2012. TDS’ business segments reflected in
this Annual Report on Form 10-K for the annual period ended December 31, 2012 are U.S. Cellular, ILEC,
CLEC, HMS, and the Non-Reportable Segment. Periods presented for comparative purposes have been
re-presented to conform to this revised presentation.
U.S. Cellular
U.S. Cellular’s consolidated operating markets cover approximately 5.8 million customers in five
geographic market areas in 26 states. As of December 31, 2012, U.S. Cellular’s average penetration rate
in its consolidated operating markets was 12.3%. U.S. Cellular operates on a customer satisfaction
strategy, striving to meet or exceed customer needs by providing a comprehensive range of wireless
products and services, excellent customer support, and a high-quality network. U.S. Cellular’s business
development strategy is to obtain interests in and access to wireless licenses in certain spectrum bands
in areas overlapping, adjacent to or in proximity to its other wireless licenses, thereby building
contiguous operating market areas with strong spectrum positions. U.S. Cellular anticipates that grouping
its operations into market areas will continue to provide it with certain economies in its capital and
operating costs.
Financial and operating highlights in 2012 included the following:
(cid:127) Total consolidated customers were 5,798,000 at December 31, 2012, including 5,557,000 retail
customers (96% of total).
1
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
(cid:127) In November 2012, U.S. Cellular entered into a Purchase and Sale Agreement with subsidiaries of
Sprint Nextel Corporation. U.S. Cellular will transfer to Sprint certain rights and assets, and Sprint will
assume certain liabilities, related to U.S. Cellular’s Chicago, central Illinois, St. Louis and certain
Indiana/Michigan/Ohio markets, in consideration for $480 million in cash at closing, subject to
pro-rations of certain assets and liabilities. See ‘‘Divestiture Transaction’’ below for additional
information.
(cid:127) In May 2012, U.S. Cellular began offering U Prepaid, a no-contract wireless service, in select Walmart
stores within its service areas. U.S. Cellular began offering a postpaid option through Walmart in
October 2012 and continues to explore new distribution options.
(cid:127) In March 2012, U.S. Cellular, in conjunction with King Street Wireless L.P., began offering fourth
generation Long-term Evolution (‘‘4G LTE’’) service; as of December 31, 2012, the 4G LTE network
covered approximately 61% of U.S. Cellular’s postpaid customers. 4G LTE enhances the wireless
experience by significantly increasing both the speed and data capacity available compared to 3G
networks.
(cid:127) In March 2012, U.S. Cellular sold the majority of the assets and liabilities of a wireless market for
$49.8 million in cash net of working capital adjustments. In connection with the sale, a $4.2 million
gain was recorded in (Gain) loss on sale of business and other exit costs, net in the Consolidated
Statement of Operations.
(cid:127) U.S. Cellular continued its efforts on a number of multi-year initiatives including the development of a
new Billing and Operational Support System (‘‘B/OSS’’) which will include a new point-of-sale system
and consolidate billing on one platform.
(cid:127) Retail customer net losses were 47,000 in 2012 compared to net losses of 125,000 in 2011. In the
postpaid category, there were net losses of 165,000 in 2012, compared to net losses of 117,000 in
2011. Prepaid net additions were 118,000 in 2012 compared to net losses of 8,000 in 2011.
(cid:127) Postpaid customers comprised approximately 92% of U.S. Cellular’s retail customers as of
December 31, 2012. The postpaid churn rate was 1.7% in 2012 and 1.5% in 2011. The prepaid churn
rate was 6.0% in 2012 and 6.6% in 2011.
(cid:127) Postpaid customers on smartphone service plans increased to 42% as of December 31, 2012
compared to 30% as of December 31, 2011. In addition, smartphones represented 56% of all devices
sold in 2012 compared to 44% in 2011. LTE smartphones represented 40% of all smartphones sold in
2012.
(cid:127) Retail service revenues of $3,548.0 million increased $61.5 million year-over-year, due to an increase in
average monthly service revenue per customer, partially offset by a decrease of 156,000 in the average
number of customers. Total service revenues of $4,098.9 million increased $45.1 million year-over-year,
primarily due to increases in data and prepaid revenues partially offset by the phase down of ETC
support and the net loss of retail customers.
(cid:127) Additions to Property, plant and equipment totaled $836.7 million, including expenditures to construct
cell sites, increase capacity in existing cell sites and switches, deploy fourth generation Long-term
Evolution (‘‘4G LTE’’) equipment, outfit new and remodel existing retail stores, develop new billing and
other customer management related systems and platforms, and enhance existing office systems. Total
cell sites in service increased by 146, or 2%, year-over-year to 8,028.
U.S. Cellular anticipates that future results will be affected by the following factors:
– Impacts of the Divestiture Transaction including, but not limited to, the ability to obtain regulatory
approval, successfully complete the transaction and the actual financial impacts of such transaction;
– Relative ability to attract and retain customers in a competitive marketplace in a cost effective manner;
2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
– Effects of industry competition on service and equipment pricing and roaming revenues as well as the
impacts associated with the expanding presence of carriers and other retailers offering low-priced,
unlimited prepaid service;
– Expanded distribution of products and services, such as U Prepaid and postpaid plans, in third-party
national retailers;
– Potential increases in prepaid customers, who generally generate lower average revenue per user
(‘‘ARPU’’), as a percentage of U.S. Cellular’s customer base in response to changes in customer
preferences and industry dynamics;
– The nature and rate of growth in the wireless industry, requiring U.S. Cellular to grow revenues
primarily from selling additional products and services to its existing customers, increasing the number
of multi-device users among its existing customers, increasing data products and services and
attracting wireless customers switching from other wireless carriers.
– Continued growth in revenues from data products and services and lower growth or declines in
revenues from voice services;
– Rapid growth in the demand for new data devices and services which may result in increased cost of
equipment sold and other operating expenses and the need for additional investment in network
capacity;
– Costs of developing and enhancing office and customer support systems, including costs and risks
associated with the completion and potential benefits of the multi-year initiatives described above;
– Further consolidation among carriers in the wireless industry, which could result in increased
competition for customers and/or cause roaming revenues to decline;
– Continued enhancements to U.S. Cellular’s wireless networks;
– Uncertainty related to various rulemaking proceedings underway at the Federal Communications
Commission (‘‘FCC’’);
– The FCC’s adoption of mandatory roaming rules which may be of assistance in the negotiation of data
roaming agreements with other wireless operators in the future;
– Economic or competitive factors that restrict U.S. Cellular’s access to devices desired by customers;
and
– Possible effects of industry litigation relating to patents, other intellectual property or otherwise, that
may restrict U.S. Cellular’s access to devices for sale to customers.
See ‘‘Results of Operations—U.S. Cellular.’’
TDS Telecom
TDS Telecom seeks to be the preferred telecommunications solutions provider in its chosen markets for
both residential and commercial customers by developing and delivering high-quality products that meet
or exceed customers’ needs and to outperform the competition by maintaining superior customer
service. TDS Telecom provides voice, high-speed data, and video services to residential customers
through value-added bundling of products. The commercial focus is to provide advanced IP-based voice
and data services to small to medium sized businesses. In addition, TDS Telecom seeks to grow through
strategic acquisitions, as demonstrated by recent HMS acquisitions which provide colocation, dedicated
hosting, hosted application management, cloud computing services and planning, engineering,
procurement, installation, sales and management of Information Technology (‘‘IT’’) infrastructure
hardware solutions. TDS Telecom’s strategy encompasses many components, including:
(cid:127) Delivering superior customer service;
3
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
(cid:127) Developing a product portfolio targeted to TDS Telecom’s chosen customers;
(cid:127) Investing in networks and deploying advanced technologies;
(cid:127) Advocating with respect to state and federal regulations for positions that support its ability to provide
advanced telecommunications services to its customers;
(cid:127) Increasing its presence in the IT infrastructure, application outsourcing, and solution provider markets
through organic growth, expansion or acquisition; and
(cid:127) Exploring transactions to acquire or divest properties that would result in strengthening its operations.
TDS Telecom is faced with significant challenges, including growing competition from wireless providers,
wireline providers (other CLECs and cable providers) and other HMS providers, changes in regulation
and technologies such as VoIP. These challenges could have a material adverse effect on the financial
condition, results of operations and cash flows of TDS Telecom in the future.
Financial and operating highlights in 2012 included the following:
(cid:127) Operating revenues increased $39.1 million or 5% to $854.5 million in 2012. The increase was primarily
due to $64.1 million from acquisitions of two HMS companies (one acquisition in each of 2011 and
2012), partially offset by a decline in revenue received from access charges to interexchange carriers
and from regulatory recovery mechanisms and a decrease in revenues due to the decline in ILEC and
CLEC connections.
(cid:127) Operating expenses increased $97.0 million or 14% to $813.8 million in 2012 primarily due to $68.8
million in operating costs associated with acquisitions of two HMS companies, coupled with the
impacts of discrete expense reductions recorded in 2011 including insurance proceeds, the refund of
certain prior year regulatory contributions and the settlement of a legal dispute.
(cid:127) Additions to Property, plant and equipment totaled $173.9 million including strategic investment in
increased network capabilities for broadband services, HMS expansion, IPTV expansion, and software
tools that improve management of the network and support sales and customer service processes.
(cid:127) On February 25, 2013, TDS entered into an Asset Purchase Agreement with Baja Broadband, LLC
(‘‘Baja’’) to acquire substantially all of the assets of Baja for $267.5 million in cash, subject to a
working capital adjustment. Baja is a cable company that passes approximately 212,000 households in
markets in Colorado, New Mexico, Texas, and Utah and offers video, broadband and voice services.
The transaction is subject to governmental regulatory approvals, compliance with the Hart-Scott-
Rodino Act and other conditions. Subject to approvals, the transaction is expected to close in the third
quarter of 2013.
TDS anticipates that TDS Telecom’s future results will be affected by the following factors:
– Continued increases in competition from wireless and other wireline providers, cable providers, and
technologies such as VoIP, DOCSIS 3.0 offered by cable providers, and third generation (‘‘3G’’) and
fourth generation (‘‘4G’’) mobile technology;
– Continued increases in consumer data usage and demand for high-speed data services;
– Continued declines in physical access lines;
– Continued focus on customer retention programs, including discounting for ‘‘triple-play’’ bundles that
provide voice, DSL and IPTV or satellite video;
– The expansion of IPTV into additional market areas in 2013;
– Continued growth in hosted and managed services including the impacts resulting from the acquisition
of OneNeck IT Services Corporation, a provider of hosted application management and managed
services, in June 2011 and Vital Support Systems, LLC an Information Technology Solutions Provider,
in June 2012;
4
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
– Continued focus on cost-reduction initiatives through product cost improvement and process
efficiencies;
– The Federal government’s disbursement of Broadband Stimulus Funds to bring broadband to rural
customers;
– Uncertainty related to the National Broadband Plan and other rulemaking by the FCC, including
uncertainty relating to future funding from the USF, broadband requirements, intercarrier compensation
and changes in access reform;
– Impacts of the Baja transaction, including, but not limited to, the ability to obtain regulatory approval,
successfully complete the transaction, successfully integrate and operate the cable business of Baja,
and the financial impacts of such transaction, including the effects on TDS’ capital resources and
liquidity as a result of the use of $267.5 million in cash for the purchase price; and
– Potential acquisitions or divestitures by TDS and/or TDS Telecom of other ILEC, CLEC, HMS, cable or
other businesses.
See ‘‘Results of Operations—TDS Telecom.’’
FCC Reform Order
On November 18, 2011, the FCC released a Report and Order and Further Notice of Proposed
Rulemaking (‘‘Reform Order’’) adopting reforms of its universal service and intercarrier compensation
mechanisms, establishing a new, broadband-focused support mechanism, and proposing further rules to
advance reform.
U.S. Cellular
The Reform Order substantially revises the current USF high cost program and intercarrier compensation
regime. The current USF program, which supports voice services, is to be phased out over time and
replaced with the Connect America Fund (‘‘CAF’’), a new Mobility Fund and a Remote Area Fund, which
will collectively support broadband-capable networks. Mobile wireless carriers such as U.S. Cellular are
eligible to receive funds in both the CAF and the Mobility Fund, although some areas that U.S. Cellular
currently serves may be declared ineligible for support if they are already served, or are subject to
certain rights of first refusal by incumbent carriers.
The terms and rules for participating in the CAF for wireless eligible telecommunications carriers (‘‘ETC’’)
have not been developed yet by the FCC. It is uncertain whether U.S. Cellular will obtain support through
these replacement mechanisms to the current USF funding regime. If U.S. Cellular is successful in
obtaining support, it will be required to meet certain regulatory conditions to obtain and retain the right
to receive support including, for example, allowing other carriers to collocate on U.S. Cellular’s towers,
allowing voice and data roaming on U.S. Cellular’s network, and submitting various reports and
certifications to retain eligibility each year. It is possible that additional regulatory requirements will be
imposed pursuant to the FCC’s Further Notice of Proposed Rulemaking.
U.S. Cellular’s current USF support is scheduled to be phased down. Support for 2012 (excluding certain
adjustments) was frozen on January 1, 2012 using support for 2011 as a baseline and was reduced by
20% starting in July 2012. The reduction in USF support that U.S. Cellular otherwise would have received
in 2012 is approximately $16 million. Support will be further reduced by 20% in July of each subsequent
year; however, if the Phase II Mobility Fund is not operational by July 2014, the phase down will halt at
that time and U.S. Cellular will receive 60% of its baseline support until the Phase II Mobility Fund is
operational.
Multiple appeals and petitions for reconsideration have been filed with respect to the FCC Reform Order,
but it has not been stayed.
5
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
At this time, U.S. Cellular cannot predict the net effect of the FCC’s changes to the USF high cost
support program in the Reform Order or whether reductions in support will be fully offset with additional
support from the CAF or the Mobility Fund. Accordingly, U.S. Cellular cannot predict whether such
changes will have a material adverse effect on U.S. Cellular’s business, financial condition or results of
operations.
On September 27, 2012, the FCC conducted a single round, sealed bid, reverse auction to award up to
$300 million in one-time Mobility Fund Phase I support to successful bidders that commit to provide 3G,
or better, wireless service in areas designated as unserved by the FCC. This auction was designated by
the FCC as Auction 901. As announced on October 3, 2012, U.S. Cellular and several of its wholly-
owned subsidiaries participated in Auction 901. U.S. Cellular and its subsidiaries were winning bidders in
eligible areas within 10 states and will receive up to $40.1 million in support from the Mobility Fund. As
part of the auction rules, winning bidders must complete network build-out projects to provide 3G or 4G
service to these areas within two or three years, respectively, and must also make their networks
available to other providers for roaming. Winning bidders will receive support funding primarily upon
achievement of coverage milestones defined in the auction rules.
TDS Telecom
The Reform Order is intended to modernize the payment framework for intercarrier compensation from
one which had carriers recovering their capital and operating costs, in part, from one another to one
where carriers will recover their costs first from their end user subscribers and then, if certain criteria are
met, through a new federal restructure mechanism. The Reform Order adopted a national framework for
switched access rates that brings TDS Telecom’s ILECs terminating intrastate and interstate switched
access to parity by July 1, 2013, rates for wireless traffic to bill-and-keep by July 1, 2012, and confirmed
that VoIP traffic can be billed at access rates. It also mandated the development of a new restructure
mechanism effective July 1, 2012 that allows TDS Telecom’s ILECs to recover any lost access revenue
from these access rate reductions, after first implementing or imputing set rate increases to end user
subscribers, and subject to an annual 5% phase down.
The Reform Order also intends to reform the federal USF program by shifting over time the existing
high-cost portion of the fund from supporting the voice network to facilitating the development of a
broadband network in high-cost areas. While the Reform Order puts off long-term USF reform for
rate-of-return carriers like TDS Telecom, it did mandate specific changes to the support these carriers
currently receive. Additionally, limits on operating expenses and capital investment levels were
established and are being phased-in with the intention to reduce legacy high-cost support.
The Reform Order has been the subject of numerous Petitions for Reconsideration, which asked the FCC
to reconsider portions of its decision, and it is also the subject of numerous judicial appeals. In addition,
the Reform Order also included a Further Notice of Proposed Rulemaking which primarily addresses
longer-term USF reform by seeking comments on a range of follow up proposals. The future proposed
rulemaking is especially important to TDS Telecom, as numerous issues relevant to rate of return carriers,
such as TDS Telecom, will be addressed in it. TDS Telecom cannot predict the outcome of future
rulemaking, reconsideration and legal challenges and as a consequence, the impacts these may have on
TDS Telecom’s Wholesale revenues.
Cash Flows and Investments
See ‘‘Financial Resources’’ and ‘‘Liquidity and Capital Resources’’ below for information related to cash
flows and investments.
6
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
DIVESTITURE TRANSACTION
On November 6, 2012, U.S. Cellular entered into a Purchase and Sale Agreement with subsidiaries of
Sprint Nextel Corporation (‘‘Sprint’’). The Purchase and Sale Agreement also contemplates certain other
agreements, collectively referred to as the ‘‘Divestiture Transaction.’’
As more fully described below, the Purchase and Sale Agreement provides that U.S. Cellular will transfer
to Sprint certain rights and assets (collectively, the ‘‘Subject Assets’’), and Sprint will assume certain
liabilities (‘‘Subject Liabilities’’), related to U.S. Cellular’s Chicago, central Illinois, St. Louis and certain
Indiana/Michigan/Ohio markets (the ‘‘Divestiture Markets’’), in consideration for $480 million in cash at
closing (‘‘Purchase Price’’), subject to pro-rations of certain assets and liabilities. U.S. Cellular will retain
all other assets (‘‘Retained Assets’’) and liabilities (‘‘Retained Liabilities’’) related to the Divestiture
Markets. U.S. Cellular is not transferring and will continue to operate and provide services in Peoria,
Rockford and certain other areas in Illinois, and in Columbia, Joplin, Jefferson City and certain other
areas in Missouri.
Management, the U.S. Cellular Board of Directors and the TDS Board of Directors considered various
alternatives and approved this transaction as part of a decision to divest low-margin markets and focus
U.S. Cellular’s efforts and capital on its higher-margin markets. The transaction will better position U.S.
Cellular to invest its resources in markets where it is more likely to succeed. U.S. Cellular’s strategic
priority is to drive growth and profitability in its stronger markets.
The Subject Assets include customers (the ‘‘Subject Customers’’) and most of U.S. Cellular’s PCS
licenses in the Divestiture Markets. U.S. Cellular will retain its direct and indirect ownership interests in
other spectrum in the Divestiture Markets. The transaction does not affect spectrum licenses held by U.S.
Cellular or by variable interest entities consolidated by U.S. Cellular, that are not currently used in the
operations of the Divestiture Markets. The Subject Liabilities that will be assumed by Sprint include only
(i) liabilities as of the closing relating to the Subject Customers and (ii) liabilities arising after the closing
relating to the Subject Assets.
The Retained Assets include all assets other than the Subject Assets, including cash, accounts
receivable, inventory, naming rights, real estate, 561 owned cell sites including towers, network
equipment, stores, retail equipment, furniture and fixtures, and all other assets, including corporate and
other facilities located in the Divestiture Markets. The Retained Liabilities include all liabilities other than
the Subject Liabilities, including accounts payable, accrued expenses, liabilities to employees, taxes, and
obligations under benefit plans, contracts, leases and asset retirement obligations.
The transaction is subject to FCC approval, compliance with the Hart-Scott-Rodino Act and other
conditions. Subject to the satisfaction or (if permitted) waiver of all conditions, the transaction is expected
to close in mid-2013.
7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
Selected pro forma information related to the Divestiture Transaction is as follows:
(Dollars in millions)
As of or for the Year Ended December 31, 2012
Postpaid customers(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid customers(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reseller customers(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As Reported
Divestiture
Markets(1)
Core
Markets
5,134,000
423,000
241,000
463,000
81,000
16,000
560,000
4,671,000
342,000
225,000
5,238,000
Total customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,798,000
Market penetration in consolidated operating markets(2) . . . . . .
Postpaid churn rate(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TDS Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Cellular Service revenues . . . . . . . . . . . . . . . . . . . . . . . . .
TDS Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Cellular Capital expenditures . . . . . . . . . . . . . . . . . . . . . . .
For the year ended December 31, 2011
TDS Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Cellular Service revenues . . . . . . . . . . . . . . . . . . . . . . . . .
TDS Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Cellular Capital expenditures . . . . . . . . . . . . . . . . . . . . . . .
For the year ended December 31, 2010
TDS Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Cellular Service revenues . . . . . . . . . . . . . . . . . . . . . . . . .
TDS Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Cellular Capital expenditures . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
$
$
$
$
$
12.3%
1.67%
5,345
4,099
1,005
837
5,180
4,054
987
783
4,987
3,913
755
583
$
$
$
$
$
$
$
$
$
$
$
$
3.7%
2.95%
440
427
68
68
474
468
67
67
515
513
68
68
$
$
$
$
$
$
$
$
$
$
$
$
16.4%
1.53%
4,905
3,672
937
769
4,706
3,586
920
716
4,472
3,400
687
515
(1) The As-Reported amounts of Operating revenues and Capital expenditures represent GAAP financial
measures and the U.S. Cellular Service revenues and the Divestiture Markets and Core Markets
amounts represent non-GAAP financial measures. TDS believes that the amounts under Divestiture
Markets and Core Markets may be useful to investors and other users of its financial information in
evaluating the pro forma amounts for the Core Markets.
(2) See ‘‘Results of Operations—U.S. Cellular’’ for a further description of customers, market penetration
and churn rate.
The Divestiture Transaction contemplates that five agreements will be entered into as of the closing: a
Customer Transition Services Agreement, a Network Transition Services Agreement, a Spectrum Manager
Lease Agreement, a Brand License Agreement, and an amendment to the Sprint/U.S. Cellular Intercarrier
Roaming Agreement.
At closing, the Subject Customers will cease to be customers of U.S. Cellular and will become customers
of Sprint. Pursuant to the Customer Transition Services Agreement, on and after closing, U.S. Cellular will
provide customer service and billing to, and collect accounts receivable from, the Subject Customers on
behalf of Sprint for a period of up to 24 months following the closing. Sprint will reimburse U.S. Cellular
at an amount equal to U.S. Cellular’s cost, including applicable overhead allocations, for providing such
services and will provide notice to U.S. Cellular when to discontinue them.
Pursuant to the Network Transition Services Agreement, U.S. Cellular will retain and continue to operate
the Retained Assets to provide network services to Sprint in the Divestiture Markets for a period of up to
24 months following the closing. Sprint will reimburse U.S. Cellular at an amount equal to U.S. Cellular’s
cost, including applicable overhead allocations, for providing such services and for actual cell site rent
expenses during the transition period. Sprint will provide notice to U.S. Cellular as to how and when to
decommission certain network assets.
8
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
Sprint will reimburse U.S. Cellular up to $200 million (the ‘‘Sprint Cost Reimbursement’’) for network-
related exit costs in the Divestiture Markets that U.S. Cellular expects to incur as a result of the
transaction, including: (i) costs to decommission cell sites and mobile telephone switching office
(‘‘MTSO’’) sites in the Divestiture Markets, (ii) costs to terminate real property leases related to cell sites
in the Divestiture Markets, (iii) costs to terminate certain network access arrangements, and (iv) costs for
employee termination benefits that are paid to specified engineering employees in the Divestiture
Markets.
The Spectrum Manager Lease Agreement provides that Sprint, as lessor, would lease the Subject
Licenses to U.S. Cellular, as lessee, to provide U.S. Cellular with FCC authority to operate the network
during the transition period. U.S. Cellular is not required to make any lease payments to Sprint under this
agreement.
The Brand License Agreement provides that Sprint will have the rights to continue to use U.S. Cellular’s
trade-names, trademarks and service marks in the Divestiture Markets during the transition period. No
additional payments are due by Sprint to U.S. Cellular under this agreement.
Sprint will not purchase or assume any of U.S. Cellular’s retail locations, distribution points or agent
relationships. The transaction ultimately will result in the closure of approximately 100 company-owned
stores and the termination of related retail associates, along with the termination of agent and sub-agent
relationships related to approximately 150 stores in these markets. U.S. Cellular also will cease to
distribute the U Prepaid product in Walmart stores in these markets.
U.S. Cellular expects to incur costs associated with store closures and agent terminations in the
Divestiture Markets, including: (i) costs to terminate leases for company-owned retail stores, (ii) costs for
employee termination benefits that are paid to retail and support employees, and (iii) costs to terminate
certain agent and sub-agent relationships. Sprint will not reimburse U.S. Cellular for costs associated
with company-owned store closures and agent terminations.
Upon the completion of the transaction, U.S. Cellular expects to reduce its workforce by approximately
1,000 employees in these markets, primarily store employees, but also including engineering employees
and support staff. Most of these employees will continue to work through the closing and some of the
employees will continue to be retained through the completion of the transition services period.
Between the date of the Purchase and Sale Agreement and the closing, the operating results of the
Divestiture Markets will continue to be presented in continuing operations. The financial impacts of the
Divestiture Transaction are classified in the Consolidated Statement of Operations within Operating
income. See Note 7—Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial
Statements for additional information regarding (i) the amounts TDS expects to recognize in the
Consolidated Statement of Operations between the date the Purchase and Sale Agreement was signed
and the end of the transition services period and (ii) the actual amounts incurred during the year ended
December 31, 2012 as a result of the transaction. The net impacts of the Divestiture Transaction resulted
in a $44.5 million reduction in U.S. Cellular’s Operating income in the quarter ended December 31, 2012.
As a result of the transaction, TDS reviewed the remaining goodwill and intangible assets in these
reporting units and units of accounting for impairment in the fourth quarter of 2012 and concluded there
was no impairment of Goodwill or Licenses. See Application of Critical Accounting Policies and
Estimates, below, for additional information.
As noted above, the Purchase Price is $480 million, net of certain pro-rations, to be received upon the
closing of the Purchase and Sale Agreement, and the Sprint Cost Reimbursement is up to $200 million.
After the closing, U.S. Cellular intends to invest the Purchase Price in excess of non-reimbursed exit
costs and income tax payments in temporary investments and these funds will be available for use for
general corporate purposes. This will increase U.S. Cellular’s liquidity and capital resources at that time,
subject to the below cash expenditures and income taxes.
9
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
As a result of the transaction, U.S. Cellular expects net cash flows of the following:
(Dollars in thousands)
Proceeds:
Cash inflow (outflow)
Purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reimbursement of transition and exit costs . . . . . . . . . . . . . . . . . . . . . . . . . .
$
480,000
150,000 - 200,000
Cash expenditures:
Employee related costs including severance, retention and outplacement . . . .
Contract termination costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs of decommissioning cell sites and MTSOs . . . . . . . . . . . . . . . . . . . . . .
Transaction costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(15,000) - (25,000)
(125,000) - (175,000)
(40,000) - (50,000)
(3,000) - (5,000)
(130,000) - (150,000)
Net cash proceeds from the transaction are expected to be $275 million to $350 million. Such net cash
proceeds will be realized over the period from the date of the signing of the Purchase and Sale
Agreement on November 6, 2012, to the end of the transition services agreements. Net cash outflows
related to the Divestiture Transaction for the quarter ended December 31, 2012 totaled $0.3 million.
Following the closing, TDS will no longer receive Operating revenues in the Divestiture Markets. However,
following the closing, TDS will continue to incur Cost of services and products expenses, Selling, general
and administrative expenses and Depreciation, amortization and accretion in the Divestiture Markets in
order for U.S. Cellular to provide transition services to Sprint. Certain of these costs will be reimbursed
by Sprint pursuant to the Customer Transition Service Agreement and the Network Transition Services
Agreement described above.
2013 ESTIMATES
Estimates of full-year 2013 results for U.S. Cellular, TDS Telecom and TDS, are shown below. Such
estimates represent management’s view as of the date of filing of TDS’ Form 10-K for the year ended
December 31, 2012. Such forward-looking statements should not be assumed to be current as of any
future date. TDS undertakes no duty to update such information whether as a result of new information,
future events or otherwise. There can be no assurance that final results will not differ materially from
such estimated results.
TDS has changed the measures which it uses to present estimates of operating results. TDS now
provides estimates for consolidated revenues and capital expenditures. In addition, TDS previously
presented Adjusted OIBDA, defined as operating income excluding the effects of: depreciation,
amortization and accretion (OIBDA); the loss on impairment of assets; and the net gain or loss on asset
disposals and exchanges. TDS believes Adjusted income before income taxes, as defined below, is a
measure which provides a more comprehensive and meaningful view of TDS’ recurring results of
operations.
U.S. Cellular(2)
TDS Telecom(3)
TDS(2)(3)(7)
2013 Estimated Results(1)
(Dollars in millions)
Adjusted operating revenues(4) . . . . . . . . . .
Adjusted income before income taxes(5)
. . .
Capital expenditures . . . . . . . . . . . . . . . . .
$3,765 - $3,885
$780 - $900
Approx. $600
$850 - $900
$220 - $250
Approx. $155
$4,660 - $4,830
$995 - $1,145
Approx. $765
(1) These estimates are based on TDS’ current plans, which include a multi-year deployment of 4G LTE technology
which commenced in 2011 at U.S. Cellular and a multi-year deployment of IPTV which commenced in 2011 at
TDS Telecom. New developments or changing conditions (such as, but not limited to, regulatory developments,
customer net growth, customer demand for data services, costs to deploy, agreements for content or
franchises, or possible acquisitions, dispositions or exchanges) could affect TDS’ plans and, therefore, its 2013
estimated results.
10
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
(2) These estimates also assume the Divestiture Transaction closes July 1, 2013. Actual effects could vary
significantly from these estimates as a result of a change in the expected timing of the Divestiture Transaction.
See Note 7—Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for
additional information on the Divestiture Transaction.
These estimates reflect U.S. Cellular’s consolidated results for 2013. Estimated results reflecting U.S. Cellular’s
Divestiture Markets and Core Markets are shown in the table below:
2013 Estimated Results
U.S. Cellular
Core Markets(6)
U.S. Cellular
Divestiture Markets(6)
U.S. Cellular
Consolidated(6)
(Dollars in millions)
Adjusted operating revenues(4) . . . . . . .
Adjusted income before income taxes(5)
Capital expenditures . . . . . . . . . . . . . . .
$3,600 - $3,700
$765 - $865
Approx. $600
$165 - $185
$15 - $35
—
$3,765 - $3,885
$780 - $900
Approx. $600
(3) These estimates do not reflect the effects of the acquisition of Baja Broadband, LLC. See Note 20—
Subsequent Events in the Notes to Consolidated Financial Statements for additional information.
(4) Adjusted operating revenues is a non-GAAP financial measure defined as Operating revenues
excluding U.S. Cellular Equipment sales revenues. U.S. Cellular Equipment sales revenues are
excluded from Adjusted operating revenues since U.S. Cellular equipment is generally sold at a net
loss, and such net loss that results from U.S. Cellular Equipment sales revenues less U.S. Cellular
Cost of equipment sold is viewed as a cost of earning service revenues for purposes of assessing
business results. For purposes of developing this guidance, TDS does not calculate an estimate of
U.S. Cellular Equipment sales revenues. TDS believes this measure provides useful information to
investors regarding TDS’ results of operations. Adjusted operating revenues is not a measure of
financial performance under GAAP and should not be considered as an alternative to Operating
revenues as an indicator of the Company’s operating performance.
(5) Adjusted income before income taxes is a non-GAAP financial measure defined as income before:
Income taxes, Depreciation, amortization and accretion, net Gain or loss on sale of business and
other exit costs, and Interest expense. Adjusted income before income taxes is not a measure of
financial performance under GAAP and should not be considered as an alternative to Income before
income taxes as an indicator of the Company’s operating performance or as an alternative to cash
flows from operating activities, determined in accordance with GAAP, as an indicator of cash flows or
as a measure of liquidity. TDS believes Adjusted income before income taxes is a meaningful
measure of TDS’ operating results before significant recurring non-cash charges, discrete gains and
losses and financing charges (Interest expense). The following tables provide a reconciliation of
Income before income taxes to Adjusted income before income taxes for 2013 Estimated Results
and 2012, 2011 and 2010 actual results:
U.S. Cellular
Core
Markets(6)
2013 Estimated Results
U.S. Cellular
Divestiture
U.S. Cellular
Markets(2)(6) Consolidated(6)
TDS Telecom
TDS(7)
(Dollars in millions)
Income before income taxes(8)(9) . . . . . . . . . . . . . .
Depreciation, amortization and accretion expense . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . .
$165 - $265
Approx. $545
Approx. $55
($180) - ($160)
Approx. $195
—
($15) - $105
Approx. $740
Approx. $55
$25 - $55
Approx. $195
—
($55) - $95
Approx. $940
Approx. $110
Adjusted income before income taxes . . . . . . . . . . .
$765 - $865
$15 - $35
$780 - $900
$220 - $250
$995 - $1,145
11
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
2012 Actual Results
U.S. Cellular
Consolidated(6)
TDS Telecom
TDS(7)
(Dollars in millions)
Income before income taxes(9) . . . . . . . . . . . . . . . . . . .
Depreciation, amortization and accretion expense . . . . . .
(Gain) loss on sale of business and other exit costs, net .
Interest expense (Capitalized interest) . . . . . . . . . . . . . .
Adjusted income before income taxes . . . . . . . . . . . . . .
$ 205.1
608.6
21.0
42.4
$ 877.1
$
45.0
193.1
—
(1.5)
$ 236.6
$ 196.2
813.6
21.1
86.7
$1,117.6
2011 Actual Results
U.S. Cellular
Consolidated(6)
TDS Telecom
TDS(7)
(Dollars in millions)
Income before income taxes . . . . . . . . . . . . . . . . . . . . .
Depreciation, amortization and accretion expense . . . . . .
(Gain) loss on sale of business and other exit costs, net .
Interest expense (Capitalized interest) . . . . . . . . . . . . . .
Adjusted income before income taxes . . . . . . . . . . . . . .
$ 312.8
573.6
—
65.6
$ 952.0
$ 107.5
180.5
—
(2.6)
$ 285.4
$ 363.7
765.8
—
118.2
$1,247.7
2010 Actual Results
U.S. Cellular
Consolidated(6)
TDS Telecom
TDS(7)
(Dollars in millions)
Income before income taxes . . . . . . . . . . . . . . . . . . . . .
Depreciation, amortization and accretion expense . . . . . .
(Gain) loss on sale of business and other exit costs, net .
Interest expense (Capitalized interest) . . . . . . . . . . . . . .
Adjusted income before income taxes . . . . . . . . . . . . . .
$ 241.1
571.0
—
61.6
$ 873.7
$ 101.3
174.1
—
(0.8)
$ 274.6
$ 285.8
755.6
—
116.8
$1,158.2
(6) The U.S. Cellular Consolidated amounts represent GAAP financial measures and include the results
of both the Core Markets and the Divestiture Markets. As used herein, ‘‘Core Markets’’ represents
U.S. Cellular’s total consolidated markets excluding the Divestiture Markets. The Core Markets and
Divestiture Markets amounts represent non-GAAP financial measures. TDS believes that the Core
Markets and Divestiture Markets amounts may be useful to investors and other users of its financial
information in evaluating the pro forma results for the Core Markets.
(7) The TDS column includes U.S. Cellular, TDS Telecom and also the impacts of consolidating
eliminations, corporate operations and non-reportable segments, all of which are not presented
above.
(8) This amount does not include any estimate for (Gain) loss on sale of business and other exit costs,
net, as the timing of such amount is not readily estimable.
(9) The 2013 estimated amounts for depreciation, amortization and accretion expense in the U.S.
Cellular Divestiture Markets include approximately $120 million of incremental accelerated
depreciation resulting from the Divestiture Transaction. The 2012 actual results include $20.1 million
of incremental accelerated depreciation resulting from the Divestiture Transaction.
TDS’ management currently believes that the foregoing estimates represent a reasonable view of what is
achievable considering actions that TDS and its subsidiaries have taken and will be taking. However, the
12
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
current competitive conditions in the telecommunications industry have created a challenging
environment that could continue to significantly impact actual results.
U.S. Cellular expects to continue its focus on customer satisfaction by delivering a high quality network,
attractively priced service plans, a broad line of wireless devices and other products, and outstanding
customer service. U.S. Cellular believes that future growth in its revenues will result primarily from selling
additional products and services, including data products and services, to its existing customers,
increasing the number of multi-device users among its existing customers, and attracting wireless users
switching from other wireless carriers. U.S. Cellular is focusing on opportunities to increase revenues,
pursuing cost reduction initiatives in various areas and implementing a number of initiatives to enable
future growth. The initiatives are intended, among other things, to allow U.S. Cellular to accelerate its
introduction of new products and services, better segment its customers for new services and retention,
sell additional services such as data, expand its distribution channels, enhance its internet sales and
customer service capabilities, improve its prepaid products and services and reduce operational
expenses over the long term.
TDS Telecom will continue to focus on revenue growth through new service offerings as well as expense
reduction through product and service cost improvement and process efficiencies. In order to achieve
these objectives TDS Telecom has allocated capital expenditures for: process and productivity initiatives,
increased network and product capabilities for broadband services, the expansion of IPTV, success-
based spending to sustain managedIP growth and development of HMS products and services.
Additionally, TDS Telecom will fund its share for projects approved under the Recovery Act to increase
broadband access in unserved areas. Under the Recovery Act, TDS Telecom will receive $105.1 million
in federal grants and will provide $30.9 million ($15.8 million of which is included in 2013 estimated
capital expenditures) of its own funds to complete 44 projects. Under the terms of the grants, the
projects must be completed by June of 2015. TDS Telecom will also experience financial effects as a
result of the Baja acquisition and the operations of Baja after the closing, the effects of which are not
included in the above estimates for 2013.
13
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
RESULTS OF OPERATIONS—CONSOLIDATED
Year Ended December 31,
2012
Increase/ Percentage
(Decrease) Change
2011
Increase/ Percentage
(Decrease) Change
2010
(Dollars in thousands, except per share amounts)
Operating revenues
U.S. Cellular
TDS Telecom . . . . . . . . . . . . . . . .
All other(1) . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . $4,452,084 $ 108,738
39,118
16,950
854,506
38,687
3% $4,343,346 $165,665
19,546
5%
8,431
78%
815,388
21,737
4% $4,177,681
795,842
2%
13,306
63%
Total operating revenues . . . . . . .
5,345,277
164,806
3% 5,180,471
193,642
4% 4,986,829
Operating expenses
U.S. Cellular
. . . . . . . . . . . . . . . .
TDS Telecom . . . . . . . . . . . . . . . .
All other(1) . . . . . . . . . . . . . . . . .
4,295,428
813,764
52,222
232,862
97,027
13,556
6% 4,062,566
716,737
38,666
14%
35%
86,358
20,729
20,144
2% 3,976,208
696,008
3%
18,522
>100%
Total operating expenses . . . . . . .
5,161,414
343,445
7% 4,817,969
127,231
3% 4,690,738
Operating income (loss)
U.S. Cellular
. . . . . . . . . . . . . . . .
TDS Telecom . . . . . . . . . . . . . . . .
All other(1) . . . . . . . . . . . . . . . . .
156,656
40,742
(13,535)
(124,124)
(57,909)
3,394
Total operating income . . . . . . . .
183,863
(178,639)
Other income (expenses)
Equity in earnings of unconsolidated
entities . . . . . . . . . . . . . . . . . .
Interest and dividend income . . . . .
Gain (loss) on investment . . . . . . . .
Interest expense . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . .
92,867
9,248
(3,718)
(86,745)
720
10,329
103
(27,821)
31,456
(2,938)
(44)%
(59)%
20%
(49)%
13%
1%
N/M
27%
(80)%
Total other income (expenses)
. . .
12,372
11,129
>100%
Income before income taxes . . . . . . . . .
Income tax expense . . . . . . . . . . .
196,235
73,582
(167,510)
(39,921)
Net income . . . . . . . . . . . . . . . . . . . . .
Less: Net income attributable to
122,653
(127,589)
(46)%
(35)%
(51)%
280,780
98,651
(16,929)
79,307
(1,183)
(11,713)
39%
(1)%
>(100)%
201,473
99,834
(5,216)
362,502
66,411
22%
296,091
82,538
9,145
24,103
(118,201)
3,658
1,243
363,745
113,503
250,242
(15,536)
(1,363)
24,103
(1,391)
5,747
11,560
77,971
18,315
59,656
(16)%
(13)%
N/M
98,074
10,508
—
(1)% (116,810)
(2,089)
N/M
N/M
(10,317)
27%
19%
31%
285,774
95,188
190,586
noncontrolling interests, net of tax .
(40,792)
8,884
18%
(49,676)
(3,939)
(9)%
(45,737)
Net income attributable to TDS
shareholders . . . . . . . . . . . . . . . . . .
. . . .
Preferred dividend requirement
81,861
(50)
(118,705)
—
(59)%
—
200,566
(50)
55,717
—
38%
—
144,849
(50)
Net income available to common
shareholders . . . . . . . . . . . . . . . . . . $
81,811 $(118,705)
(59)% $ 200,516 $ 55,717
38% $ 144,799
Basic earnings per share attributable to
TDS shareholders(2) . . . . . . . . . . . . . $
0.75 $
(1.10)
(59)% $
1.85 $
0.53
40% $
1.32
Diluted earnings per share attributable to
TDS shareholders(2) . . . . . . . . . . . . . $
0.75 $
(1.08)
(59)% $
1.83 $
0.52
40% $
1.31
N/M—Percentage change not meaningful
(1) Consists of Non-Reportable Segment, corporate operations and intercompany eliminations between U.S. Cellular, TDS
Telecom, the Non-Reportable Segment and corporate operations.
(2) On January 13, 2012, TDS shareholders approved a Share Consolidation Amendment to the Restated Certificate of
Incorporation of TDS. Basic and diluted earnings per share attributable to TDS shareholders have been retroactively restated
to reflect the impact of the increased shares outstanding as a result of the Share Consolidation Amendment as of the
beginning of all periods presented. See Note 15—Common Shareholders’ Equity in the Notes to Consolidated Financial
Statements for additional information.
Operating Revenues and Expenses
See ‘‘Results of Operations—U.S. Cellular’’ and ‘‘Results of Operations—TDS Telecom’’ below for factors
that affected Operating revenues and expenses.
14
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
Equity in earnings of unconsolidated entities
Equity in earnings of unconsolidated entities represents TDS’ share of net income from entities
accounted for by the equity method. TDS’ investment in the Los Angeles SMSA Limited Partnership (‘‘LA
Partnership’’) contributed $67.2 million, $55.3 million and $64.8 million to Equity in earnings of
unconsolidated entities in 2012, 2011 and 2010, respectively. TDS received cash distributions from the
LA Partnership of $66.0 million in each of 2012, 2011 and 2010.
Gain (loss) on investment
Loss on investment in 2012 includes a provision for loss of $3.7 million related to a note receivable and
preferred stock acquired by U.S. Cellular in connection with an acquisition in 1998. Gain on investment
in 2011 includes a gain of $12.7 million from TDS’ acquisition of 63% of Airadigm in September 2011
and a $13.4 million gain recorded as a result of adjusting the carrying value of a pre-existing
noncontrolling interest for which U.S. Cellular purchased the remaining interest in May 2011, as more
fully described in Note 7—Acquisitions, Divestitures and Exchanges in the Notes to Consolidated
Financial Statements.
Interest expense
TDS recorded $15.4 million in interest expense to write-off unamortized debt issuance costs related to
TDS’ $282.5 million, 7.6% Senior Notes, and U.S. Cellular’s $330 million, 7.5% Senior Notes, redeemed
on May 2, 2011 and June 20, 2011, respectively. The impact of these write-offs in 2011, along with lower
effective interest rates on long-term debt and an increase in capitalized interest for multi-year projects
during 2012, resulted in the year-over-year decrease of $31.5 million expense from 2011 to 2012. The
increase of $1.4 million from 2010 to 2011 also reflects the 2011 write-offs, which was partially offset by
an increase in capitalized interest during 2011.
Income tax expense
The effective tax rates on Income before income taxes for 2012, 2011 and 2010 were 37.5%, 31.2% and
33.3%, respectively. The following significant discrete and other items impacted income tax expense for
these years:
2012—Includes tax benefits of $11.3 million resulting from state statute of limitation expirations and
$6.1 million resulting from corrections relating to prior periods, offset by tax expense of $1.3 million
related to state income tax audits and tax expense associated with increases to state deferred tax asset
valuation allowances of $5.2 million.
2011—Includes tax benefits of $26.9 million resulting from state tax law changes and $9.0 million
resulting from state statute of limitation expirations, offset by tax expense of $6.0 million resulting from
correction of partnership tax basis relating to a prior period.
2010—Includes a tax benefit of $6.5 million resulting from favorable settlement of state income tax audits.
See Note 4—Income Taxes in the Notes to Consolidated Financial Statements for further information on
the effective tax rate.
15
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
Net income attributable to noncontrolling interests, net of tax
Net income attributable to noncontrolling interests, net of tax includes the noncontrolling public
shareholders’ share of U.S. Cellular’s net income, the noncontrolling shareholders’ or partners’ share of
certain U.S. Cellular subsidiaries’ net income or loss and other TDS noncontrolling interests.
Year Ended December 31,
2012
2011
2010
(Dollars in thousands)
Net income attributable to noncontrolling interest, net of tax U.S. Cellular
Noncontrolling public shareholders’ . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling shareholders’ or partners’ . . . . . . . . . . . . . . . . . . . . .
$18,431
22,361
$28,934
20,742
$24,323
21,414
$40,792
$49,676
$45,737
RESULTS OF OPERATIONS—U.S. CELLULAR
TDS provides wireless telephone service through U.S. Cellular, an 84%-owned subsidiary. U.S. Cellular
owns, manages and invests in wireless markets throughout the United States.
Following is a table of summarized operating data for U.S. Cellular’s consolidated operations.
As of December 31,
Total population
2012
2011
2010
Consolidated markets(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated operating markets(1)
. . . . . . . . . . . . . . . . . . . .
Market penetration at end of period
Consolidated markets(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Consolidated operating markets(2)
All Customers
93,244,000
46,966,000
91,965,000
46,888,000
90,468,000
46,546,000
6.2%
12.3%
6.4%
12.6%
6.7%
13.0%
Total at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net additions (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Smartphones sold as a percent of total devices sold(3) . . . . . .
5,798,000
1,302,000
(88,000)
5,891,000
1,155,000
(186,000)
6,072,000
1,372,000
(69,000)
55.8%
44.0%
24.6%
Retail Customers
Total at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postpaid smartphone penetration(3) (4) . . . . . . . . . . . . . . . . .
Gross additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net retail additions (losses)(5) . . . . . . . . . . . . . . . . . . . . . . . .
Net postpaid additions (losses)
. . . . . . . . . . . . . . . . . . . . .
Net prepaid additions (losses) . . . . . . . . . . . . . . . . . . . . . .
5,557,000
5,608,000
5,729,000
41.8%
30.5%
16.7%
1,248,000
(47,000)
(165,000)
118,000
1,064,000
(125,000)
(117,000)
(8,000)
1,205,000
(15,000)
(66,000)
51,000
Service revenue components (000s)
Retail service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inbound roaming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total service revenues (000s) . . . . . . . . . . . . . . . . . . . . . . . . .
Total ARPU(6)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Billed ARPU(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postpaid ARPU(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postpaid churn rate(9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures (000s) . . . . . . . . . . . . . . . . . . . . . . . . . .
Cell sites in service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,547,979
348,717
202,160
$4,098,856
58.70
$
50.81
$
54.32
$
$3,486,522
348,309
218,966
$4,053,797
56.54
$
48.63
$
54.00
$
$3,459,546
253,290
200,165
$3,913,001
53.27
$
47.10
$
51.21
$
1.7%
1.5%
1.5%
$ 836,748
8,028
$ 782,526
7,882
$ 583,134
7,645
(1) Used only to calculate market penetration of consolidated markets and consolidated operating
markets, respectively. See footnote (2) below.
16
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
(2) Market Penetration is calculated by dividing the number of wireless customers at the end of the
period by the total population of consolidated markets and consolidated operating markets,
respectively, as estimated by Claritas(cid:1).
(3) Smartphones represent wireless devices which run on an Android(cid:2), Blackberry(cid:1), or Windows
Mobile(cid:1) operating system, excluding tablets.
(4) Smartphone penetration is calculated by dividing postpaid smartphone customers by total postpaid
customers.
(5)
Includes net postpaid additions (losses) and net prepaid additions (losses).
(6) Total ARPU—Average monthly service revenue per customer includes retail service, inbound roaming
and other service revenues and is calculated by dividing total service revenues by the number of
months in the period and by the average total customers during the period.
(7) Billed ARPU—Average monthly billed revenue per customer is calculated by dividing total retail
service revenues by the number of months in the period and by the average total customers during
the period. Retail service revenues include revenues attributable to postpaid, prepaid and reseller
customers.
(8) Postpaid ARPU—Average monthly revenue per postpaid customer is calculated by dividing total
retail service revenues from postpaid customers by the number of months in the period and by the
average postpaid customers during the period.
(9) Represents the percentage of the retail postpaid customer base that disconnects service each
month. This figure represents the average monthly postpaid churn rate for each respective annual
period.
Components of Operating Income
Year Ended December 31,
2012
(Dollars in thousands)
Retail service . . . . . . . . . . . . . . $3,547,979
348,717
Inbound roaming . . . . . . . . . . .
202,160
Other . . . . . . . . . . . . . . . . . . .
Service revenues . . . . . . . . . . 4,098,856
353,228
Equipment sales . . . . . . . . . . .
$ 61,457
408
(16,806)
45,059
63,679
Total operating revenues . . . . . 4,452,084
108,738
System operations (excluding
Depreciation, amortization and
accretion reported below)
. . . .
Cost of equipment sold . . . . . . .
Selling, general and administrative
Depreciation, amortization and
accretion . . . . . . . . . . . . . . .
(Gain) loss on asset disposals and
exchanges, net . . . . . . . . . . .
(Gain) loss on sale of business
946,805
935,947
1,764,933
17,426
144,145
(4,768)
608,633
35,076
18,088
19,961
and other exit costs, net
. . . . .
21,022
Total operating expenses . . . . . 4,295,428
21,022
232,862
Increase/
(Decrease)
Percentage
Change
2011
Increase/
(Decrease)
Percentage
Change
2010
2%
—
(8)%
1%
22%
3%
2%
18%
—
6%
N/M
N/M
$3,486,522
348,309
218,966
4,053,797
289,549
4,343,346
$ 26,976
95,019
18,801
140,796
24,869
165,665
1%
38%
9%
4%
9%
4%
$3,459,546
253,290
200,165
3,913,001
264,680
4,177,681
929,379
791,802
1,769,701
74,448
35,512
(13,614)
9%
5%
(1)%
854,931
756,290
1,783,315
573,557
2,602
(1,873)
(12,590)
—
—
—
N/M
N/M
570,955
10,717
—
6%
4,062,566
86,358
2%
39%
3,976,208
$ 201,473
Operating income . . . . . . . . . . . $ 156,656
$(124,124)
(44)%
$ 280,780
$ 79,307
N/M—Percentage change not meaningful
17
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
Operating Revenues
Service revenues
Service revenues consist primarily of: (i) charges for access, airtime, roaming, recovery of regulatory
costs and value-added services, including data products and services, provided to U.S. Cellular’s retail
customers and to end users through third-party resellers (‘‘retail service’’); (ii) charges to other wireless
carriers whose customers use U.S. Cellular’s wireless systems when roaming, including long-distance
roaming (‘‘inbound roaming’’); and (iii) amounts received from the Federal USF.
Retail service revenues
Retail service revenues increased by $61.5 million, or 2%, to $3,548.0 million primarily due to the impact
of an increase in the average monthly retail service revenue per customer, partially offset by a decrease
in U.S. Cellular’s average customer base.
The average number of customers decreased to 5,819,000 in 2012 from 5,975,000 in 2011, driven by
reductions in postpaid and reseller customers. The average number of customers in 2011 decreased
from 6,121,000 in 2010 driven by reductions in postpaid, prepaid and reseller customers.
Average monthly retail service revenue per customer increased to $50.81 in 2012 from $48.63 in 2011,
and in 2011 increased from $47.10 in 2010. The increase in 2012 from 2011 reflects the impact of a
larger portion of the customer base using smartphones which drives incremental data access revenue.
The average monthly retail service revenue increase in both years also includes the impact of a
reduction in the number of reseller customers, who typically generate lower average monthly revenues.
U.S. Cellular expects continued pressure on revenues in the foreseeable future due to industry
competition for customers and related effects on pricing of service plan offerings offset to some degree
by continued adoption of smartphones and data usage.
U.S. Cellular accounts for loyalty reward points under the deferred revenue method. Under this method,
U.S. Cellular allocates a portion of the revenue billed to customers with applicable plans to the loyalty
reward points. The revenue allocated to these points is initially deferred in the Consolidated Balance
Sheet and is recognized in future periods when the loyalty reward points are redeemed or used.
Application of the deferred revenue method of accounting related to loyalty reward points resulted in
deferring net revenues of $17.7 million in 2012, $31.8 million in 2011, and $7.1 million in 2010. Deferred
revenues related to loyalty reward points are included in the Customer deposits and deferred revenues in
the Consolidated Balance Sheet at December 31, 2012 and December 31, 2011.
Inbound roaming revenues
Inbound roaming revenues of $348.7 million were flat in 2012 compared to 2011 as higher data
revenues, reflecting significantly higher volumes but lower negotiated rates, were offset by lower voice
revenues, reflecting both lower volumes and rates. In 2011, inbound roaming revenues increased
$95.0 million, or 38% compared to 2010 as an increase in data roaming revenues was partially offset by
a decrease in voice roaming revenues. U.S. Cellular expects continued growth in data roaming volume
but also expects that the revenue impact of this growth will be offset by the impacts of decreases in
negotiated data roaming rates and voice roaming volumes.
Other revenues
As described below, ETC support was phased down to 80% of 2011 levels beginning July 1, 2012. As a
result, Other revenues decreased by $16.8 million, or 8%, in 2012 compared to 2011. In 2011, the
increase of $18.8 million, or 9%, was driven primarily by increased ETC revenues due to expanded
eligibility in certain states and adjustments by the Universal Service Administrative Company (‘‘USAC’’)
that reduced amounts received in prior years. U.S. Cellular was eligible to receive ETC funds in sixteen
states in 2012, 2011 and 2010. ETC revenues recorded in 2012, 2011 and 2010 were $140.8 million,
$160.5 million and $143.9 million, respectively.
18
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
Pursuant to the FCC’s Reform Order (See ‘‘Overview—FCC Reform Order’’ above), U.S. Cellular’s ETC
support is currently being phased down. Support for 2012 (excluding certain adjustments) was frozen on
January 1, 2012 at 2011 levels and was reduced by 20% starting in July 2012. Support will be reduced
by 20% in July of each subsequent year; however, if the Phase II Mobility Fund is not operational by July
2014, the phase down will halt at that time and U.S. Cellular will receive 60% of its baseline support until
the Phase II Mobility Fund is operational.
See the ‘‘Overview—FCC Reform Order’’ section above for a discussion of alternative sources of funding.
At this time, U.S. Cellular cannot predict the net effect of the FCC’s changes to the USF high cost
support program in the Reform Order or the extent to which reductions in support will be offset with
additional support from the CAF or the Mobility Fund. Accordingly, U.S. Cellular cannot predict whether
such changes will have a material adverse effect on U.S. Cellular’s business, financial condition or results
of operations.
Equipment sales revenues
Equipment sales revenues include revenues from sales of wireless devices and related accessories to
both new and existing customers, as well as revenues from sales of wireless devices and accessories to
agents. All equipment sales revenues are recorded net of rebates.
U.S. Cellular offers a competitive line of quality wireless devices to both new and existing customers.
U.S. Cellular’s customer acquisition and retention efforts include offering new wireless devices to
customers at discounted prices; in addition, customers on currently offered rate plans receive loyalty
reward points that may be used to purchase a new wireless device or accelerate the timing of a
customer’s eligibility for a wireless device upgrade at promotional pricing. U.S. Cellular also continues to
sell wireless devices to agents including national retailers; this practice enables U.S. Cellular to provide
better control over the quality of wireless devices sold to its customers, establish roaming preferences
and earn quantity discounts from wireless device manufacturers which are passed along to agents and
other retailers. U.S. Cellular anticipates that it will continue to sell wireless devices to agents in the future.
The increase in 2012 equipment sales revenues of $63.7 million, or 22%, to $353.2 million was driven
primarily by a 17% increase in average revenue per wireless device sold; an increase in equipment
activation fees also was a factor. Average revenue per wireless device sold increased due to a shift in
customer preference to higher priced smartphones. The increase in 2011 equipment sales revenues of
$24.9 million, or 9%, to $289.5 million was driven by a 15% increase in average revenue per wireless
device sold offset by a 4% decrease in total wireless devices sold.
Operating Expenses
System operations expenses (excluding Depreciation, amortization and accretion)
System operations expenses (excluding Depreciation, amortization and accretion) include charges from
telecommunications service providers for U.S. Cellular’s customers’ use of their facilities, costs related to
local interconnection to the wireline network, charges for cell site rent and maintenance of U.S. Cellular’s
network, long-distance charges, outbound roaming expenses and payments to third-party data product
and platform developers.
System operations expenses increased $17.4 million, or 2%, to $946.8 million in 2012 and $74.4 million,
or 9%, to $929.4 million in 2011. Key components of the overall increases in System operations
expenses were as follows:
(cid:127) Maintenance, utility and cell site expenses increased $24.4 million, or 6%, in 2012 and $26.4 million, or
7%, in 2011, driven primarily in both years by increases in the number of cell sites within U.S.
Cellular’s network and costs related to the deployment and operation of LTE networks. The number of
cell sites totaled 8,028, 7,882 and 7,645 in 2012, 2011 and 2010, respectively, as U.S. Cellular
continued to expand and enhance coverage in its existing markets. The increases in expenses were
also due to an increase in software maintenance costs to support increased data needs.
19
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
(cid:127) Customer usage expenses increased by $4.1 million, or 1%, in 2012, and $2.7 million, or 1%, in 2011,
primarily due to an increase in data capacity and usage, offset by a decline in voice usage in both
years as well as reduced intercarrier compensation expenses as a result of the FCC’s Reform Order.
(cid:127) Expenses incurred when U.S. Cellular’s customers used other carriers’ networks while roaming
decreased $11.1 million, or 4%, in 2012 and increased $45.4 million, or 22%, in 2011. In 2012 roaming
data usage continued to increase rapidly but it was more than offset by reductions in negotiated
roaming rates and continued decreases in voice roaming. The increase in 2011 was primarily due to
increased data roaming usage partially offset by a decline in voice roaming expenses.
U.S. Cellular expects system operations expenses to increase in the future to support the continued
growth in cell sites and other network facilities as it continues to add capacity, enhance quality and
deploy new technologies as well as to support increases in total customer usage, particularly data
usage. However, these increases are expected to be offset to some extent by cost savings generated by
shifting data traffic to the 4G LTE network from the 3G network, containment of roaming expense via
lower negotiated rates and initiatives designed to reduce overall customer usage.
Cost of equipment sold
Cost of equipment sold increased $144.1 million, or 18%, in 2012 and $35.5 million, or 5% in 2011. In
2012, total devices sold increased by 1% due to expanded distribution for U Prepaid compared to a
decline in total wireless devices sold in 2011. In both years there was an increase in the average cost
per wireless device sold (18% in 2012 and 8% in 2011) due to a shift in the mix of sales to smartphones.
In 2012, the introduction of 4G LTE devices also was a significant driver to the increase in Cost of
equipment sold as these devices are more costly than similar 3G devices. However, 4G LTE technology
results in lower system operations expense during a customer’s lifecycle.
U.S. Cellular’s loss on equipment, defined as equipment sales revenues less cost of equipment sold,
was $582.7 million, $502.3 million and $491.6 million for 2012, 2011 and 2010, respectively. U.S. Cellular
expects loss on equipment to continue to be a significant cost in the foreseeable future as wireless
carriers continue to use device availability and pricing as a means of competitive differentiation. In
addition, U.S. Cellular expects increasing sales of data centric wireless devices such as smartphones
and tablets to result in higher equipment subsidies over time; these devices generally have higher
purchase costs which cannot be recovered through proportionately higher selling prices to customers.
Smartphones sold as a percentage of total devices sold was 56%, 44% and 25% in 2012, 2011 and
2010, respectively.
Selling, general and administrative expenses
Selling, general and administrative expenses include salaries, commissions and expenses of field sales
and retail personnel and facilities; telesales department salaries and expenses; agent commissions and
related expenses; corporate marketing and merchandise management; and advertising expenses.
Selling, general and administrative expenses also include bad debts expense, costs of operating
customer care centers and corporate expenses.
20
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
Selling, general and administrative expenses decreased by $4.8 million to $1,764.9 million in 2012 and
by $13.6 million to $1,769.7 in 2011. Key components of the net changes in Selling, general and
administrative expenses were as follows:
2012—
(cid:127) Selling and marketing expenses decreased by $24.8 million, or 3%, primarily from more cost-effective
advertising spending.
(cid:127) General and administrative expenses increased by $20.1 million, or 2%, driven by increases in bad
debt expense, Federal Universal Service Charge (‘‘FUSC’’) expense and non-income tax expense.
FUSC charges are assessed to customers and also included in Service revenues.
2011—
(cid:127) Selling and marketing expenses decreased by $13.7 million, or 2%, primarily due to lower advertising
costs as a result of shifting advertising efforts to more cost effective methods as well as lower
commissions expense reflecting fewer eligible transactions.
(cid:127) General and administrative expenses were relatively flat year over year.
Depreciation, amortization and accretion
Depreciation, amortization and accretion expense increased $35.1 million in 2012, or 6% primarily due to
the acceleration of depreciation in the Divestiture Markets and depreciation and amortization on asset
additions.
(Gain) loss on asset disposals and exchanges, net
(Gain) loss on asset disposals and exchanges, net was a loss of $18.1 million in 2012 primarily due to
losses resulting from the write-off of certain network assets.
(Gain) loss on sale of business and other exit costs, net
(Gain) loss on sale of business and other exit costs, net was a loss of $21.0 million in 2012. This loss is
primarily due to employee severance costs and asset write-offs in the Divestiture Markets, partially offset
by a $4.2 million gain resulting from the sale of a wireless market in March 2012.
See ‘‘Financial Resources’’ and ‘‘Liquidity and Capital Resources’’ for a discussion of U.S. Cellular’s
capital expenditures.
21
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
RESULTS OF OPERATIONS—TDS TELECOM
TDS conducts its wireline operations through TDS Telecom, a wholly-owned subsidiary. The following
table summarizes operating data for TDS Telecom’s ILEC and CLEC operations:
As of December 31,
ILEC
Residential Connections
2012
2011
2010
Physical access lines(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Broadband connections(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IPTV customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
350,100
221,700
7,900
367,500
219,600
4,600
386,600
210,300
3,900
ILEC residential connections . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
579,700
591,700
600,800
Commercial Connections
Physical access lines(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Broadband connections(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
managedIP connections(3)
107,600
18,500
17,200
114,400
18,200
8,600
121,100
17,000
4,000
ILEC commercial connections . . . . . . . . . . . . . . . . . . . . . . . . . . . .
143,300
141,200
142,100
CLEC
Residential Connections
Physical access lines(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Broadband connections(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,600
8,200
31,800
11,000
CLEC residential connections . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32,800
42,800
42,200
14,500
56,700
Commercial Connections
Physical access lines(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Broadband connections(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
managedIP connections(3)
135,500
11,200
77,400
157,300
14,600
44,900
174,800
16,400
26,000
CLEC commercial connections . . . . . . . . . . . . . . . . . . . . . . . . . . .
224,100
216,800
217,200
Total ILEC and CLEC Customer Connections . . . . . . . . . . . . . . . . . .
979,900
992,500
1,016,800
(1) A physical access line is the individual circuit connecting a customer to TDS Telecom’s central office
facilities.
(2) The number of customers provided high-capacity data circuits via various technologies, including
DSL and dedicated Internet circuit technologies.
(3) The number of telephone handsets, data lines and IP trunks providing communications using IP
networking technology.
22
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
TDS Telecom Total (ILEC, CLEC, and HMS Operations)
Components of Operating Income
Year Ended December 31,
(Dollars in thousands)
Operating revenues
2012
Increase/ Percentage
(Decrease)
Change
2011
Increase/ Percentage
(Decrease)
Change
2010
ILEC revenues . . . . . . . . . . . . . . . . . . . $578,412 $(19,399)
(6,935)
CLEC revenues . . . . . . . . . . . . . . . . . .
65,830
HMS revenues . . . . . . . . . . . . . . . . . . .
(378)
Intra-company elimination . . . . . . . . . . .
173,397
113,010
(10,313)
(3)% $597,811 $ (9,033)
(7,652)
(4)% 180,332
36,630
47,180
(399)
(9,935)
>100%
(4)%
(1)% $606,844
(4)% 187,984
10,550
(9,536)
>100%
(4)%
TDS Telecom operating revenues . . . . .
854,506
39,118
5% 815,388
19,546
2% 795,842
Operating expenses
ILEC expenses . . . . . . . . . . . . . . . . . .
CLEC expenses . . . . . . . . . . . . . . . . . .
HMS expenses . . . . . . . . . . . . . . . . . .
Intra-company elimination . . . . . . . . . . .
514,138
179,289
130,650
(10,313)
17,515
1,371
78,519
(378)
4% 496,623
1% 177,918
52,131
(9,935)
>100%
(4)%
(11,782)
(8,164)
41,074
(399)
(2)% 508,405
(4)% 186,082
11,057
(9,536)
>100%
(4)%
TDS Telecom operating expenses . . . . .
813,764
97,027
14% 716,737
20,729
3% 696,008
TDS Telecom operating income . . . . . . . . . $ 40,742 $(57,909)
(59)% $ 98,651 $ (1,183)
(1)% $ 99,834
ILEC Operations
Components of Operating Income
Year Ended December 31,
(Dollars in thousands)
Operating revenues
2012
Increase/ Percentage
(Decrease)
Change
2011
Increase/ Percentage
(Decrease)
Change
2010
. . . . . . . . . . . . . . . . . . . . . $279,400 $
Residential
Commercial
. . . . . . . . . . . . . . . . . . . .
Wholesale . . . . . . . . . . . . . . . . . . . . .
97,382
201,630
(458)
(1,199)
(17,742)
$279,858 $
—
(1)%
98,581
(8)% 219,372
455
(6,263)
(3,225)
—
$279,403
(6)% 104,844
(1)% 222,597
Total operating revenues . . . . . . . . . . .
578,412
(19,399)
(3)% 597,811
(9,033)
(1)% 606,844
Operating expenses
Cost of services and products (excluding
depreciation, amortization and accretion
. . . . . . . . . . . . . . . .
reported below)
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . . . . . .
Depreciation, amortization and accretion .
Loss on asset disposals, net
. . . . . . . . .
Loss on sale of business and other exit
192,514
923
—
191,591
(1,108)
(1)% 192,699
170,493
150,557
535
12,191
4,870
(508)
8%
3%
(49)%
158,302
145,687
1,043
(10,481)
(664)
471
(6)% 168,783
146,351
—
572
82%
costs, net
. . . . . . . . . . . . . . . . . . . .
39
39
N/M
—
—
N/M
—
Total operating expenses . . . . . . . . . .
514,138
17,515
4%
496,623
(11,782)
(2)% 508,405
Total operating income . . . . . . . . . . . . . . . $ 64,274 $(36,914)
(36)% $101,188 $ 2,749
3% $ 98,439
N/M—Percentage change not meaningful
Operating Revenues
Residential revenues consist of voice, data and video services to our residential customer base.
Residential revenues of $279.4 million in 2012 were essentially the same compared to 2011 and 2010.
Reductions in the number of residential connections of 2% and 1% in 2012 and 2011, respectively,
negatively impacted residential revenues by $4.7 million and $2.1 million. Customers choosing higher
speed data plans drove a 2% increase in average revenue per residential connection in 2012, which
increased residential revenues $6.0 million. Reductions in discounts attributed to bundled offerings
increased revenues $2.7 million in 2011 compared to 2010.
23
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
Commercial revenues consist of data and voice services and sales and installation of business
telephone systems to our commercial customer base.
The decrease in Commercial revenues of $1.2 million or 1% to $97.4 million in 2012 was primarily due to
a $1.9 million decline in business systems sales and charges for directory assistance. A $1.9 million
increase in revenue resulting from an increase in commercial connections was partially offset by a
$1.3 million decrease in the average revenue per commercial connection.
The decrease in Commercial revenues of $6.3 million or 6% to $98.6 million in 2011 was primarily due to
a $3.2 million decline in business systems sales. A decrease in commercial connections resulted in a
$1.5 million decrease in revenue and a decrease in the average revenue per commercial connection
reduced revenue by $1.3 million.
Wholesale revenues consist of compensation from other carriers for utilizing TDS Telecom’s network
infrastructure and regulatory recoveries.
Wholesale revenues decreased $17.7 million or 8% to $201.6 million in 2012. Wholesale revenues
decreased $7.8 million in 2012 as a result of changes in support mechanisms and in intercarrier
compensation resulting from the Reform Order released by the FCC in November 2011, as described in
the Overview—FCC Reform Order section above. Revenues received through interstate and intrastate
regulatory recovery mechanisms also decreased $5.7 million due to changes in eligible expense
recovery thresholds and reductions in the pool earnings. Additionally, Wholesale revenues declined
$4.9 million due to a 12% decline in intrastate minutes of use. TDS Telecom expects Wholesale revenues
to continue to decline in 2013.
Wholesale revenues decreased by $3.2 million or 1% to $219.4 million in 2011. Wholesale revenues
decreased $4.2 million due to a 9% decline in intrastate minutes of use and $2.4 million due to declines
in revenues received through interstate regulatory recovery mechanisms. Partially offsetting these
decreases was an increase of $1.2 million in revenues received from state USF programs.
Operating Expenses
Cost of services and products (excluding Depreciation, amortization and accretion)
Cost of services and products of $192.5 million in 2012 were flat compared to 2011. Increases in
employee related costs, increased charges related to IPTV expansion and network maintenance costs
were nearly offset by decreased costs of goods sold, lower circuit charges and a decrease in reciprocal
compensation expense related to the FCC Reform Order which mandated rate reductions that became
effective in July of 2012.
Cost of services and products of $191.6 million in 2011 were flat compared to 2010. Reduced network
costs primarily resulting from improved circuit infrastructure and traffic routing and decreased costs of
goods sold, were nearly offset by increased expense associated with promotions.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $12.2 million or 8% to $170.5 million in 2012.
Discrete benefits recorded in 2011 including receipt of insurance proceeds, the refund of certain prior
year regulatory contributions and the settlement of a legal dispute decreased 2011 Selling, general and
administrative expenses by $7.7 million. These discrete benefits in 2011 were the primary cause of the
overall expense decrease from 2010 to 2011, and expense increase from 2011 to 2012. Additionally,
higher employee related and contractor costs, and contributions to the USF contributed to the increase
in 2012.
24
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
Depreciation, amortization and accretion expense
Depreciation, amortization and accretion expense increased $4.9 million or 3% to $150.6 million in 2012
due to increased capital additions.
Depreciation, amortization and accretion expense of $145.7 million in 2011 was flat compared to 2010.
CLEC Operations
Components of Operating Income
Year Ended December 31,
2012
Increase/
(Decrease)
Percentage
Change
2011
Increase/
(Decrease)
Percentage
Change
2010
(Dollars in thousands)
Operating revenues
. . . . . . . . . .
Residential
Commercial
. . . . . . . . .
Wholesale . . . . . . . . . . .
$ 17,192
138,637
17,568
$(4,814)
407
(2,528)
(22)% $ 22,006
138,230
—
20,096
(13)%
$(8,545)
2,018
(1,125)
(28)%
1%
(5)%
$ 30,551
136,212
21,221
Total operating
revenues . . . . . . . .
173,397
(6,935)
(4)%
180,332
(7,652)
(4)%
187,984
Operating expenses
Cost of services and
products (excluding
depreciation,
amortization and
accretion reported
below) . . . . . . . . . . . .
Selling, general and
administrative expenses
Depreciation, amortization
and accretion . . . . . . .
Loss on asset disposals,
net . . . . . . . . . . . . . .
Total operating
89,949
(1,399)
(2)%
91,348
(5,586)
(6)%
96,934
66,886
2,377
4%
64,509
402
1%
64,107
21,969
(7)
—
21,976
(2,703)
(11)%
24,679
485
400
>100%
85
(277)
(77)%
362
expenses . . . . . . . .
179,289
1,371
1%
177,918
(8,164)
Total operating income . . . .
$ (5,892)
$(8,306)
N/M
$ 2,414
$
512
(4)%
27%
186,082
$ 1,902
N/M—Percentage change not meaningful
Operating Revenues
Residential revenues consist of data and voice services to our residential customer base.
Residential revenues decreased $4.8 million or 22% to $17.2 million in 2012, and decreased $8.5 million
or 28% to $22.0 million in 2011. Average residential connections decreased 24% in 2012 and 2011,
respectively, as the CLEC operations continue to implement a strategic shift towards serving primarily a
commercial subscriber base.
Commercial revenues consist of data and voice services to our commercial customer base.
Commercial revenues of $138.6 million in 2012 were essentially unchanged compared to 2011 and 2010.
The revenue increase from the growth in managedIP connections was partially offset by a decrease in
revenue from the decline in legacy voice and data services in both 2012 and 2011.
Wholesale revenues represent charges to other carriers for utilizing TDS Telecom’s network
infrastructure.
25
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
Wholesale revenues decreased $2.5 million or 13% to $17.6 million in 2012 primarily due to lower
average rates due to the FCC Reform Order which mandated rate reductions that became effective July
2012. Wholesale revenues decreased $1.1 million or 5% to $20.1 million in 2011 due to an 11%
reduction in minutes of use, which resulted in a $3.1 million decrease to Wholesale revenues which was
partially offset by a $1.8 million increase in special access revenues.
Operating Expenses
Cost of services and products (excluding Depreciation, amortization and accretion)
Cost of services decreased $1.4 million or 2% to $89.9 million in 2012, and decreased $5.6 million or 6%
to $91.3 million in 2011. Reductions in purchased network services of $2.7 million and $5.5 million in
2012 and 2011, respectively, have been realized as a result of the decline in the residential customer
base. Reciprocal compensation expense decreased $0.9 million in 2012 due to the FCC Reform Order.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $2.4 million or 4% to $66.9 million in 2012
primarily due to an increase in contributions to the USF.
Selling, general and administrative expenses were relatively unchanged in 2011 as increases in payroll
related expense of $1.5 million were mostly offset by decreases in USF charges and bad debt expense.
Depreciation, amortization and accretion expense
Depreciation, amortization and accretion expense of $22.0 million was unchanged at 2012.
Depreciation, amortization and accretion expense decreased $2.7 million or 11% to $22.0 million in 2011
primarily due to accelerated depreciation recorded in 2010 on certain equipment due to technological
obsolescence as well as certain assets becoming fully depreciated in 2011.
HMS Operations
Components of Operating Income
Year Ended December 31,
2012
Increase/ Percentage
(Decrease)
Change
2011
Increase/ Percentage
(Decrease)
Change
2010
(Dollars in thousands)
Total operating revenues . . . . . . . $113,010 $ 65,830
>100% $47,180 $36,630
>100% $10,550
Operating expenses
Cost of services and products
(excluding depreciation,
amortization and accretion
reported below) . . . . . . . . . .
Selling, general and
75,781
52,279
>100% 23,502
19,903
>100% 3,599
administrative expenses . . . .
34,193
18,546
>100% 15,647
11,410
>100% 4,237
Depreciation, amortization and
accretion . . . . . . . . . . . . . . .
. .
Loss on asset disposals, net
20,568
108
7,701
(7)
60% 12,867
115
(6)%
9,843
(82)
>100% 3,024
197
(42)%
Total operating expenses . . .
130,650
78,519
>100% 52,131
41,074
>100% 11,057
Total operating income . . . . . . . . $ (17,640) $(12,689) >(100)% $ (4,951) $ (4,444) >(100)% $ (507)
26
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
Operating Revenues
HMS operating revenues consist of colocation, dedicated hosting, hosted application management,
cloud computing services, and planning, engineering, procurement, installation, sales and management
of IT infrastructure hardware solutions.
HMS revenues increased $65.8 million to $113.0 million in 2012. The acquisitions of OneNeck in June of
2011 and Vital in June of 2012 contributed $64.1 million of incremental 2012 revenues.
HMS revenues increased $36.6 million to $47.2 million in 2011. The acquisitions of VISI and TEAM in
March and December of 2010, respectively and OneNeck in June of 2011 contributed $34.9 million of
the increase in 2011 revenues compared to 2010.
Operating Expenses
Cost of services and products (excluding Depreciation, amortization and accretion)
Cost of services and products increased $52.3 million to $75.8 million in 2012 and increased
$19.9 million to $23.5 million in 2011. Acquisitions increased Cost of services and products $47.7 million
and $19.1 million in 2012 and 2011, respectively.
Selling, general and administrative expense
Selling, general and administrative expense increased $18.5 million to $34.2 million in 2012 and
increased $11.4 million to $15.6 million in 2011. Acquisitions increased Selling, general and
administrative expense $15.1 million and $9.9 million in 2012 and 2011, respectively. Additional expenses
were incurred in both 2012 and 2011 as TDS Telecom develops the infrastructure and products and
services to grow the HMS operations.
Depreciation, amortization and accretion expense
Depreciation, amortization and accretion expense increased $7.7 million to $20.6 million in 2012 and
increased $9.8 million to $12.9 million in 2011 primarily due to acquisitions. Customer list and trade
name amortization contributed $4.4 million and $3.6 million of the increase in 2012 and 2011,
respectively.
INFLATION
Management believes that inflation affects TDS’ business to no greater or lesser extent than the general
economy.
RECENT ACCOUNTING PRONOUNCEMENTS
In general, recent accounting pronouncements did not have and are not expected to have a significant
effect on TDS’ financial condition and results of operations.
See Note 1—Summary of Significant Accounting Policies and Recent Accounting Pronouncements in the
Notes to Consolidated Financial Statements for information on recent accounting pronouncements.
27
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
FINANCIAL RESOURCES
TDS operates a capital- and marketing-intensive business. TDS utilizes cash on hand, cash from
operating activities, cash proceeds from divestitures and disposition of investments, short-term credit
facilities and long-term debt financing to fund its acquisitions (including licenses), construction costs,
operating expenses and share repurchases. Cash flows may fluctuate from quarter to quarter and year to
year due to seasonality, the timing of acquisitions, capital expenditures and other factors. The table
below and the following discussion in this Financial Resources section summarize TDS’ cash flow
activities in 2012, 2011 and 2010.
2012
2011
2010
(Dollars in thousands)
Cash flows from (used in)
Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,105,172
(998,078)
70,112
$1,255,711
(866,089)
(168,030)
$ 1,076,207
(1,208,038)
(200,955)
Net increase (decrease) in cash and cash equivalents . . . . . . . .
$ 177,206
$ 221,592
$ (332,786)
The Divestiture Transaction, as described above, resulted in net Cash used in operating activities of
$0.3 million during the year ended December 31, 2012. Cash flows from operating and financing
activities in future periods will be impacted by the Divestiture Transaction, as described in the Divestiture
Transaction section.
Cash Flows from Operating Activities
The following table presents Adjusted OIBDA and is included for purposes of analyzing changes in
operating activities. Adjusted OIBDA is defined as operating income excluding the effects of:
depreciation, amortization and accretion (OIBDA); the loss on impairment of assets (if any); the net gain
or loss on asset disposals and exchanges (if any); and the net gain or loss on sale of business and
other exit costs (if any). A more detailed description of Adjusted OIBDA is presented with Note 17—
Business Segment Information in the Notes to Consolidated Financial Statements.
(Dollars in thousands)
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add back:
Depreciation, amortization and accretion . . . . . . . . . . . . . . . .
Loss on impairment of assets . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) loss on asset disposals and exchanges, net . . . . . . . . .
(Gain) loss on sale of business and other exit costs, net . . . . .
2012
2011
2010
$ 183,863
$ 362,502
$ 296,091
813,626
515
19,741
21,061
765,776
—
(810)
—
755,649
—
11,763
—
Adjusted OIBDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,038,806
$1,127,468
$1,063,503
Cash flows from operating activities in 2012 were $1,105.2 million, a decrease of $150.5 million from
2011. Significant changes included the following:
(cid:127) Adjusted OIBDA, as shown in the table above, decreased by $88.7 million primarily due to a decrease
in operating income. See discussion in the ‘‘Results of Operations’’ for factors that affected operating
income.
(cid:127) Income tax refunds, net of $62.0 million were recorded in 2012 compared to income tax refunds, net of
$67.0 million in 2011. This resulted in a year-over-year decrease in cash flows of $5.0 million. Federal
tax refunds of $71.5 million were received in 2012 for carrybacks from the 2011 tax year to the 2009
and 2010 tax years. TDS incurred a federal net operating loss in 2011 attributed to 100% bonus
28
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
depreciation applicable to qualified capital expenditures. TDS’ future federal income tax liabilities
associated with the current benefits being realized from bonus depreciation are accrued as a
component of Net deferred income tax liability (noncurrent) in the Consolidated Balance Sheet. TDS
expects federal income tax payments to substantially increase beginning in 2014 and remain at a
higher level for several years as the amount of TDS’ federal tax depreciation deduction substantially
decreases as a result of having accelerated depreciation in earlier years. This expectation considers
the bonus depreciation provisions enacted in January 2013, which includes 50% federal tax bonus
depreciation on qualified capital expenditures in the 2013 tax year and assumes that federal bonus
depreciation provisions are not enacted in future periods. To the extent further federal bonus
depreciation provisions are enacted, this expectation will change.
(cid:127) Changes in Accounts receivable combined with the impact of Bad debts expense required $6.4 million
and $26.8 million in 2012 and 2011, respectively, resulting in a year-over-year increase in cash flows of
$20.4 million. Accounts receivable balances fluctuate based on the timing of customer payments,
promotions and other factors.
(cid:127) Changes in Inventory required $29.9 million in 2012 and $13.4 million in 2011, resulting in a
$16.5 million year-over-year decrease in cash flows. This change was primarily due to higher inventory
levels and a change in inventory mix, resulting in a higher cost per unit.
(cid:127) Changes in Accounts payable required $12.3 million in 2012 and provided $29.3 million in 2011
causing a year-over-year decrease in cash flows of $41.6 million. Changes in Accounts payable were
primarily driven by payment timing differences related to network equipment and device purchases.
(cid:127) Changes in other assets and liabilities required $30.5 million and $4.4 million in 2012 and 2011,
respectively, causing a year-over-year decrease in cash flows of $26.1 million. This change was
primarily due to an increase in LTE-related deferred charges.
Cash flows from operating activities in 2011 were $1,255.7 million, an increase of $179.5 million from
2010. Significant changes included the following:
(cid:127) Adjusted OIBDA, as shown in the table above, increased by $64.0 million primarily due to an increase
in operating income. See discussion in the ‘‘Results of Operations’’ for factors that affected operating
income.
(cid:127) Income tax refunds, net of $67.0 million were recorded in 2011 compared to income tax payments, net
of $87.1 million in 2010 resulting in a $154.1 million year-over-year increase in cash flows. Tax refunds
received in 2011 primarily represented federal refunds related to the 2010 tax year.
(cid:127) Changes in Inventory required $13.4 million in 2011 and provided $40.7 million in 2010, resulting in a
$54.0 million year-over-year decrease in cash flows. This change was primarily due to higher inventory
levels and a change in inventory mix, resulting in a higher cost per unit.
(cid:127) Changes in Accounts payable provided $29.3 million in 2011 and required $47.8 million in 2010
causing a year-over-year increase in cash flows of $77.1 million. Changes in Accounts payable were
driven primarily by payment timing differences related to network equipment and device purchases.
(cid:127) Changes in Customer deposits and deferred revenues provided $35.5 million in 2011 and $6.5 million
in 2010, resulting in a year-over-year increase in cash flows of $29.0 million. This change was primarily
driven by deferred revenues related to the loyalty reward program at U.S. Cellular.
(cid:127) Changes in Other assets and liabilities required $4.4 million in 2011 and provided $93.5 million in
2010, causing a year-over-year net decrease in cash flows of $97.9 million. In 2009, a $38.0 million
deposit was paid to the Internal Revenue Service (‘‘IRS’’) to eliminate any potential interest due to the
IRS subsequent to the date of the deposit. In 2010, after closure of the IRS audit for the tax years 2002
through 2005, the IRS returned TDS’ $38.0 million deposit. This $38.0 million was included in Change
in other assets and liabilities in 2010 as a cash inflow. Changes in amounts due to agents and accrued
29
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
rebates were the primary cause of the remaining $59.9 million year-over-year change in Other assets
and liabilities.
Cash Flows from Investing Activities
TDS makes substantial investments to acquire wireless licenses and properties and to construct and
upgrade telecommunications networks and facilities as a basis for creating long-term value for
shareholders. In recent years, rapid changes in technology and new opportunities have required
substantial investments in potentially revenue-enhancing and cost-reducing upgrades to TDS’ networks.
Capital expenditures (i.e. additions to property, plant and equipment and system development
expenditures) totaled $1,004.6 million in 2012, $987.2 million in 2011 and $755.0 million in 2010. Cash
used for additions to property, plant and equipment is reported in the Consolidated Statement of Cash
Flows and excludes amounts accrued in Accounts payable for capital expenditures at December 31 of
the current year, and includes amounts paid in the current period that were accrued at December 31 of
the prior year. Cash used for additions to property, plant and equipment totaled $995.5 million,
$971.8 million and $739.2 million in 2012, 2011 and 2010, respectively. These expenditures were made
to provide for customer and usage growth (in recent periods, particularly with respect to data usage), to
upgrade service and to take advantage of service-enhancing and cost-reducing technological
developments in order to maintain competitive services.
(cid:127) U.S. Cellular’s capital expenditures totaled $836.7 million in 2012, $782.5 million in 2011 and
$583.1 million in 2010 representing expenditures to construct new cell sites, build-out 4G LTE networks
in certain markets, increase capacity in existing cell sites and switches, develop new and enhance
existing office systems such as the new Billing and Operational Support System (‘‘B/OSS’’) and
customer relationship management platforms, and construct new and remodel existing retail stores.
(cid:127) TDS Telecom’s capital expenditures for its ILEC operations totaled $137.1 million in 2012,
$141.8 million in 2011 and $123.6 million in 2010 representing expenditures to upgrade property, plant
and equipment to provide enhanced services. TDS Telecom’s capital expenditures for its CLEC
operations totaled $21.5 million in 2012, $22.4 million in 2011 and $20.3 million in 2010 for switching
and other network facilities. TDS Telecom’s capital expenditures for its HMS operations totaled
$15.3 million in 2012, $27.0 million in 2011 and $13.4 million in 2010 representing expenditures to
expand data center facilities and purchase IT related equipment to deliver products and services.
Cash payments for acquisitions in 2012, 2011 and 2010 were as follows:
Cash Payments for Acquisitions(1)
2012
2011
2010
(Dollars in thousands)
U.S. Cellular licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Cellular businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
HMS businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Reportable Segment(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$122,690
—
40,692
$ 4,406
19,367
95,865
— (14,130)
$17,101
—
64,590
—
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$163,382
$105,508
$81,691
(1) Cash amounts paid for the acquisitions may differ from the purchase price due to cash acquired in
the transactions and cash payments remitted in periods subsequent to the respective transactions.
(2) Cash held by Airadigm at acquisition. TDS acquired 63% of Airadigm on September 23, 2011.
In March 2012, U.S. Cellular sold the majority of the assets and liabilities of a wireless market for
$49.8 million in cash. See Note 7—Acquisitions, Divestitures and Exchanges in the Notes to
Consolidated Financial Statements for additional information related to this sale.
30
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
TDS invested $120.0 million, $180.9 million and $493.8 million in 2012, 2011 and 2010, respectively, in
U.S. Treasury securities and corporate notes with maturities greater than three months from the
acquisition date. TDS realized cash proceeds of $243.4 million, $393.2 million and $106.3 million in 2012,
2011 and 2010, respectively, related to the maturities of its investments in U.S. Treasury securities,
corporate notes and certificates of deposit.
Cash Flows from Financing Activities
Cash flows from financing activities primarily reflect repayment of and proceeds from short-term and
long-term debt balances, dividends to shareholders, distributions to noncontrolling interests, cash used
to repurchase Common Shares and cash proceeds from reissuance of Common Shares pursuant to
stock-based compensation plans.
In September 2011, Airadigm paid $32.7 million to the FCC in satisfaction of amounts due pursuant to
Airadigm’s plan of reorganization. See Note 7—Acquisitions, Divestitures and Exchanges in the Notes to
Consolidated Financial Statements for additional information related to this acquisition.
In November 2012, TDS issued $195.0 million of 5.875% Senior Notes due 2061, and paid related debt
issuance costs of $7.1 million.
In May 2011, U.S. Cellular issued $342.0 million of 6.95% Senior Notes due 2060, and paid related debt
issuance costs of $11.0 million. The net proceeds from the 6.95% Senior Notes were used primarily to
redeem $330.0 million of U.S. Cellular’s 7.5% Senior Notes in June 2011. The redemption price of the
7.5% Senior Notes was equal to 100% of the principal amount plus accrued and unpaid interest thereon
to the redemption date.
In March 2011, TDS issued $300.0 million of 7% Senior Notes due 2060, and paid related debt issuance
costs of $9.7 million. The net proceeds from the 7% Senior Notes were primarily used to redeem
$282.5 million of TDS’ 7.6% Series A Notes in May 2011. The redemption price of the 7.6% Series A
Notes was equal to 100% of the outstanding aggregate principal amount, plus accrued and unpaid
interest thereon to the redemption date.
In November 2010, TDS issued $225.0 million aggregate principal amount of 6.875% Senior Notes due in
2059, and paid related debt issuance costs of $7.6 million. In December 2010, TDS redeemed
$217.5 million aggregate principal amount of the outstanding $500.0 million aggregate principal amount
of its 7.6% Series A Senior Notes due 2041. The redemption price of $222.0 million was 100% of the
outstanding aggregate principal amount, plus accrued and unpaid interest thereon until the redemption
date. The redemption was financed with the net proceeds from the issuance of $225.0 million in
aggregate principal amount of TDS’ 6.875% Senior Notes.
Free Cash Flow
The following table presents Free cash flow. Free cash flow is defined as Cash flows from operating
activities less Cash used for additions to property, plant and equipment. Free cash flow is a non-GAAP
financial measure. TDS believes that Free cash flow as reported by TDS may be useful to investors and
other users of its financial information in evaluating the amount of cash generated by business
operations, after Cash used for additions to property, plant and equipment.
(Dollars in thousands)
Cash flows from operating activities . . . . . . . . . . . . . . . . . . . . .
. . . . .
Cash used for additions to property, plant and equipment
$1,105,172
(995,517)
$1,255,711
(971,759)
$1,076,207
(739,222)
Free cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 109,655
$ 283,952
$ 336,985
2012
2011
2010
See Cash flows from Operating Activities and Cash flows from Investing Activities for details on the
changes to the components of Free cash flow.
31
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
LIQUIDITY AND CAPITAL RESOURCES
TDS believes that existing cash and investment balances, funds available under its revolving credit
facilities and expected cash flows from operating and investing activities provide substantial liquidity and
financial flexibility for TDS to meet its normal financing needs (including working capital, construction and
development expenditures and share repurchases under approved programs) for the foreseeable future.
In addition, TDS and its subsidiaries may access public and private capital markets to help meet their
financing needs.
U.S. Cellular’s profitability historically has been lower in the fourth quarter as a result of significant
promotional spending during the holiday season. Changes in these or other economic factors could
have a material adverse effect on demand for TDS’ products and services and on TDS’ financial
condition and results of operations.
TDS cannot provide assurances that circumstances that could have a material adverse effect on its
liquidity or capital resources will not occur. Economic conditions, changes in financial markets or other
factors could restrict TDS’ liquidity and availability of financing on terms and prices acceptable to TDS,
which could require TDS to reduce its construction, development, acquisition or share repurchase
programs. Such reductions could have a material adverse effect on TDS’ business, financial condition or
results of operations.
Cash and Cash Equivalents
At December 31, 2012, TDS had $740.5 million in Cash and cash equivalents. Of this amount,
$378.4 million consisted of Cash and cash equivalents held by U.S. Cellular. Cash and cash equivalents
include cash and short-term, highly liquid investments with original maturities of three months or less.
The primary objective of TDS’ Cash and cash equivalents investment activities is to preserve principal. At
December 31, 2012, the majority of TDS’ Cash and cash equivalents was held in money market funds
that invest exclusively in U.S. Treasury securities or in repurchase agreements fully collateralized by such
obligations. TDS monitors the financial viability of the money market funds and direct investments in
which it invests and believes that the credit risk associated with these investments is low.
Short-term and Long-term Investments
At December 31, 2012, TDS had $115.7 million in Short-term investments and $50.3 million in Long-term
investments. Of this amount, $100.7 million and $50.3 million consisted of Short-term investments and
Long-term investments, respectively, held by U.S. Cellular. Short-term and Long-term investments consist
primarily of U.S. Treasury securities which are designated as held-to-maturity investments and recorded
at amortized cost in the Consolidated Balance Sheet. For these investments, TDS’ objective is to earn a
higher rate of return on funds that are not anticipated to be required to meet liquidity needs in the near
term, while maintaining a low level of investment risk. See Note 3—Fair Value Measurements in the Notes
to Consolidated Financial Statements for additional details on Short-term and Long-term investments.
Revolving Credit Facilities
TDS and U.S. Cellular have revolving credit facilities available for general corporate purposes.
In connection with U.S. Cellular’s revolving credit facility, TDS and U.S. Cellular entered into a
subordination agreement dated December 17, 2010 together with the administrative agent for the lenders
under U.S. Cellular’s revolving credit facility. At December 31, 2012, no U.S. Cellular debt was
subordinated pursuant to this subordination agreement.
TDS’ and U.S. Cellular’s interest cost on their revolving credit facilities is subject to increase if their
current credit ratings from nationally recognized credit rating agencies are lowered, and is subject to
decrease if the ratings are raised. The credit facilities would not cease to be available nor would the
maturity date accelerate solely as a result of a downgrade in TDS’ or U.S. Cellular’s credit rating.
32
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
However, a downgrade in TDS’ or U.S. Cellular’s credit rating could adversely affect their ability to renew
the credit facilities or obtain access to other credit facilities in the future.
As of December 31, 2012, TDS’ and U.S. Cellular’s credit ratings from the nationally recognized credit
rating agencies remained at investment grade.
The following table summarizes the terms of such revolving credit facilities as of December 31, 2012:
TDS
U.S. Cellular
(Dollars in millions)
300.0
Maximum borrowing capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.2
Letter of credit outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
299.8
Amount available for use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agreement date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 2010 December 2010
Maturity date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 2017 December 2017
400.0
0.2
399.8
$
$
$
$
$
$
TDS and U.S. Cellular may seek to extend the maturity date from time to time. In 2012, each of the TDS
and U.S. Cellular revolving credit facilities were amended to extend the maturity date from December
2015 to December 2017.
The continued availability of the revolving credit facilities requires TDS and U.S. Cellular to comply with
certain negative and affirmative covenants, maintain certain financial ratios and make representations
regarding certain matters at the time of each borrowing. TDS and U.S. Cellular believe they were in
compliance as of December 31, 2012 with all of the covenants and requirements set forth in their
revolving credit facilities.
Long-Term Financing
TDS and its subsidiaries had the following debt outstanding as of December 31, 2012:
Issuance Date
Maturity Date
Call Date(1)
Aggregate
Principal Amount
(Dollars in thousands)
TDS:
Unsecured Senior Notes
6.625% . . . . . . . . . . . . March 2005
6.875% . . . . . . . . . . . . November 2010
7.0% . . . . . . . . . . . . . . March 2011
5.875% . . . . . . . . . . . . November 2012
U.S. Cellular:
Unsecured Senior Notes
March 2010
March 2045
November 2059 November 2015
March 2060
December 2061 December 2017
March 2016
$116,250
225,000
300,000
195,000
6.7% . . . . . . . . . . . . . . December 2003 and December 2033 December 2003
$544,000
June 2004
6.95% . . . . . . . . . . . . . May 2011
May 2060
May 2016
342,000
(1) U.S. Cellular may redeem the 6.7% Senior Notes, in whole or in part, at any time prior to maturity at
a redemption price equal to the greater of (a) 100% of the principal amount of such notes, plus
accrued and unpaid interest, or (b) the sum of the present values of the remaining scheduled
payments of principal and interest thereon discounted to the redemption date on a semi-annual
basis at the Treasury Rate plus 30 basis points. TDS may redeem its callable notes and U.S. Cellular
may redeem its 6.95% Senior Notes, in whole or in part at any time after the respective call date, at
a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid
interest.
33
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
TDS and its subsidiaries’ long-term debt and indentures do not contain any provisions resulting in
acceleration of the maturities of outstanding debt in the event of a change in TDS’ credit rating. However,
a downgrade in TDS’ credit rating could adversely affect its ability to obtain long-term debt financing in
the future. TDS believes it and its subsidiaries were in compliance as of December 31, 2012 with all
covenants and other requirements set forth in long-term debt indentures. TDS and U.S. Cellular have not
failed to make nor do they expect to fail to make any scheduled payment of principal or interest under
such indentures.
The long-term debt principal payments due for the next five years represent less than 1% of the total
long-term debt obligation at December 31, 2012. Refer to Market Risk—Long-Term Debt for additional
information regarding required principal payments and the weighted average interest rates related to
TDS’ long-term debt.
TDS, at its discretion, may from time to time seek to retire or purchase its outstanding debt through cash
purchases and/or exchanges for other securities, in open market purchases, privately negotiated
transactions, tender offers, exchange offers or otherwise. Such repurchases or exchanges, if any, will
depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors.
The amounts involved may be material.
TDS and U.S. Cellular each have effective shelf registration statements on Form S-3 that may be used to
issue senior debt securities. The proceeds from any such issuances may be used for general corporate
purposes, including to finance the redemption of any of the above existing debt. The TDS shelf
registration statement is an automatic shelf registration that permits TDS to issue at any time and from
time to time senior debt securities in one or more offerings in an indeterminate amount. The U.S. Cellular
shelf registration statement permits U.S. Cellular to issue at any time and from time to time senior debt
securities in one or more offerings up to an aggregate principal amount of $500 million. The ability of
TDS or U.S. Cellular to complete an offering pursuant to such shelf registration statements is subject to
market conditions and other factors at the time.
Capital Expenditures
U.S. Cellular’s capital expenditures for 2013 are expected to be approximately $600 million. These
expenditures are expected to be for the following general purposes:
(cid:127) Expand and enhance U.S. Cellular’s network coverage in its service areas, including providing
additional capacity to accommodate increased network usage, principally data usage, by current
customers;
(cid:127) Continue to deploy 4G LTE technology in certain markets;
(cid:127) Enhance U.S. Cellular’s retail store network;
(cid:127) Develop and enhance office systems; and
(cid:127) Develop new billing and other customer management related systems and platforms.
TDS Telecom’s anticipated capital expenditures for 2013 are expected to be approximately $155 million.
These expenditures are expected to be for the following general purposes:
(cid:127) Process and productivity initiatives;
(cid:127) Increased network and product capabilities for broadband services;
(cid:127) Expansion of IPTV;
(cid:127) Success-based spending to sustain managedIP and IPTV growth;
(cid:127) Development of HMS products and services; and
(cid:127) Fund its share for projects approved under the Recovery Act.
34
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
TDS plans to finance its capital expenditure programs for 2013 using primarily cash flows from operating
activities, and as necessary, existing cash balances and short-term investments.
Acquisitions, Divestitures and Exchanges
TDS assesses business interests on an ongoing basis with a goal of improving the competitiveness of its
operations and maximizing its long-term return on investment. As part of this strategy, TDS reviews
attractive opportunities to acquire additional wireless operating markets, telecommunications companies,
wireless spectrum, HMS businesses, cable businesses and other possible lines of business. In addition,
TDS may seek to divest outright or include in exchanges for other interests those interests that are not
strategic to its long-term success.
TDS also may be engaged from time to time in negotiations relating to the acquisition, divestiture or
exchange of companies, strategic properties, wireless spectrum and other possible businesses. In
general, TDS may not disclose such transactions until there is a definitive agreement. See ‘‘Divestiture
Transaction’’ above in this Management’s Discussion and Analysis of Financial Condition and Results of
Operations and Note 7—Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial
Statements for details on significant transactions in 2012 and 2011.
Variable Interest Entities
TDS consolidates certain entities because they are ‘‘variable interest entities’’ under accounting principles
generally accepted in the United States of America (‘‘GAAP’’). See Note 5—Variable Interest Entities in
the Notes to Consolidated Financial Statements for the details of these variable interest entities. TDS may
elect to make additional capital contributions and/or advances to these variable interest entities in future
periods in order to fund their operations.
Share Repurchase Programs
TDS and U.S. Cellular have repurchased their Common Shares, subject to their repurchase programs.
U.S. Cellular expects to continue to repurchase its Common Shares, subject to the repurchase program.
The TDS repurchase program expired in November 2012. TDS determines whether to repurchase shares
from time to time based on many considerations, including cash needed for other known or possible
requirements, the stock price, market conditions, debt rating considerations, business forecasts,
business plans, macroeconomic conditions, share issuances under compensation plans, provisions in
governing and legal documents and other legal requirements and other facts and circumstances. Subject
to these considerations, TDS may approve the repurchase of its shares from time to time when
circumstances warrant. For additional information related to repurchases made during 2012, 2011 and
2010 and to the U.S. Cellular repurchase authorization, see Note 15—Common Shareholders’ Equity in
the Notes to Consolidated Financial Statements.
On January 13, 2012, TDS shareholders approved a Share Consolidation Amendment to the Restated
Certificate of Incorporation of TDS. See Note 15—Common Shareholders’ Equity in the Notes to
Consolidated Financial Statements for additional information.
35
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
Contractual and Other Obligations
At December 31, 2012, the resources required for contractual obligations were as follows:
(Dollars in millions)
Long-term debt obligations(1)
. . . . . . . . . . . . .
Interest payments on long-term debt obligations
Operating leases(2) . . . . . . . . . . . . . . . . . . . . .
Capital leases . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase obligations(3)(4) . . . . . . . . . . . . . . . .
Payments Due by Period
Total
$1,729.8
4,452.2
1,427.5
9.4
1,040.3
Less Than
1 Year
$
1.1
116.1
171.4
0.6
564.6
1 - 3 Years
3 - 5 Years
$
2.6
232.1
266.3
1.2
290.2
$
2.8
231.9
179.1
1.2
120.7
More Than
5 Years
$1,723.3
3,872.1
810.7
6.4
64.8
$8,659.2
$853.8
$792.4
$535.7
$6,477.3
(1)
(2)
(3)
Includes current and long-term portions of debt obligations. The total long-term debt obligation
differs from Long-term debt in the Consolidated Balance Sheet due to capital leases and the
$11.8 million unamortized discount related to U.S. Cellular’s 6.7% Senior Notes. See Note 12—Debt
in the Notes to Consolidated Financial Statements for additional information.
Includes future lease costs related to office space, retail sites, cell sites and equipment. See
Note 14—Commitments and Contingencies in the Notes to Consolidated Financial Statements for
additional information.
Includes obligations payable under non-cancellable contracts, commitments for network facilities and
services, agreements for software licensing and long-term marketing programs. As described more
fully in the ‘‘Divestiture Transaction’’ section of Management’s Discussion and Analysis of Financial
Condition and Results of Operations and in Note 7—Acquisitions, Divestitures and Exchanges in the
Notes to Consolidated Financial Statements, U.S. Cellular expects to incur network-related exit costs
in the Divestiture Markets as a result of the transaction, including: (i) costs to decommission cell
sites and mobile telephone switching office (‘‘MTSO’’) sites, (ii) costs to terminate real property
leases and (iii) costs to terminate certain network access arrangements in the subject markets. The
impacts of these exit activities on TDS’ purchase obligation are reflected in the table above only to
the extent that agreements were consummated at December 31, 2012.
(4) Does not include reimbursable amounts TDS Telecom will provide to complete projects under the
American Recovery and Reinvestment Act of 2009. TDS Telecom will receive $105.1 million in federal
grants and will provide $30.9 million of its own funds to complete 44 projects. As of December 31,
2012, TDS Telecom has expended $15.8 million of the $30.9 million on these projects. Under the
terms of the grants, the projects must be completed by June of 2015.
The table above excludes liabilities related to ‘‘unrecognized tax benefits’’ as defined by GAAP because
TDS is unable to predict the period of settlement of such liabilities. Such unrecognized tax benefits were
$28.4 million at December 31, 2012. See Note 4—Income Taxes in the Notes to Consolidated Financial
Statements for additional information on unrecognized tax benefits.
Agreements
See Agreements in Note 14—Commitments and Contingencies in the Notes to Consolidated Financial
Statements.
Off-Balance Sheet Arrangements
TDS had no transactions, agreements or other contractual arrangements with unconsolidated entities
involving ‘‘off-balance sheet arrangements,’’ as defined by Securities and Exchange Commission (‘‘SEC’’)
rules, that had or are reasonably likely to have a material current or future effect on its financial
36
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
Dividends
TDS paid quarterly dividends per outstanding share of $0.1225 in 2012, $0.1175 in 2011 and $0.1125 in
2010. These dividends per share amounts for 2011 and 2010 have not been retroactively adjusted to
reflect the impact of the Share Consolidation Amendment. See Note 15—Common Shareholders’ Equity
in the Notes to Consolidated Financial Statements for additional information. TDS has no current plans to
change its policy of paying dividends.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
TDS prepares its consolidated financial statements in accordance with GAAP. TDS’ significant accounting
policies are discussed in detail in Note 1—Summary of Significant Accounting Policies and Recent
Accounting Pronouncements in the Notes to Consolidated Financial Statements.
Management believes the application of the following critical accounting policies and the estimates
required by such application reflect its most significant judgments and estimates used in the preparation
of TDS’ consolidated financial statements. Management has discussed the development and selection of
each of the following accounting policies and related estimates and disclosures with the Audit Committee
of TDS’ Board of Directors.
Goodwill and Licenses
See the Goodwill and Licenses Impairment Assessment section of Note 1—Summary of Significant
Accounting Policies and Recent Accounting Pronouncements in the Notes to Consolidated Financial
Statements for information on Goodwill and Licenses impairment testing policies and methods.
See Note 8—Intangible Assets in the Notes to Consolidated Financial Statements for additional
information related to Goodwill and Licenses activity in 2012 and 2011.
During the second quarter of 2012, a sustained decrease in TDS’ stock price resulted in a triggering
event, as defined by GAAP, requiring an interim impairment test of Licenses and Goodwill as of June 30,
2012. Based on this test, TDS concluded that the entire amount of Goodwill related to Airadigm was
impaired resulting in an impairment loss of $0.5 million and no impairment of Licenses.
Goodwill
U.S. Cellular
U.S. Cellular tests Goodwill for impairment at the level of reporting referred to as a ‘‘reporting unit.’’ For
purposes of impairment testing of Goodwill in 2012, U.S. Cellular identified five reporting units based on
geographic service areas (all of which are included in TDS’ wireless reportable operating segment).
There were no changes to U.S. Cellular’s reporting units or to U.S. Cellular’s overall Goodwill impairment
testing methodology between November 1, 2012 and November 1, 2011.
A discounted cash flow approach was used to value each reporting unit, using value drivers and risks
specific to the industry and current economic factors. The cash flow estimates incorporated assumptions
that market participants would use in their estimates of fair value and may not be indicative of U.S.
Cellular specific assumptions. The most significant assumptions made in this process were the revenue
growth rate, the long-term and terminal revenue growth rate, discount rate and projected capital
expenditures. Also, discounted cash flows related to the Central Region exclude projected cash flows
associated with the Divestiture Markets, as the assets associated with such markets, including Goodwill,
were excluded from the carrying value of the Central Region reporting unit for purposes of conducting
37
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
the Goodwill impairment test as of November 1, 2012. These assumptions were as follows for
November 1, 2012 and 2011:
Key Assumptions
November 1,
2012
November 1,
2011
Weighted-average expected revenue growth rate (next five years) . . . . . . . . . .
Weighted-average long-term and terminal revenue growth rate (after year five) .
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average annual capital expenditures (millions) . . . . . . . . . . . . . . . . . . . . . . . .
2.4%
2.0%
11.0%
$ 559
3.6%
2.0%
10.5%
$ 609
The decrease in the weighted-average expected revenue growth rate for the next five years was due to a
decrease in projected customer penetration growth rate of market participants. In spite of lower overall
market interest rates, the discount rate used to estimate cash flows increased from 10.5% in November
2011 to 11.0% in November 2012 due to a shift toward more equity in the representative capital structure
of market participants.
The carrying value of each U.S. Cellular reporting unit at TDS as of November 1, 2012, as impacted for
the Divestiture Transaction, was as follows:
Reporting Unit
Carrying Value
at TDS(1)
(Dollars in millions)
Central Region(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mid-Atlantic Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New England Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York Region(3)
Northwest Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 215
788
268
172
344
$1,787
(1) Under previous business combination guidance in effect prior to January 1, 2009, TDS had recorded
Goodwill as a result of accounting for U.S. Cellular’s purchases of U.S. Cellular Common Shares as
step acquisitions using purchase accounting. As a result, the carrying values of the reporting units
differ between U.S. Cellular and TDS. The carrying value of the reporting units at U.S. Cellular was
$1,870 million at November 1, 2012.
(2) Excludes $160 million of Goodwill and Licenses of Divestiture Markets, which is classified as Assets
held for sale at December 31, 2012 and was tested separately for impairment.
(3) Operated by Verizon Wireless.
As of November 1, 2012, the fair values of the reporting units exceeded their respective carrying values
by amounts ranging from 19% to 166% of the respective carrying values. Therefore, no impairment of
Goodwill existed. Given that the fair values of the respective reporting units exceed their respective
carrying values, provided all other assumptions remained the same, the discount rate would have to
increase to a range of 12.4% to 14.2% to yield estimated fair values of reporting units that equal their
respective carrying values at November 1, 2012. Further, assuming all other assumptions remained the
same, the terminal growth rate assumptions would need to decrease to negative amounts, ranging from
negative 9.0% to negative 1.3%, to yield estimates of fair value equal to the carrying values of the
respective reporting units at November 1, 2012.
38
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
TDS Telecom
TDS Telecom has recorded Goodwill as a result of the acquisition of ILEC companies and HMS
companies. For purposes of the annual impairment testing, TDS Telecom has four reporting units: one
reporting unit within its ILEC reportable operating segment and three reporting units within its HMS
reportable operating segment. For purposes of its annual impairment testing of Goodwill, as of
November 1, 2011, TDS Telecom identified two reporting units within its ILEC reportable operating
segment. TDS Telecom’s change in reporting units resulted from additional acquisitions and TDS’
reevaluation of its reportable business segments, more fully described in Note 1—Summary of Significant
Accounting Policies and Recent Accounting Pronouncements. TDS Telecom’s overall Goodwill
impairment testing methodology changed between November 1, 2012 and November 1, 2011. Over time,
the historical companies used by TDS ILEC as peers have added additional lines of business to their
traditional wireline activities, predominately either HMS or CLEC operations. As TDS Telecom has
separated their HMS and CLEC operations into different segments and therefore different reporting units,
the peer group operations are not as comparable to TDS ILEC operations as they were in prior years. In
the fourth quarter of 2012, management added the discounted cash flow approach as an additional
method to address this development.
In 2012, the discounted cash flow approach and publicly-traded guideline company method were used
to value the ILEC and each of the HMS reporting units. The discounted cash flow approach uses value
drivers and risks specific to the industry and current economic factors. The cash flow estimates
incorporated assumptions that market participants would use in their estimates of fair value and may not
be indicative of TDS Telecom specific assumptions. The most significant assumptions made in this
process were the revenue growth rate, the long-term and terminal revenue growth rate, discount rate and
projected capital expenditures. These assumptions were as follows for November 1, 2012:
Key Assumptions
ILEC
HMS
Average expected revenue growth rate (next five years) . . . . . . . . . . . . . . . . . . .
Average long-term and terminal revenue growth rate . . . . . . . . . . . . . . . . . . . . .
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures as a percentage of revenue . . . . . . . . . . . . . . . . . . . . . . . .
(0.4)% 8.5-23.0%
—% 1.5-3.0%
7.0% 11.0-13.0%
12.5-16.9% 0.4-44.9%
The publicly-traded guideline company method develops an indication of fair value by calculating
average market pricing multiples for selected publicly-traded companies using multiples of: Revenue,
Earnings before Interest, Taxes, and Depreciation and Amortization, and Earnings before Interest and
Taxes. The developed multiples were applied to applicable financial measures of the respective reporting
unit to determine fair value. The discounted cash flow approach and publicly-traded guideline company
method were weighted to arrive at the total fair value used for impairment testing.
In 2011, the publicly-traded guideline company method and recent transaction method were used to
value the ILEC and HMS reporting units tested. The recent transaction method calculates market pricing
multiples based upon recent acquisitions of similar businesses. In both the publicly-traded guideline
company method and the recent transaction method, the developed multiples were applied to applicable
financial measures of the respective reporting unit to determine fair value. Given the nature of this
methodology, no specific consideration of the economic environment was considered since those factors
would be inherent in the multiples used.
As of November 1, 2012, the fair value of the ILEC reporting unit exceeded its carrying value by 34% of
its value. Therefore, no impairment of goodwill existed. Given that the fair value of the ILEC reporting unit
exceeded its carrying value, provided all other assumptions remained the same, the discount rate would
have to increase to 10.0% for the discounted cash flow approach to yield an estimated fair value of the
ILEC reporting unit that equals its carrying value at November 1, 2012. Further, assuming all other
assumptions remained the same, the long-term and terminal revenue growth rate assumption would
39
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
need to decrease to negative 6.2%, for the discounted cash flow approach to yield an estimate of fair
value equal to the carrying value of the ILEC reporting unit at November 1, 2012.
As of November 1, 2012 the fair values of the HMS reporting units exceeded their respective carrying
values by amounts ranging from 5% to 76% of the respective carrying values. Therefore, no impairment
of Goodwill existed. Given that the fair values of the respective reporting units exceed their respective
carrying values, provided all other assumptions remained the same, the discount rate would have to
increase to a range of 11.8% to 15.3% for the discounted cash flow approach to yield estimated fair
values of the HMS reporting units that equal their respective carrying values at November 1, 2012.
Further, assuming all other assumptions remained the same, the long-term and terminal revenue growth
rate assumptions would need to decrease to amounts ranging from positive 0.6% to negative 2.8%, for
the discounted cash flow approach to yield estimates of fair value equal to the carrying values of the
respective HMS reporting units at November 1, 2012.
Licenses
U.S. Cellular tests licenses for impairment at the level of reporting referred to as a ‘‘unit of accounting.’’
For purposes of its impairment testing of licenses as of November 1, 2012, U.S. Cellular separated its
FCC licenses into thirteen units of accounting based on geographic service areas. As of November 1,
2011, U.S. Cellular separated its FCC licenses into twelve units of accounting based on geographic
service areas. In both 2012 and 2011 testing, seven of the units of accounting represented geographic
groupings of licenses which, because they were not being utilized and, therefore, were not expected to
generate cash flows from operating activities in the foreseeable future, were considered separate units of
accounting for purposes of impairment testing.
Developed operating market licenses (‘‘built licenses’’)
U.S. Cellular applies the build-out method to estimate the fair values of built licenses. The most
significant assumptions applied for purposes of the November 1, 2012 and 2011 licenses impairment
assessments were as follows:
Key Assumptions
Build-out period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term EBITDA margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term capital expenditure requirement (as a % of service revenue) . . . . . .
Long-term service revenue growth rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer penetration rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 1,
2012
November 1,
2011
7 years
7 years
8.5%
33.9%
14.5%
2.0%
13-17%
9.0%
32.2%
13.0%
2.0%
11-16%
The discount rate used to estimate the fair value of built licenses was based on market participant capital
structures, participant risk profiles, market conditions and risk premium assumptions. The decline from
9.0% in November 2011 to 8.5% in November 2012 primarily reflects the general decline in market
interest rates during that period as well as revised cash flow assumptions based on forecasts of market
participants.
The discount rate used in the valuation of licenses is less than the discount rate used in the valuation of
reporting units for purposes of goodwill impairment testing. That is primarily because the discount rate
used for licenses does not include a company-specific risk premium as a wireless license would not be
subject to such risk.
The discount rate is the most significant assumption used in the build-out method. The discount rate is
estimated based on the overall risk-free interest rate adjusted for industry participant information, such as
a typical capital structure (i.e., debt-equity ratio), the after-tax cost of debt and the cost of equity. The
cost of equity takes into consideration the average risk specific to individual market participants.
40
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
The results of the licenses impairment test at November 1, 2012 did not result in the recognition of a loss
on impairment. Given that the fair values of the licenses exceed their respective carrying values, the
discount rate would have to increase to a range of 8.6% to 9.1% to yield estimated fair values of licenses
in the respective units of accounting that equal their respective carrying values at November 1, 2012. An
increase of 10 basis points to the assumed discount rate would cause less than a $6 million impairment
whereas an increase of 50 basis points would cause an impairment of approximately $36 million.
Non-operating market licenses (‘‘unbuilt licenses’’)
For purposes of performing impairment testing of unbuilt licenses, U.S. Cellular prepares estimates of fair
value by reference to prices paid in recent auctions and market transactions where available. If such
information is not available, the fair value of the unbuilt licenses is assumed to have changed by the
same percentage, and in the same direction, that the fair value of built licenses measured using the
build-out method changed during the period. There was no impairment loss recognized related to unbuilt
licenses as a result of the November 1, 2012 licenses impairment test.
Carrying Value of Licenses
The carrying value of licenses at November 1, 2012 was as follows:
Unit of Accounting(1)
Carrying Value
(Dollars in millions)
U.S. Cellular—Developed Operating markets (6 units of accounting)
Central Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Licenses to be transferred to Assets held for sale as a result of the Divestiture Transaction
Mid-Atlantic Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New England Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Northwest Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York Region(2)
U.S. Cellular—Non-operating markets (7 units of accounting)
North Northwest (2 states) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South Northwest (2 states)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
North Central (5 states) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South Central (5 states) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
East Central (5 states) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mid-Atlantic (8 states) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mississippi Valley (13 states) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 693
141
228
108
67
1
3
2
51
24
127
50
43
Total(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,538
TDS Telecom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Airadigm(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
15
Total(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,556
(1) U.S. Cellular participated in spectrum auctions indirectly through its interests in Aquinas Wireless L.P.
(‘‘Aquinas Wireless’’) and King Street Wireless L.P. (‘‘King Street Wireless’’), collectively, the ‘‘limited
partnerships.’’ Interests in other limited partnerships that participated in spectrum auctions have
since been acquired. Each limited partnership participated in and was awarded spectrum licenses in
one of two separate spectrum auctions (FCC Auctions 78 and 73). All of the units of accounting
above, except Mississippi Valley and the New York Region, include licenses awarded to the limited
partnerships.
(2) Operated by Verizon Wireless.
41
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
(3) Under previous business combination guidance in effect prior to January 1, 2009, TDS had recorded
licenses as a result of accounting for U.S. Cellular’s purchases of U.S. Cellular Common Shares as
step acquisitions using purchase accounting. As a result, the carrying values of the units of
accounting for the developed operating markets differ between U.S. Cellular and TDS. The total
carrying value of all units of accounting at U.S. Cellular was $1,532 million at November 1, 2012.
(4) TDS acquired 63% of Airadigm on September 23, 2011. See Note 7—Acquisitions, Divestitures and
Exchanges in the Notes to Consolidated Financial Statements for additional information on Airadigm.
(5) Between November 1, 2012 and December 31, 2012, TDS reclassified licenses to Assets held for
sale as a result of the Divestiture Transaction in the amount of $140.6 million, obtained licenses
through acquisitions in the amount of $64.2 million and capitalized interest on certain licenses
pursuant to current network build-outs in the amount of $0.8 million.
Licenses with an aggregate carrying value of $70.2 million were in units of accounting where the fair
value exceeded the carrying value by amounts less than 10% of the carrying value. Any further declines
in the fair value of such licenses in future periods could result in the recognition of impairment losses on
such licenses and any such impairment losses would have a negative impact on future results of
operations. The impairment losses on licenses are not expected to have a future impact on liquidity. TDS
is unable to predict the amount, if any, of future impairment losses attributable to licenses. Further,
historical operating results, particularly amounts related to impairment losses, are not indicative of future
operating results.
Income Taxes
The amounts of income tax assets and liabilities, the related income tax provision and the amount of
unrecognized tax benefits are critical accounting estimates because such amounts are significant to TDS’
financial condition and results of operations.
The preparation of the consolidated financial statements requires TDS to calculate a provision for income
taxes. This process involves estimating the actual current income tax liability together with assessing
temporary differences resulting from the different treatment of items for tax purposes. These temporary
differences result in deferred income tax assets and liabilities, which are included in TDS’ Consolidated
Balance Sheet. TDS must then assess the likelihood that deferred income tax assets will be realized
based on future taxable income and, to the extent management believes that realization is not likely,
establish a valuation allowance. Management’s judgment is required in determining the provision for
income taxes, deferred income tax assets and liabilities and any valuation allowance that is established
for deferred income tax assets.
TDS recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a position are measured
based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate
resolution.
See Note 4—Income Taxes in the Notes to Consolidated Financial Statements for details regarding TDS’
income tax provision, deferred income taxes and liabilities, valuation allowances and unrecognized tax
benefits, including information regarding estimates that impact income taxes.
Loyalty Reward Program
See the Revenue Recognition—U.S. Cellular section of Note 1—Summary of Significant Accounting
Policies and Recent Accounting Pronouncements in the Notes to Consolidated Financial Statements for a
description of this program and the related accounting.
U.S. Cellular follows the deferred revenue method of accounting for its loyalty reward program. Under
this method, revenue allocated to loyalty reward points is fully deferred as U.S. Cellular does not yet
have sufficient historical data in which to estimate any portion of loyalty reward points that will not be
42
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
redeemed. Revenue is recognized at the time of customer redemption or when such points have been
depleted via a maintenance charge. U.S. Cellular periodically reviews and will revise the redemption and
depletion rates as appropriate based on history and related future expectations.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Note 19—Certain Relationships and Related Transactions in the Notes to Consolidated Financial
Statements.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR CAUTIONARY STATEMENT
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other
sections of this Annual Report contain statements that are not based on historical facts, including the
words ‘‘believes,’’ ‘‘anticipates,’’ ‘‘intends,’’ ‘‘expects’’ and similar words. These statements constitute
‘‘forward-looking statements’’ within the meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties and other factors that
may cause actual results, events or developments to be significantly different from any future results,
events or developments expressed or implied by such forward-looking statements. Such factors include,
but are not limited to, the following risks:
(cid:127) Intense competition in the markets in which TDS operates could adversely affect TDS’ revenues or
increase its costs to compete.
(cid:127) A failure by TDS to successfully execute its business strategy (including planned acquisitions,
divestitures and exchanges) or allocate resources or capital could have an adverse effect on TDS’
business, financial condition or results of operations.
(cid:127) A failure by TDS’ service offerings to meet customer expectations could limit TDS’ ability to attract and
retain customers and could have an adverse effect on TDS’ business, financial condition or results of
operations.
(cid:127) TDS’ system infrastructure may not be capable of supporting changes in technologies and services
expected by customers, which could result in lost customers and revenues.
(cid:127) An inability to obtain or maintain roaming arrangements with other carriers on terms that are acceptable
to TDS could have an adverse effect on TDS’ business, financial condition or results of operations.
(cid:127) TDS currently receives a significant amount of roaming revenues from its wireless business. Further
consolidation within the wireless industry, continued network build-outs by other wireless carriers and/or
the inability to negotiate 4G LTE roaming agreements with other operators could cause roaming
revenues to decline from current levels, which would have an adverse effect on TDS’ business, financial
condition and results of operations.
(cid:127) A failure by TDS to obtain access to adequate radio spectrum to meet current or anticipated future
needs and/or to accurately predict future needs for radio spectrum could have an adverse effect on
TDS’ business, financial condition or results of operations.
(cid:127) To the extent conducted by the Federal Communications Commission (‘‘FCC’’), TDS is likely to
participate in FCC auctions of additional spectrum in the future as an applicant or as a noncontrolling
partner in another auction applicant and, during certain periods, will be subject to the FCC’s
anti-collusion rules, which could have an adverse effect on TDS.
(cid:127) Changes in the regulatory environment or a failure by TDS to timely or fully comply with any applicable
regulatory requirements could adversely affect TDS’ business, financial condition or results of
operations.
(cid:127) Changes in Universal Service Fund (‘‘USF’’) funding and/or intercarrier compensation could have an
adverse impact on TDS’ business, financial condition or results of operations.
43
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
(cid:127) An inability to attract and/or retain highly competent management, technical, sales and other personnel
could have an adverse effect on TDS’ business, financial condition or results of operations.
(cid:127) TDS’ assets are concentrated primarily in the U.S. telecommunications industry. As a result, its results of
operations may fluctuate based on factors related primarily to conditions in this industry.
(cid:127) TDS’ lower scale relative to larger competitors could adversely affect its business, financial condition or
results of operations.
(cid:127) Changes in various business factors could have an adverse effect on TDS’ business, financial condition
or results of operations.
(cid:127) Advances or changes in technology could render certain technologies used by TDS obsolete, could put
TDS at a competitive disadvantage, could reduce TDS’ revenues or could increase its costs of doing
business.
(cid:127) Complexities associated with deploying new technologies present substantial risk.
(cid:127) TDS is subject to numerous surcharges and fees from federal, state and local governments, and the
applicability and the amount of these fees are subject to great uncertainty.
(cid:127) Changes in TDS’ enterprise value, changes in the market supply or demand for wireless licenses,
wireline markets or IT service providers, adverse developments in the businesses or the industries in
which TDS is involved and/or other factors could require TDS to recognize impairments in the carrying
value of its license costs, goodwill and/or physical assets.
(cid:127) Costs, integration problems or other factors associated with acquisitions/divestitures of properties or
licenses and/or expansion of TDS’ businesses could have an adverse effect on TDS’ business, financial
condition or results of operations.
(cid:127) A significant portion of TDS’ wireless revenues is derived from customers who buy services through
independent agents who market TDS’ services on a commission basis. If TDS’ relationships with these
agents are seriously harmed, its business, financial condition or results of operations could be
adversely affected.
(cid:127) TDS’ investments in technologies which are unproven may not produce the benefits that TDS expects.
(cid:127) A failure by TDS to complete significant network construction and systems implementation activities as
part of its plans to improve the quality, coverage, capabilities and capacity of its network, support and
other systems and infrastructure could have an adverse effect on its operations.
(cid:127) Financial difficulties (including bankruptcy proceedings) or other operational difficulties of TDS’ key
suppliers, termination or impairment of TDS’ relationships with such suppliers, or a failure by TDS to
manage its supply chain effectively could result in delays or termination of TDS’ receipt of required
equipment or services, or could result in excess quantities of required equipment or services, any of
which could adversely affect TDS’ business, financial condition or results of operations.
(cid:127) TDS has significant investments in entities that it does not control. Losses in the value of such
investments could have an adverse effect on TDS’ financial condition or results of operations.
(cid:127) A failure by TDS to maintain flexible and capable telecommunication networks or information
technology, or a material disruption thereof, including breaches of network or information technology
security, could have an adverse effect on TDS’ business, financial condition or results of operations.
(cid:127) Wars, conflicts, hostilities and/or terrorist attacks or equipment failures, power outages, natural disasters
or other events could have an adverse effect on TDS’ business, financial condition or results of
operations.
(cid:127) The market price of TDS’ Common Shares is subject to fluctuations due to a variety of factors.
(cid:127) Identification of errors in financial information or disclosures could require amendments to or
restatements of financial information or disclosures included in this or prior filings with the Securities
44
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
and Exchange Commission (‘‘SEC’’). Such amendments or restatements and related matters, including
resulting delays in filing periodic reports with the SEC, could have an adverse effect on TDS’ business,
financial condition or results of operations.
(cid:127) The existence of material weaknesses in the effectiveness of internal control over financial reporting
could result in inaccurate financial statements or other disclosures or failure to prevent fraud, which
could have an adverse effect on TDS’ business, financial condition or results of operations.
(cid:127) Changes in facts or circumstances, including new or additional information that affects the calculation
of potential liabilities for contingent obligations under guarantees, indemnities, claims, litigation or
otherwise, could require TDS to record charges in excess of amounts accrued in the financial
statements, if any, which could have an adverse effect on TDS’ business, financial condition or results
of operations.
(cid:127) Disruption in credit or other financial markets, a deterioration of U.S. or global economic conditions or
other events could, among other things, impede TDS’ access to or increase the cost of financing its
operating and investment activities and/or result in reduced revenues and lower operating income and
cash flows, which would have an adverse effect on TDS’ business, financial condition or results of
operations.
(cid:127) Uncertainty of TDS’ ability to access capital, deterioration in the capital markets, other changes in
market conditions, changes in TDS’ credit ratings or other factors could limit or restrict the availability of
financing on terms and prices acceptable to TDS, which could require TDS to reduce its construction,
development or acquisition programs.
(cid:127) Settlements, judgments, restraints on its current or future manner of doing business and/or legal costs
resulting from pending and future litigation could have an adverse effect on TDS’ business, financial
condition or results of operations.
(cid:127) The possible development of adverse precedent in litigation or conclusions in professional studies to
the effect that radio frequency emissions from wireless devices and/or cell sites cause harmful health
consequences, including cancer or tumors, or may interfere with various electronic medical devices
such as pacemakers, could have an adverse effect on TDS’ wireless business, financial condition or
results of operations.
(cid:127) Claims of infringement of intellectual property and proprietary rights of others, primarily involving patent
infringement claims, could prevent TDS from using necessary technology to provide products or
services or subject TDS to expensive intellectual property litigation or monetary penalties, which could
have an adverse effect on TDS’ business, financial condition or results of operations.
(cid:127) Certain matters, such as control by the TDS Voting Trust and provisions in the TDS Restated Certificate
of Incorporation, may serve to discourage or make more difficult a change in control of TDS.
(cid:127) Any of the foregoing events or other events could cause revenues, earnings, capital expenditures
and/or any other financial or statistical information to vary from TDS’ forward-looking estimates by a
material amount.
See ‘‘Risk Factors’’ in TDS’ Annual Report on Form 10-K for the year ended December 31, 2012 for a
further discussion of these risks. TDS undertakes no obligation to update publicly any forward-looking
statements whether as a result of new information, future events or otherwise. Readers should evaluate
any statements in light of these important factors.
45
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
MARKET RISK
Long-Term Debt
As of December 31, 2012, the majority of TDS’ long-term debt was in the form of fixed-rate notes with
original maturities ranging up to 49 years. Fluctuations in market interest rates can lead to significant
fluctuations in the fair value of these fixed-rate notes.
The following table presents the scheduled principal payments on long-term debt and capital lease
obligations, and the related weighted average interest rates by maturity dates at December 31, 2012:
Principal Payments Due by Period
Long-Term
Debt Obligations(1)
Weighted-Avg.
Interest Rates
on Long-Term
Debt Obligations(2)
(Dollars in millions)
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1.2
1.6
1.2
3.0
0.2
1,727.4
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,734.6
4.4%
4.6%
2.5%
4.6%
9.7%
6.7%
6.7%
(1) The total long-term debt obligation differs from Long-term debt in the Consolidated Balance Sheet
due to the $11.8 million unamortized discount related to U.S. Cellular’s 6.7% Senior Notes. See
Note 12—Debt in the Notes to Consolidated Financial Statements for additional information.
(2) Represents the weighted average interest rates at December 31, 2012, for debt maturing in the
respective periods.
Fair Value of Long-Term Debt
At December 31, 2012 and 2011, the estimated fair value of long-term debt obligations, excluding capital
lease obligations and the current portion of such long-term debt, was $1,827.6 million and
$1,586.9 million, respectively. The fair value of long-term debt, excluding capital lease obligations and the
current portion of such long-term debt, was estimated using market prices for TDS’ 7.0% Senior Notes,
6.875% Senior Notes, 6.625% Senior Notes, and 5.875% Senior Notes, and U.S. Cellular’s 6.95% Senior
Notes at December 31, 2012 and TDS’ 7.0% Senior Notes, 6.875% Senior Notes, and 6.625% Senior
Notes, and U.S. Cellular’s 6.95% Senior Notes at December 31, 2011 and discounted cash flow analysis
for U.S. Cellular’s 6.7% Senior Notes and the remaining debt at December 31, 2012 and 2011.
Other Market Risk Sensitive Instruments
The substantial majority of TDS’ other market risk sensitive instruments (as defined in item 305 of SEC
Regulation S-K) are short-term, including Cash and cash equivalents and Short-term investments. The
fair value of such instruments is less sensitive to market fluctuations than longer term instruments.
Accordingly, TDS believes that a significant change in interest rates would not have a material effect on
such other market risk sensitive instruments.
46
Telephone and Data Systems, Inc.
Consolidated Statement of Operations
Year Ended December 31,
2012
2011
2010
(Dollars and shares in thousands,
except per share amounts)
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses
Cost of services and products (excluding Depreciation,
amortization and accretion expense reported below) . . . . . .
Selling, general and administrative expense . . . . . . . . . . . . . .
Depreciation, amortization and accretion expense . . . . . . . . . .
Loss on impairment of assets . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) loss on asset disposals and exchanges, net . . . . . . . . .
(Gain) loss on sale of business and other exit costs, net . . . . .
$5,345,277
$5,180,471
$4,986,829
2,272,570
2,033,901
813,626
515
19,741
21,061
2,050,644
2,002,359
765,776
—
(810)
—
1,924,863
1,998,463
755,649
—
11,763
—
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . .
5,161,414
4,817,969
4,690,738
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
183,863
362,502
296,091
Investment and other income (expense)
Equity in earnings of unconsolidated entities . . . . . . . . . . . . .
Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on investment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
Total investment and other income (expense) . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net income attributable to noncontrolling interests, net
92,867
9,248
(3,718)
(86,745)
720
12,372
196,235
73,582
122,653
82,538
9,145
24,103
(118,201)
3,658
98,074
10,508
—
(116,810)
(2,089)
1,243
(10,317)
363,745
113,503
250,242
285,774
95,188
190,586
of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(40,792)
(49,676)
(45,737)
Net income attributable to TDS shareholders . . . . . . . . . . . . .
Preferred dividend requirement . . . . . . . . . . . . . . . . . . . . . . .
81,861
(50)
200,566
(50)
144,849
(50)
Net income available to common . . . . . . . . . . . . . . . . . . . . . .
Basic weighted average shares outstanding . . . . . . . . . . . . . .
Basic earnings per share attributable to TDS shareholders . .
Diluted weighted average shares outstanding . . . . . . . . . . . .
Diluted earnings per share attributable to TDS shareholders .
Dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
81,811
$ 200,516
$ 144,799
108,671
0.75
108,937
0.75
0.49
108,562
1.85
109,098
1.83
0.47
$
$
$
110,016
1.32
110,488
1.31
0.45
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
47
Telephone and Data Systems, Inc.
Consolidated Statement of Comprehensive Income
Year Ended December 31,
2012
2011
2010
(Dollars in thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in accumulated other comprehensive income
Change in net unrealized gain (loss) on equity investments . . . . . . .
Change in foreign currency translation adjustment
. . . . . . . . . . . . .
Change related to retirement plan
Amounts included in net periodic benefit cost for the period
Net actuarial gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost
. . . . . . . . . . . . . . . . . . . . . .
Amortization of unrecognized net loss . . . . . . . . . . . . . . . . . . .
Change in deferred income taxes . . . . . . . . . . . . . . . . . . . . . .
Change related to retirement plan, net of tax . . . . . . . . . . . . . . . .
Net change in accumulated other comprehensive income . . . . . . . .
$122,653
$250,242
$190,586
49
4
138
—
84
—
90
(3,735)
2,517
(1,128)
1,797
669
722
(9,625)
(3,815)
1,934
(11,506)
5,722
(5,784)
(5,646)
1,180
(3,815)
2,158
(477)
(105)
(582)
(498)
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
123,375
244,596
190,088
Less: Comprehensive income attributable to noncontrolling
interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(40,792)
(49,676)
(45,737)
Comprehensive income attributable to TDS shareholders . . . . . . .
$ 82,583
$194,920
$144,351
The accompanying notes are an integral part of these consolidated financial statements.
48
Telephone and Data Systems, Inc.
Consolidated Statement of Cash Flows
Year Ended December 31,
(Dollars in thousands)
Cash flows from operating activities
2012
2011
2010
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add (deduct) adjustments to reconcile net income to net cash flows from
$ 122,653
$ 250,242
$
190,586
operating activities
Depreciation, amortization and accretion . . . . . . . . . . . . . . . . . . . . .
Bad debts expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in earnings of unconsolidated entities . . . . . . . . . . . . . . . . . .
Distributions from unconsolidated entities . . . . . . . . . . . . . . . . . . . .
Loss on impairment of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) loss on asset disposals and exchanges, net . . . . . . . . . . . . . .
(Gain) loss on sale of business and other exit costs, net . . . . . . . . . .
(Gain) loss on investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncash interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities from operations
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer deposits and deferred revenues . . . . . . . . . . . . . . . . . . .
Accrued taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
813,626
74,695
41,871
58,785
(92,867)
84,884
515
19,741
21,061
3,718
(572)
1,393
(81,107)
(29,917)
(12,332)
32,981
77,458
(891)
(30,523)
765,776
68,611
36,837
202,547
(82,538)
92,231
—
(810)
—
(24,103)
18,849
1,067
(95,426)
(13,382)
29,291
35,457
(27,871)
3,351
(4,418)
755,649
83,098
35,128
76,391
(98,074)
100,845
—
11,763
—
—
9,733
383
(79,182)
40,657
(47,759)
6,478
(95,284)
(7,680)
93,475
1,105,172
1,255,711
1,076,207
Cash flows from investing activities
Cash used for additions to property, plant and equipment . . . . . . . . . . . .
Cash paid for acquisitions and licenses . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash received for divestitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash received for investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(995,517)
(163,382)
(120,000)
50,182
243,444
(12,796)
(971,759)
(105,508)
(180,920)
—
393,246
(1,148)
(739,222)
(81,691)
(493,750)
—
106,255
370
Cash flows from financing activities
Repayment of short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TDS Common Shares and Special Common Shares reissued for benefit
(998,069)
(866,089)
(1,208,038)
—
(2,566)
195,358
(32,671)
(614,639)
643,700
—
(220,249)
225,648
plans, net of tax payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,119)
32
309
U.S. Cellular Common Shares reissued for benefit plans, net of tax
payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of TDS Common and Special Common Shares . . . . . . . . . . .
Repurchase of U.S. Cellular Common Shares . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions to noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . .
Payments to acquire additional interest in subsidiaries . . . . . . . . . . . . . .
Other financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . .
Cash and cash equivalents
(2,205)
(20,026)
(20,045)
(53,165)
(8,242)
(20,856)
(3,167)
6,136
1,935
(21,500)
(62,294)
(48,670)
(21,657)
(16,236)
—
3,970
509
(68,053)
(52,827)
(47,202)
(12,533)
(19,630)
(9,248)
2,321
70,103
(168,030)
(200,955)
177,206
221,592
(332,786)
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
563,275
341,683
674,469
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 740,481
$ 563,275
$
341,683
The accompanying notes are an integral part of these consolidated financial statements.
49
Telephone and Data Systems, Inc.
Consolidated Balance Sheet—Assets
December 31,
(Dollars in thousands)
Current assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable
Due from customers, less allowances of $28,152 and $25,738,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, less allowances of $5,263 and $5,333, respectively . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred income tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
$
740,481
115,700
$
563,275
246,273
409,720
164,608
160,692
43,411
86,385
9,625
32,815
393,978
148,599
130,044
40,898
80,628
85,636
16,349
1,763,437
1,705,680
Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
163,242
49,647
Investments
Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets, net of accumulated amortization of $143,613 and
$131,101, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in unconsolidated entities . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,480,039
797,194
1,494,014
797,077
58,522
179,921
50,305
824
50,734
173,710
45,138
3,072
2,566,805
2,563,745
Property, plant and equipment
In service and under construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,808,499
6,811,233
10,197,596
6,413,061
Other assets and deferred charges . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,997,266
133,150
3,784,535
97,398
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,623,900
$ 8,201,005
The accompanying notes are an integral part of these consolidated financial statements.
50
Telephone and Data Systems, Inc.
Consolidated Balance Sheet—Liabilities and Equity
December 31,
(Dollars and shares in thousands)
Current liabilities
Current portion of long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer deposits and deferred revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
$
1,233
377,291
222,345
6,565
48,237
134,932
134,005
924,608
$
1,509
364,746
207,633
7,456
41,069
107,719
144,001
874,133
Liabilities held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,594
1,051
Deferred liabilities and credits
Net deferred income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other deferred liabilities and credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
862,580
438,727
808,713
383,567
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,721,571
1,529,857
Commitments and contingencies
Noncontrolling interests with redemption features . . . . . . . . . . . . . . . . . . . . . .
493
1,005
Equity
TDS shareholders’ equity
Series A Common and Common Shares
Authorized 290,000 shares (25,000 Series A Common and 265,000 Common
Shares)
Issued 132,672 shares (7,160 Series A Common and 125,512 Common
Shares) and 132,621 shares (7,119 Series A Common, and 125,502
Common Shares), respectively
Outstanding 108,031 shares (7,160 Series A Common and 100,871 Common
Shares) and 108,456 shares (7,119 Series A Common, and 101,337
Common Shares), respectively
Par Value ($.01 per share) of $1,327 ($72 Series A Common and $1,255
Common Shares) and of $1,326 ($71 Series A Common, and $1,255
Common Shares), respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury shares at cost:
24,641 and 24,165 Common Shares, respectively . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total TDS shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,327
2,304,122
1,326
2,268,711
(750,099)
(8,132)
2,464,318
4,011,536
825
643,966
(750,921)
(8,854)
2,451,899
3,962,161
830
639,688
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,656,327
4,602,679
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8,623,900
$8,201,005
The accompanying notes are an integral part of these consolidated financial statements
51
Telephone and Data Systems, Inc.
Consolidated Statement of Changes in Equity
Series A Common
and Common
Shares
Capital in
Excess of
Par Value
TDS Shareholders
Accumulated
Other
Treasury
Common Comprehensive
Income (Loss)
Shares
Retained
Earnings
Total TDS
Non
Shareholders’ Preferred controlling
Interests
Shares
Equity
Total
Equity
(Dollars in thousands)
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add (Deduct)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to TDS shareholders . . . . . . . . . . . . . . . . .
Net income attributable to noncontrolling interests classified as equity . .
Net unrealized gain (loss) on equity investments . . . . . . . . . . . . . . .
Change in foreign currency translation adjustment
. . . . . . . . . . . . . .
Changes related to retirement plan . . . . . . . . . . . . . . . . . . . . . . .
Common and Series A Common Shares dividends . . . . . . . . . . . . . .
Preferred dividend requirement . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend reinvestment plan . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Incentive and compensation plans . . . . . . . . . . . . . . . . . . . . . . . .
Adjust investment in subsidiaries for repurchases, issuances, other
compensation plans and noncontrolling interest purchases . . . . . . .
Stock-based compensation awards(1) . . . . . . . . . . . . . . . . . . . . . .
Tax windfall (shortfall) from stock awards(2) . . . . . . . . . . . . . . . . . .
Distributions to noncontrolling interests . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
5
2
$1,326
$2,268,711 $(750,921)
$(8,854)
$2,451,899 $3,962,161
$830
$639,688 $4,602,679
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,148
444
16,968
20,030
(3,179)
—
—
—
—
—
—
—
—
—
(20,026)
14,123
6,725
—
—
—
—
—
—
—
49
4
669
—
—
—
—
—
—
—
—
—
—
—
81,861
—
—
—
—
(53,115)
(50)
(17)
—
(8,349)
(7,911)
—
—
—
—
—
81,861
—
49
4
669
(53,115)
(50)
(17)
(20,026)
6,923
(742)
16,968
20,030
(3,179)
—
—
—
—
—
—
—
—
—
(5)
—
—
—
—
—
—
—
—
40,739
—
—
—
—
—
—
—
—
(15,662)
—
—
(20,856)
57
81,861
40,739
49
4
669
(53,115)
(50)
(22)
(20,026)
6,923
(742)
1,306
20,030
(3,179)
(20,856)
57
December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,327
$2,304,122 $(750,099)
$(8,132)
$2,464,318 $4,011,536
$825
$643,966 $4,656,327
(1)
(2)
Reflects TDS Corporate and TDS Telecom’s current year stock-based compensation awards impact on Capital in excess of par value. U.S. Cellular’s amounts are included in Adjust
investment in subsidiaries for repurchases, issuances, other compensation plans, and noncontrolling interest purchases.
Reflects tax windfalls/(shortfalls) associated with the exercise of options and the vesting of restricted stock awards of TDS Common Shares and TDS Special Common Shares. U.S.
Cellular’s tax windfalls/(shortfalls) associated with the exercise of options and vesting of restricted stock awards of U.S. Cellular are included in Adjust investment in subsidiaries for
repurchases, issuances, other compensation plans, and noncontrolling interest purchases.
The accompanying notes are an integral part of these consolidated financial statements.
Telephone and Data Systems, Inc.
Consolidated Statement of Changes in Equity
TDS Shareholders
Series A Common,
Special Common
and Common
Shares
Capital in
Excess of
Par Value
Special
Common
and Common
Treasury Shares
Accumulated
Other
Comprehensive
Income
(Loss)
Retained
Earnings
Total TDS
Non
Shareholders’ Preferred controlling
Interests
Shares
Equity
Total
Equity
5
3
(Dollars in thousands)
December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add (Deduct)
Net income attributable to TDS shareholders . . . . . . . . . . . . . .
Net income attributable to noncontrolling interests classified as
equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gain (loss) on equity investments . . . . . . . . . . . .
Changes related to retirement plan . . . . . . . . . . . . . . . . . . . .
Common, Special Common and Series A Common Shares
dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred dividend requirement
. . . . . . . . . . . . . . . . . . . . . .
Repurchase of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend reinvestment plan . . . . . . . . . . . . . . . . . . . . . . . . .
Incentive and compensation plans . . . . . . . . . . . . . . . . . . . .
Adjust investment in subsidiaries for repurchases, issuances, other
compensation plans and noncontrolling interest purchases . . . .
Stock-based compensation awards(1)
. . . . . . . . . . . . . . . . . .
Tax windfall (shortfall) from stock awards(2) . . . . . . . . . . . . . . .
Distributions to noncontrolling interests . . . . . . . . . . . . . . . . . .
Impact of Share Consolidation . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
$1,270
$2,107,929
$(738,695)
$(3,208)
$2,450,599 $3,817,895
$830
$647,013 $4,465,738
—
—
—
—
—
—
—
—
—
—
—
—
—
56
—
—
—
—
—
—
—
—
1,087
279
(572)
16,654
(697)
—
144,031
—
—
—
—
—
—
—
(21,500)
5,260
4,014
—
—
—
—
—
—
—
200,566
200,566
—
138
(5,784)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(48,620)
(50)
—
(2,675)
(3,817)
—
—
—
—
(144,104)
—
—
138
(5,784)
(48,620)
(50)
(21,500)
3,672
476
(572)
16,654
(697)
—
(17)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
200,566
49,505
—
—
—
—
—
—
—
(40,961)
—
—
(16,236)
—
367
49,505
138
(5,784)
(48,620)
(50)
(21,500)
3,672
476
(41,533)
16,654
(697)
(16,236)
(17)
367
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,326
$ 2,268,711
$ (750,921)
$ (8,854)
$ 2,451,899
$ 3,962,161
$830
$ 639,688 $ 4,602,679
The accompanying notes are an integral part of these consolidated financial statements.
Telephone and Data Systems, Inc.
Consolidated Statement of Changes in Equity
Series A Common,
Special Common
and Common
Shares
Capital in
Excess of
Par Value
Special
Common
and Common
Treasury Shares
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
TDS Shareholders
Total TDS
Non
Shareholders’ Preferred controlling
Interests
Shares
Equity
Total
Equity
5
4
(Dollars in thousands)
December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add (Deduct)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to TDS shareholders . . . . . . . . . . . . . .
Net income attributable to noncontrolling interests classified as
equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gain (loss) on equity investments . . . . . . . . . . . .
Changes related to retirement plan . . . . . . . . . . . . . . . . . . . .
Common, Special Common and Series A Common Shares
dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred dividend requirement
. . . . . . . . . . . . . . . . . . . . . .
Repurchase of Preferred Shares . . . . . . . . . . . . . . . . . . . . . .
Repurchase of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend reinvestment plan . . . . . . . . . . . . . . . . . . . . . . . . .
Incentive and compensation plans . . . . . . . . . . . . . . . . . . . .
Adjust investment in subsidiaries for repurchases, issuances and
other compensation plans and noncontrolling interest purchases .
. . . . . . . . . . . . . . . . . .
Stock-based compensation awards(1)
Tax windfall (shortfall) from stock awards(2) . . . . . . . . . . . . . . .
Distributions to noncontrolling interests . . . . . . . . . . . . . . . . . .
$1,270
$2,088,807
$(681,649)
$(2,710)
$2,361,560 $3,767,278
$832
$662,561 $4,430,671
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,858
551
(137)
17,084
(234)
—
—
—
—
—
—
—
—
(68,053)
5,492
5,515
—
—
—
—
—
144,849
144,849
—
84
(582)
—
—
—
—
—
—
—
—
—
—
—
—
—
(47,152)
(50)
(1)
—
(3,283)
(5,324)
—
—
—
—
—
84
(582)
(47,152)
(50)
(1)
(68,053)
4,067
742
(137)
17,084
(234)
—
—
—
—
—
—
—
(2)
—
—
—
—
—
—
—
—
144,849
45,644
—
—
—
—
—
—
—
—
(41,562)
—
—
(19,630)
45,644
84
(582)
(47,152)
(50)
(3)
(68,053)
4,067
742
(41,699)
17,084
(234)
(19,630)
December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,270
$2,107,929
$(738,695)
$(3,208)
$2,450,599 $3,817,895
$830
$647,013 $4,465,738
The accompanying notes are an integral part of these consolidated financial statements.
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS
Nature of Operations
Telephone and Data Systems, Inc. (‘‘TDS’’) is a diversified telecommunications company providing
high-quality telecommunications services to approximately 5.8 million wireless customers and 1.0 million
wireline customer connections at December 31, 2012. TDS conducts substantially all of its wireless
operations through its 84%-owned subsidiary, United States Cellular Corporation (‘‘U.S. Cellular’’). TDS
provides wireline services through its incumbent local exchange carrier (‘‘ILEC’’) and competitive local
exchange carrier (‘‘CLEC’’), and provides hosted and managed services (‘‘HMS’’), under its wholly-
owned subsidiary, TDS Telecommunications Corporation (‘‘TDS Telecom’’). TDS conducts printing and
distribution services through its majority-owned subsidiary, Suttle-Straus, Inc. (‘‘Suttle-Straus’’) and
provides wireless services through its majority-owned subsidiary, Airadigm Communications, Inc.
(‘‘Airadigm’’), a Wisconsin-based service provider. Airadigm operates independently from U.S. Cellular
and at this time, there are no plans to combine the operations of these subsidiaries. Suttle-Straus and
Airadigm’s financial results were not significant to TDS’ operations in 2012.
Prior to 2012, TDS had reported the following business segments: U.S. Cellular, ILEC (which included
HMS operations), CLEC, and Non-Reportable Segment which includes Suttle-Straus and Airadigm. TDS’
Corporate operations and intercompany eliminations have been included in ‘‘Other Reconciling Items’’
for purposes of business segment disclosure. As a result of recent acquisitions and changes in TDS’
strategy, operations, personnel and internal reporting, TDS reevaluated and changed its reportable
business segments in the quarter ended March 31, 2012. As a result, TDS’ business segments reflected
in this Annual Report on Form 10-K for the year ended December 31, 2012, are U.S. Cellular, ILEC,
CLEC, HMS and the Non-Reportable Segment. Periods presented for comparative purposes have been
re-presented to conform to this revised presentation. All of TDS’ segments operate only in the United
States except for HMS, which includes an insignificant foreign operation. See Note 17—Business
Segment Information for summary financial information on each business segment.
On January 13, 2012, TDS shareholders approved a Share Consolidation Amendment to the Restated
Certificate of Incorporation of TDS whereby (a) each Special Common Share was reclassified as a
Common Share on a one-for-one basis, (b) each Common Share was reclassified as 1.087 Common
Shares, and (c) each Series A Common Share was reclassified as 1.087 Series A Common Shares.
Shares outstanding at December 31, 2011, as well as the weighted average number of shares used in
basic and diluted earnings per share as of the beginning of 2011 and all prior periods presented, have
been retroactively restated to reflect the impact of the increased shares outstanding as a result of the
Share Consolidation. See Note 15—Common Shareholders’ Equity for additional information.
Principles of Consolidation
The accounting policies of TDS conform to accounting principles generally accepted in the United States
of America (‘‘GAAP’’) as set forth in the Financial Accounting Standards Board (‘‘FASB’’) Accounting
Standards Codification (‘‘ASC’’). Unless otherwise specified, references to accounting provisions and
GAAP in these notes refer to the requirements of the FASB ASC. The consolidated financial statements
include the accounts of TDS, its majority-owned subsidiaries, general partnerships in which it has a
majority partnership interest and variable interest entities (‘‘VIEs’’) in which TDS is the primary
beneficiary. Both VIE and primary beneficiary represent terms defined by GAAP.
Intercompany accounts and transactions have been eliminated.
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Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)
Reclassifications
Certain prior year amounts have been reclassified to conform to the 2012 financial statement
presentation. These reclassifications did not affect consolidated net income attributable to TDS
shareholders, cash flows, assets, liabilities or equity for the years presented.
Business Combinations
TDS accounts for business combinations at fair value in accordance with the acquisition method. This
method requires that the acquirer recognize 100% of the acquiree’s assets and liabilities at their fair
values on the acquisition date for all acquisitions, whether full or partial. In addition, transaction costs
related to acquisitions are expensed.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect (a) the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and (b) the reported
amounts of revenues and expenses during the reported period. Actual results could differ from those
estimates. Significant estimates are involved in accounting for goodwill and indefinite-lived intangible
assets, depreciation, amortization and accretion, allowance for doubtful accounts, loyalty reward points,
and income taxes.
Cash and Cash Equivalents
Cash and cash equivalents include cash and short-term, highly liquid investments with original maturities
of three months or less.
Short-Term and Long-Term Investments
At December 31, 2012 and 2011, TDS had $115.7 million and $246.3 million in Short-term investments
and $50.3 million and $45.1 million in Long-term investments, respectively. Short-term and Long-term
investments consist primarily of U.S. treasuries which are designated as held-to-maturity investments and
are recorded at amortized cost in the Consolidated Balance Sheet. For these investments, TDS’ objective
is to earn a higher rate of return on funds that are not anticipated to be required to meet liquidity needs
in the near term, while maintaining a low level of investment risk. See Note 3—Fair Value Measurements
for additional details on Short-term and Long-term investments.
Accounts Receivable and Allowance for Doubtful Accounts
U.S. Cellular’s accounts receivable consist primarily of amounts owed by customers pursuant to service
contracts and for equipment sales, by agents for sales of equipment to them and by other wireless
carriers whose customers have used U.S. Cellular’s wireless systems.
TDS Telecom’s accounts receivable primarily consist of amounts owed by customers for services
provided, by interexchange carriers for long-distance traffic which TDS Telecom carries on its network,
and by interstate and intrastate revenue pools that distribute access charges.
The allowance for doubtful accounts is the best estimate of the amount of probable credit losses related
to existing accounts receivable. The allowance is estimated based on historical experience and other
factors that could affect collectability. Accounts receivable balances are reviewed on either an aggregate
or individual basis for collectability depending on the type of receivable. When it is probable that an
account balance will not be collected, the account balance is charged against the allowance for doubtful
accounts. TDS does not have any off-balance sheet credit exposure related to its customers.
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Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)
The changes in the allowance for doubtful accounts during the years ended December 31, 2012, 2011
and 2010 were as follows:
Year Ended December 31,
2012
2011
2010
(Dollars in thousands)
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions, net of recoveries . . . . . . . . . . . . . . . . . .
Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 31,071
74,695
(72,351)
$ 35,007
68,611
(72,547)
$ 37,623
83,098
(85,714)
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 33,415
$ 31,071
$ 35,007
Inventory
Inventory consists primarily of wireless devices stated at the lower of cost or market, with cost
determined using the first-in, first-out method and market determined by replacement costs or estimated
net realizable value. TDS Telecom’s materials and supplies are stated at average cost.
Fair Value Measurements
Under the provisions of GAAP, fair value is a market-based measurement and not an entity-specific
measurement, based on an exchange transaction in which the entity sells an asset or transfers a liability
(exit price). The provisions also establish a fair value hierarchy that contains three levels for inputs used
in fair value measurements. Level 1 inputs include quoted market prices for identical assets or liabilities
in active markets. Level 2 inputs include quoted market prices for similar assets and liabilities in active
markets or quoted market prices for identical assets and liabilities in inactive markets. Level 3 inputs are
unobservable. A financial instrument’s level within the fair value hierarchy is based on the lowest level of
any input that is significant to the fair value measurement. A financial instrument’s level within the fair
value hierarchy is not representative of its expected performance or its overall risk profile and, therefore,
Level 3 assets are not necessarily higher risk than Level 2 assets or Level 1 assets.
Licenses
Licenses consist of direct and incremental costs incurred in acquiring Federal Communications
Commission (‘‘FCC’’) licenses to provide wireless service.
TDS has determined that wireless licenses are indefinite-lived intangible assets and, therefore, not
subject to amortization based on the following factors:
(cid:127) Radio spectrum is not a depleting asset.
(cid:127) The ability to use radio spectrum is not limited to any one technology.
(cid:127) TDS and its consolidated subsidiaries are licensed to use radio spectrum through the FCC licensing
process, which enables licensees to utilize specified portions of the spectrum for the provision of
wireless service.
(cid:127) TDS and its consolidated subsidiaries are required to renew their FCC licenses every ten years or, in
some cases, every fifteen years. To date, all of TDS’ license renewal applications have been granted
by the FCC. Generally, license renewal applications filed by licensees otherwise in compliance with
FCC regulations are routinely granted. If, however, a license renewal application is challenged either by
a competing applicant for the license or by a petition to deny the renewal application, the license will
be renewed if the licensee can demonstrate its entitlement to a ‘‘renewal expectancy.’’ Licensees are
entitled to such an expectancy if they can demonstrate to the FCC that they have provided
‘‘substantial service’’ during their license term and have ‘‘substantially complied’’ with FCC rules and
policies. TDS believes that it is probable that its future license renewal applications will be granted.
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Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)
Goodwill
TDS has Goodwill as a result of its acquisitions of wireless businesses, the acquisition of ILECs, HMS
companies and, under previous business combination guidance in effect prior to 2009, step acquisitions
related to U.S. Cellular’s repurchase of its common shares. Such Goodwill represents the excess of the
total purchase price over the fair value of net assets acquired in these transactions.
Goodwill and Licenses Impairment Assessment
Goodwill and Licenses must be assessed for impairment annually or more frequently if events or
changes in circumstances indicate that such assets might be impaired. TDS performs its annual
impairment assessment of Goodwill and Licenses as of November 1 of each year.
The impairment test for Goodwill is a two-step process. The first step compares the fair value of the
reporting unit to its carrying value. If the carrying amount exceeds the fair value, the second step of the
test is performed to measure the amount of impairment loss, if any. The second step compares the
implied fair value of reporting unit Goodwill with the carrying amount of that Goodwill. To calculate the
implied fair value of Goodwill in this second step, an enterprise allocates the fair value of the reporting
unit to all of the assets and liabilities of that reporting unit (including any unrecognized intangible assets)
as if the reporting unit had been acquired in a business combination and the fair value was the price
paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amount
assigned to the assets and liabilities of the reporting unit is the implied fair value of Goodwill. If the
carrying amount of Goodwill exceeds the implied fair value of Goodwill, an impairment loss is recognized
for that difference.
The impairment test for an indefinite-lived intangible asset other than Goodwill consists of comparing the
fair value of the intangible asset to its carrying amount. If the carrying amount exceeds the fair value, an
impairment loss is recognized for the difference.
Quoted market prices in active markets are the best evidence of fair value of an intangible asset or
reporting unit and are used when available. If quoted market prices are not available, the estimate of fair
value is based on the best information available, including prices for similar assets and the use of other
valuation techniques. Other valuation techniques include present value analysis, multiples of earnings or
revenues, or similar performance measures. The use of these techniques involve assumptions by
management about factors that are uncertain including future cash flows, the appropriate discount rate,
and other inputs. Different assumptions for these inputs could create materially different results.
U.S. Cellular tests Goodwill for impairment at the level of reporting referred to as a reporting unit. For
purposes of its impairment testing of Goodwill in 2012 and 2011, U.S. Cellular identified five reporting
units. The five reporting units represent five geographic groupings of FCC licenses, representing five
geographic service areas.
A discounted cash flow approach was used to value each reporting unit for purposes of the Goodwill
impairment review by using value drivers and risks specific to the current industry and economic
markets. The cash flow estimates incorporated assumptions that market participants would use in their
estimates of fair value. Key assumptions made in this process were the discount rate, estimated
expected revenue growth rate, projected capital expenditures and the terminal growth rate.
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Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)
U.S. Cellular tests Licenses for impairment at the level of reporting referred to as a unit of accounting.
For purposes of its 2012 impairment testing of Licenses, U.S. Cellular separated its FCC licenses into
thirteen units of accounting based on geographic service areas. One unit of accounting includes the
licenses to be transferred as a result of the Divestiture Transaction more fully described in Note 7—
Acquisitions, Divestitures and Exchanges. For purposes of its 2011 impairment testing of Licenses, U.S.
Cellular separated its FCC licenses into twelve units of accounting based on geographic service areas. In
both 2012 and 2011 testing, seven of the units of accounting represented geographic groupings of
licenses which, because they were not being utilized and, therefore, were not expected to generate cash
flows from operating activities in the foreseeable future, were considered separate units of accounting for
purposes of impairment testing.
U.S. Cellular estimates the fair value of built licenses for purposes of impairment testing using the
build-out method. The build-out method estimates the fair value of Licenses by calculating future cash
flows from a hypothetical start-up wireless company and assuming that the only assets available upon
formation are the underlying Licenses. To apply this method, a hypothetical build-out of the company’s
wireless network, infrastructure, and related costs are projected based on market participant information.
Calculated cash flows, along with a terminal value, are discounted to the present and summed to
determine the estimated fair value.
For units of accounting which consist of unbuilt licenses, U.S. Cellular prepares estimates of fair value by
reference to prices paid in recent auctions and market transactions where available. If such information is
not available, the fair value of the unbuilt licenses is assumed to change by the same percentage, and in
the same direction, that the fair value of built licenses measured using the build-out method changed
during the period.
TDS Telecom has recorded Goodwill as a result of the acquisition of ILEC and HMS companies. For
purposes of the annual impairment testing, TDS Telecom has four reporting units: one reporting unit
within its ILEC reportable operating segment and three reporting units within its HMS reportable
operating segment. For purposes of its annual impairment testing of Goodwill, as of November 1, 2011,
TDS Telecom identified two reporting units within its ILEC reportable operating segment. TDS Telecom’s
change in reporting units resulted from an additional acquisition and TDS’ reevaluation of its reportable
business segments, more fully described above.
The discounted cash flow approach and publicly-traded guideline company method were used to value
the reporting units in 2012. The publicly-traded guideline company method and recent transaction
method were used to value the reporting units in 2011.
The discounted cash flow approach uses value drivers and risks specific to the industry and current
economic factors. The cash flow estimates incorporated assumptions that market participants would use
in their estimates of fair value and may not be indicative of TDS Telecom’s specific assumptions. The
most significant assumptions made in this process were the revenue growth rate, discount rate,
projected capital expenditures and the terminal growth rate.
The publicly-traded guideline company method develops an indication of fair value by calculating
average market pricing multiples for selected publicly-traded companies using multiples of various
financial measures. The recent transaction method calculates market pricing multiples based upon recent
acquisitions of similar businesses. In both the publicly-traded guideline company method and the recent
transaction method, the developed multiples were applied to applicable financial measures of the
respective reporting unit to determine fair value. Given the nature of this methodology, no specific
consideration of the economic environment was considered since those factors would be inherent in the
multiples used.
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Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)
Investments in Unconsolidated Entities
Investments in unconsolidated entities consist of amounts invested in wireless and wireline entities in
which TDS holds a noncontrolling interest. TDS follows the equity method of accounting for such
investments in which its ownership interest equals or exceeds 20% for corporations and equals or
exceeds 3% for partnerships and limited liability companies. The cost method of accounting is followed
for such investments in which TDS’ ownership interest is less than 20% for corporations and is less than
3% for partnerships and limited liability companies, and for investments for which TDS does not have the
ability to exercise significant influence.
For its equity method investments for which financial information is readily available, TDS records its
equity in the earnings of the entity in the current period. For its equity method investments for which
financial information is not readily available, TDS records its equity in the earnings of the entity on a one
quarter lag basis.
Property, Plant and Equipment
Property, plant and equipment is stated at the original cost of construction or purchase including
capitalized costs of certain taxes, payroll-related expenses, interest and estimated costs to remove the
assets.
Expenditures that enhance the productive capacity of assets in service or extend their useful lives are
capitalized and depreciated. Expenditures for maintenance and repairs of assets in service are charged
to Cost of services and products or Selling, general and administrative expense, as applicable.
Retirements and disposals of assets are recorded by removing the original cost of the asset (along with
the related accumulated depreciation) from plant in service and charging it, together with removal cost
less any salvage realized, to (Gain) loss on asset disposals and exchanges, net.
Costs of developing new information systems are capitalized and amortized over their expected
economic useful lives.
Depreciation
Depreciation is provided using the straight-line method over the estimated useful life of the assets,
except for the ILEC segment, which uses the group depreciation method. The group depreciation
method develops a depreciation rate based on the average useful life of a specific group of assets,
rather than each asset individually. TDS depreciates leasehold improvement assets associated with
leased properties over periods ranging from one to thirty years; such periods approximate the shorter of
the assets’ economic lives or the specific lease terms.
Useful lives of specific assets are reviewed throughout the year to determine if changes in technology or
other business changes would warrant accelerating the depreciation of those specific assets. Due to the
Divestiture Transaction more fully described in Note 7—Acquisitions, Divestitures and Exchanges, U.S.
Cellular changed the useful lives of certain assets in 2012. There were no material changes to useful
lives of property, plant and equipment in 2011 or 2010. TDS Telecom did not materially change the
useful lives of its property, plant and equipment in 2012, 2011 or 2010.
Impairment of Long-lived Assets
TDS reviews long-lived assets for impairment whenever events or changes in circumstances indicate that
the assets might be impaired. The impairment test for tangible long-lived assets is a two-step process.
The first step compares the carrying value of the asset (or asset group) with the estimated undiscounted
cash flows over the remaining asset (or asset group) life. If the carrying value of the asset (or asset
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Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)
group) is greater than the undiscounted cash flows, the second step of the test is performed to measure
the amount of impairment loss. The second step compares the carrying value of the asset to its
estimated fair value. If the carrying value exceeds the estimated fair value (less cost to sell), an
impairment loss is recognized for the difference.
Quoted market prices in active markets are the best evidence of fair value of a tangible long-lived asset
and are used when available. If quoted market prices are not available, the estimate of fair value is
based on the best information available, including prices for similar assets and the use of other valuation
techniques. A present value analysis of cash flow scenarios is often the best available valuation
technique. The use of this technique involves assumptions by management about factors that are
uncertain including future cash flows, the appropriate discount rate and other inputs. Different
assumptions for these inputs could create materially different results.
Agent Liabilities
U.S. Cellular has relationships with agents, which are independent businesses that obtain customers for
U.S. Cellular. At December 31, 2012 and 2011, U.S. Cellular had accrued $88.2 million and $75.3 million,
respectively, for amounts due to agents. This amount is included in Other current liabilities in the
Consolidated Balance Sheet.
Other Assets and Deferred Charges
Other assets and deferred charges include legal fees and other charges related to various borrowing
instruments, and are amortized over the respective term of each instrument. The amounts for deferred
charges included in the Consolidated Balance Sheet at December 31, 2012 and 2011 are shown net of
accumulated amortization of $30.0 million and $25.2 million, respectively.
Asset Retirement Obligations
U.S. Cellular operates cell sites, retail stores and office spaces in its operating markets. A majority of
these sites, stores and office spaces are leased. Most of these leases contain terms which require or
may require U.S. Cellular to return the leased property to its original condition at the lease expiration
date.
TDS Telecom owns poles, cable and wire and certain buildings and leases data center and office space
and property used for housing central office switching equipment and fiber cable. These assets and
leases often have removal or remediation requirements associated with them. For example, TDS
Telecom’s poles, cable and wire are often located on property that is not owned by TDS Telecom and
are often subject to the provisions of easements, permits, or leasing arrangements. Pursuant to the terms
of the permits, easements, or leasing arrangements, TDS Telecom is often required to remove these
assets and return the property to its original condition at some defined date in the future.
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Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)
TDS accounts for asset retirement obligations by recording the fair value of a liability for legal obligations
associated with an asset retirement in the period in which the obligations are incurred. At the time the
liability is incurred, TDS records a liability equal to the net present value of the estimated cost of the
asset retirement obligation and increases the carrying amount of the related long-lived asset by an equal
amount. The liability is accreted to its present value over a period ending with the estimated settlement
date of the respective asset retirement obligation. The carrying amount of the long-lived asset is
depreciated over the useful life of the asset. Upon settlement of the obligation, any difference between
the cost to retire the asset and the recorded liability (including accretion of discount) is recognized in the
Consolidated Statement of Operations.
Treasury Shares
Common Shares repurchased by TDS are recorded at cost as treasury shares and result in a reduction
of equity. Treasury shares are reissued as part of TDS’ stock-based compensation programs. When
treasury shares are reissued, TDS determines the cost using the first-in, first-out cost method. The
difference between the cost of the treasury shares and reissuance price is included in Capital in excess
of par value or Retained earnings. On January 13, 2012, TDS shareholders approved a Share
Consolidation Amendment to the Restated Certificate of Incorporation of TDS whereby each Special
Common Share was reclassified as one Common Share on a one-for-one basis and each Common
Share was reclassified as 1.087 Common Shares. See Note 15—Common Shareholders’ Equity for
additional information.
Revenue Recognition
U.S. Cellular
Revenues from wireless operations consist primarily of:
(cid:127) Charges for access, airtime, roaming, long distance, data and other value added services provided to
U.S. Cellular’s retail customers and to end users through third-party resellers;
(cid:127) Charges to carriers whose customers use U.S. Cellular’s systems when roaming;
(cid:127) Sales of equipment and accessories;
(cid:127) Amounts received from the Universal Service Fund (‘‘USF’’) in states where U.S. Cellular has been
designated an Eligible Telecommunications Carrier (‘‘ETC’’); and
(cid:127) Redemptions of loyalty reward points for products or services.
Revenues related to wireless services and other value added services are recognized as services are
rendered. Revenues billed in advance or in arrears of the services being provided are estimated and
deferred or accrued, as appropriate.
Revenues from sales of equipment and accessories are recognized when title and risk of loss passes to
the agent or end-user customer.
U.S. Cellular allocates revenue to each element of multiple element service offerings using the relative
selling price method. Under this method, arrangement consideration, which consists of the amounts
billed to the customer net of any cash-based discounts, is allocated to each element on the basis of its
relative selling price on a stand-alone basis. Such stand-alone selling price is determined in accordance
with the following hierarchy:
(cid:127) U.S. Cellular-specific objective evidence of stand-alone selling price, if available; otherwise
(cid:127) Third-party evidence of selling price, if it is determinable; otherwise
(cid:127) A best estimate of stand-alone selling price.
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Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)
U.S. Cellular estimates stand-alone selling prices of the elements of its service offerings as follows:
(cid:127) Wireless services—Based on the actual selling price U.S. Cellular offers when such plan is sold on a
stand-alone basis, or if the plan is not sold on a stand-alone basis, U.S. Cellular’s estimate of the price
of such plan based on similar plans that are sold on a stand-alone basis.
(cid:127) Wireless devices—Based on the selling price of the respective wireless device when it is sold on a
stand-alone basis.
(cid:127) Phone Replacement—Based on U.S. Cellular’s estimate of the price of this service if it were sold on a
stand-alone basis, which was calculated by estimating the cost of this program plus a reasonable
margin.
(cid:127) Loyalty reward points—By estimating the retail price of the products and services for which points may
be redeemed and dividing such amount by the number of loyalty points required to receive such
products and services. This is calculated on a weighted average basis and requires U.S. Cellular to
estimate the percentage of loyalty points that will be redeemed for each product or service.
U.S. Cellular follows the deferred revenue method of accounting for its loyalty reward program. Under
this method, revenue allocated to loyalty reward points is fully deferred as U.S. Cellular does not have
sufficient historical data in which to estimate any portion of loyalty reward points that will not be
redeemed. Revenue is recognized at the time of customer redemption or when such points have been
depleted via a maintenance charge. U.S. Cellular periodically reviews and will revise the redemption and
depletion rates as appropriate based on history and related future expectations. As of December 31,
2012 and 2011, U.S. Cellular had deferred revenue related to loyalty reward points outstanding of
$56.6 million and $38.9 million, respectively. These amounts are recorded in Customer deposits and
deferred revenues (a current liability account) in the Consolidated Balance Sheet, as customers may
redeem their reward points within the current period.
Cash-based discounts and incentives, including discounts to customers who pay their bills through the
use of on-line bill payment methods, are recognized as a reduction of Operating revenues concurrently
with the associated revenue, and are allocated to the various products and services in the bundled
offering based on their respective relative selling price.
In order to provide better control over wireless device quality, U.S. Cellular sells wireless devices to
agents. U.S. Cellular pays rebates to agents at the time an agent activates a new customer or retains an
existing customer in a transaction involving a wireless device. U.S. Cellular accounts for these rebates by
reducing revenues at the time of the wireless device sale to the agent rather than at the time the agent
activates a new customer or retains a current customer. Similarly, U.S. Cellular offers certain wireless
device sales rebates and incentives to its retail customers and records the revenue net of the
corresponding rebate or incentive. The total potential rebates and incentives are reduced by U.S.
Cellular’s estimate of rebates that will not be redeemed by customers based on historical experience of
such redemptions.
Prior to July 1, 2012, U.S. Cellular charged a service activation fee to customers. Activation fees charged
at agent locations with the sale of service only, where U.S. Cellular did not sell a wireless device to the
customer, were deferred and recognized over the average customer life. On July 1, 2012, U.S. Cellular
discontinued the service activation fee and began charging a device activation fee. Device activation fees
charged at agent locations, where U.S. Cellular does not also sell a wireless device to the customer, are
deferred and recognized over the average device life. Device activation fees charged as a result of
handset sales at Company-owned retail stores are recognized at the time the handset is delivered to the
customer. GAAP requires that activation fees charged with the sale of equipment and service be
allocated to the equipment and service based upon the relative selling prices of each item. This generally
results in the recognition of the activation fee as additional wireless device revenue at the time of sale.
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Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)
ETC revenues recognized in the reporting period represent the amounts which U.S. Cellular is entitled to
receive for such period, as determined and approved in connection with U.S. Cellular’s designation as an
ETC in various states.
TDS Telecom
Revenue from ILEC and CLEC operations consist primarily of charges for:
(cid:127) The provision of local telephone exchange service;
(cid:127) Compensation for carrying long-distance voice and data traffic on TDS Telecom’s local telephone
networks, including compensation from USF’s;
(cid:127) Leasing, selling, installing and maintaining customer premise equipment;
(cid:127) Providing broadband services;
(cid:127) Providing hosted Voice over Internet Protocol (‘‘VoIP’’) solutions and other hosted services to business;
(cid:127) Reselling long-distance services; and
(cid:127) Selling Internet Protocol Television (‘‘IPTV’’) and satellite video service.
HMS operating revenues consist of colocation, dedicated hosting, hosted application management and
cloud computing services, and planning, engineering, procurement, installation, sales and management
of IT infrastructure hardware solutions.
Revenues are recognized as services are rendered. Activation fees charged are deferred and recognized
over the average customer’s service period.
TDS Telecom offers some products and services that are provided by third-party vendors, primarily
satellite video service through its ILEC business, and third-party equipment maintenance contracts
through its HMS business. TDS records these service revenues on a net basis.
TDS Telecom offers discounts and incentives to customers who receive certain groupings of products
and services (bundled arrangements). These discounts are recognized concurrently with the associated
revenue and are allocated to the various products and services in the bundled offering based on their
relative selling prices.
Discounts and cash incentives offered by TDS Telecom that are given directly to customers are recorded
in the financial statements as a reduction of Operating revenues.
TDS Telecom’s ILECs earn Wholesale revenues as a result of their participation in revenue pools with
other telephone companies for interstate revenue and for certain intrastate revenue. Such pools are
funded by long distance revenue and/or access charges within state jurisdictions and by access charges
in the interstate jurisdiction. Wholesale revenues earned through the various pooling processes are
recorded based on estimates following the National Exchange Carrier Association’s rules as approved by
the FCC.
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 Operating 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 $152.4 million, $141.3 million and
$154.0 million for 2012, 2011 and 2010, respectively.
64
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)
Advertising Costs
TDS expenses advertising costs as incurred. Advertising costs totaled $240.9 million, $267.7 million and
$273.0 million in 2012, 2011 and 2010, respectively.
Income Taxes
TDS files a consolidated federal income tax return. Deferred taxes are computed using the liability
method, whereby deferred tax assets are recognized for future deductible temporary differences and
operating loss carryforwards, and deferred tax liabilities are recognized for future taxable temporary
differences. Both deferred tax assets and liabilities are measured using the tax rates anticipated to be in
effect when the temporary differences reverse. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of enactment. Deferred tax assets
are reduced by a valuation allowance when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. TDS evaluates income tax uncertainties, assesses the probability
of the ultimate settlement with the applicable taxing authority and records an amount based on that
assessment.
Stock-Based Compensation
TDS has established long-term incentive plans, dividend reinvestment plans, a Non-Employee Director
compensation plan, and previously had an employee stock purchase plan before this was terminated in
the fourth quarter of 2011. See Note 16—Stock-based Compensation for additional information. The
dividend reinvestment plan of TDS is not considered a compensatory plan and, therefore, recognition of
compensation costs for grants made under this plan is not required. All other plans are considered
compensatory plans; therefore, recognition of compensation costs for grants made under these plans is
required.
TDS values its share-based payment transactions using a Black-Scholes valuation model. Stock-based
compensation cost recognized during the period is based on the portion of the share-based payment
awards that are ultimately expected to vest. Accordingly, stock-based compensation cost recognized has
been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting forfeitures
and expected life are estimated based on historical experience related to similar awards, giving
consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of
future employee behavior. TDS believes that its historical experience provides the best estimates of future
pre-vesting forfeitures and future expected life. The expected volatility assumption is based on the
historical volatility of TDS’ common stock over a period commensurate with the expected life. The
dividend yield assumption is equal to the dividends declared in the most recent year as a percentage of
the share price on the date of grant. The risk-free interest rate assumption is determined using the U.S.
Treasury Yield Curve Rate with a term length that approximates the expected life of the stock options.
65
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)
Compensation cost for stock option awards is recognized over the respective requisite service period of
the awards, which is generally the vesting period, on a straight-line basis for each separate vesting
portion of the awards as if the awards were, in-substance, multiple awards (graded vesting attribution
method).
Operating Leases
TDS is a party to various lease agreements for office space, retail stores, cell sites and equipment that
are accounted for as operating leases. Certain leases have renewal options and/or fixed rental increases.
Renewal options that are reasonably assured of exercise are included in determining the lease term. TDS
accounts for certain operating leases that contain rent abatements, lease incentives and/or fixed rental
increases by recognizing lease revenue and expense on a straight-line basis over the lease term.
Recent Accounting Pronouncements
On July 27, 2012, the FASB issued Accounting Standards Update 2012-02, Intangibles—Goodwill and
Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (‘‘ASU 2012-02’’).
ASU 2012-02 is intended to reduce the cost and complexity of the annual indefinite-lived intangible
assets impairment testing by providing entities an option to perform a ‘‘qualitative’’ assessment to
determine whether further impairment testing is necessary. As such, there is the possibility that
quantitative assessments would not need to be performed if it is more likely than not that no impairment
exists. TDS is required to adopt the provisions of ASU 2012-02 as of January 1, 2013. Early adoption is
permitted. The adoption of ASU 2012-02 is not expected to have a significant impact on TDS’ financial
position or results of operations.
On February 5, 2013, the FASB issued Accounting Standards Update 2013-02, Comprehensive Income
(Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
(‘‘ASU 2013-02’’). ASU 2013-02 is intended to improve the reporting of reclassifications out of
accumulated other comprehensive income. TDS is required to adopt the provisions of ASU 2013-02 as of
January 1, 2013. Since ASU 2013-02 only requires additional disclosure, adoption will not have an
impact on TDS’ financial position or results of operations.
66
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 2 NONCONTROLLING INTERESTS
Impact of Changes in TDS Ownership
The following schedule discloses the effects of net income attributable to TDS shareholders and changes
in TDS’ ownership interest in U.S. Cellular on TDS’ equity for 2012, 2011 and 2010:
Year Ended December 31,
2012
2011
2010
(Dollars in thousands)
Net income attributable to TDS shareholders . . . . . . .
$81,861
$200,566
$144,849
Transfer (to) from the noncontrolling interests
Change in TDS’ Capital in excess of par value
from U.S. Cellular’s issuance of U.S. Cellular
shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in TDS’ Capital in excess of par value
from U.S. Cellular’s repurchase of U.S. Cellular
shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of ownership in subsidiary from
(8,854)
(8,555)
(7,180)
4,789
(7,723)
(2,964)
noncontrolling interest
. . . . . . . . . . . . . . . . . .
4,397
—
(3,510)
Net transfers (to) from noncontrolling interests . .
332
(16,278)
(13,654)
Change from net income attributable to TDS
shareholders and transfers (to) from
noncontrolling interests . . . . . . . . . . . . . . . . . . .
$82,193
$184,288
$131,195
Mandatorily Redeemable Noncontrolling Interests in Finite-Lived Subsidiaries
TDS’ consolidated financial statements include certain noncontrolling interests that meet the GAAP
definition of mandatorily redeemable financial instruments. These mandatorily redeemable noncontrolling
interests represent interests held by third parties in consolidated partnerships and limited liability
companies (‘‘LLCs’’), where the terms of the underlying partnership or LLC agreement provide for a
defined termination date at which time the assets of the subsidiary are to be sold, the liabilities are to be
extinguished and the remaining net proceeds are to be distributed to the noncontrolling interest holders
and TDS in accordance with the respective partnership and LLC agreements. The termination dates of
these mandatorily redeemable noncontrolling interests range from 2085 to 2107.
The settlement value or estimate of cash that would be due and payable to settle these noncontrolling
interests, assuming an orderly liquidation of the finite-lived consolidated partnerships and LLCs on
December 31, 2012, net of estimated liquidation costs, is $141.1 million. This amount excludes
redemption amounts recorded in Noncontrolling interests with redemption features in the Consolidated
Balance Sheet. The estimate of settlement value was based on certain factors and assumptions which
are subjective in nature. Changes in those factors and assumptions could result in a materially larger or
smaller settlement amount. TDS currently has no plans or intentions relating to the liquidation of any of
the related partnerships or LLCs prior to their scheduled termination dates. The corresponding carrying
value of the mandatorily redeemable noncontrolling interests in finite-lived consolidated partnerships
and LLCs at December 31, 2012 was $51.1 million, and is included in Noncontrolling interests in the
Consolidated Balance Sheet. The excess of the aggregate settlement value over the aggregate carrying
value of these mandatorily redeemable noncontrolling interests is primarily due to the unrecognized
appreciation of the noncontrolling interest holders’ share of the underlying net assets in the consolidated
partnerships and LLCs. Neither the noncontrolling interest holders’ share, nor TDS’ share, of the
appreciation of the underlying net assets of these subsidiaries is reflected in the consolidated financial
statements.
67
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 3 FAIR VALUE MEASUREMENTS
As of December 31, 2012 and 2011, TDS did not have any financial assets or liabilities that were
required to be recorded at fair value in its Consolidated Balance Sheet in accordance with GAAP.
However, TDS has applied the provisions of fair value accounting for purposes of computing the fair
value of financial instruments for disclosure purposes as displayed below.
Level within the
Fair Value
Hierarchy
December 31, 2012
December 31, 2011
Book Value
Fair Value
Book Value
Fair Value
(Dollars in thousands)
Cash and cash equivalents . . .
Short-term investments(1)(2)
Certificates of deposit
Government-backed
. . . . .
securities(3) . . . . . . . . . . .
Long-term investments(1)(4)
Government-backed
securities(3) . . . . . . . . . . .
Long-term debt(5)
Retail
Institutional and other
. . . . . . . . . . . . . . . . .
. . . . .
1
1
1
1
1
2
$ 740,481
$ 740,481
$563,275
$ 563,275
—
—
27,444
27,444
115,700
115,700
218,829
218,829
50,305
50,339
45,138
45,310
1,178,250
538,657
1,238,204
589,435
983,250
542,398
1,043,549
543,309
(1) Designated as held-to-maturity investments and are recorded at amortized cost in the Consolidated
Balance Sheet.
(2) Maturities are less than twelve months from the respective balance sheet dates.
(3)
Includes U.S. treasuries and corporate notes guaranteed under the Federal Deposit Insurance
Corporation’s Temporary Liquidity Guarantee Program.
(4) Maturities range between 14 and 23 months from the balance sheet date.
(5) Excludes capital lease obligations and current portion of Long-term debt.
The fair values of Cash and cash equivalents and Short-term investments approximate their book values
due to the short-term nature of these financial instruments. The fair values of Long-term investments were
estimated using quoted market prices for the individual issuances. The fair value of Long-term debt,
excluding capital lease obligations and the current portion of such Long-term debt, was estimated using
market prices for TDS’ 7.0% Senior Notes, 6.875% Senior Notes, 6.625% Senior Notes and 5.875%
Senior Notes, and U.S. Cellular’s 6.95% Senior Notes at December 31, 2012, and TDS’ 7.0% Senior
Notes, 6.875% Senior Notes and 6.625% Senior Notes, and U.S. Cellular’s 6.95% Senior Notes at
December 31, 2011. TDS’ institutional debt is traded over the counter; therefore 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 0.0% to 6.09% at December 31,
2012 and 0.00% to 6.85% at December 31, 2011.
68
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 4 INCOME TAXES
TDS’ income taxes balances at December 31, 2012 and 2011 were as follows:
December 31,
2012
2011
(Dollars in thousands)
. . . . . . . . . . . . . . . . .
Federal income taxes receivable (payable)
State income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (5,455) $77,238
8,398
9,625
Income tax expense (benefit) is summarized as follows:
Year Ended December 31,
(Dollars in thousands)
Current
2012
2011
2010
Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,705
5,092
$ (94,627) $24,329
(5,532)
5,583
Deferred
Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61,113
(2,328)
214,722
(12,175)
67,466
8,925
$73,582
$113,503
$95,188
A reconciliation of TDS’ income tax expense computed at the statutory rate to the reported income tax
expense, and the statutory federal income tax expense rate to TDS’ effective income tax expense rate is
as follows:
Year Ended December 31,
2012
2011
2010
Amount
Rate
Amount
Rate
Amount
Rate
(Dollars in millions)
Statutory federal income tax expense and rate . . . . . . . .
State income taxes, net of federal benefit(1) . . . . . . . . . .
Effect of noncontrolling interests . . . . . . . . . . . . . . . . . .
Correction of deferred taxes(2) . . . . . . . . . . . . . . . . . . .
Other differences, net . . . . . . . . . . . . . . . . . . . . . . . . . .
$68.7
8.4
—
(6.1)
2.6
35.0% $127.3
(20.9)
(3.0)
6.0
4.1
4.2
—
(3.1)
1.4
35.0% $100.0
2.7
(5.7)
(4.0)
(0.8)
—
1.6
(3.5)
1.1
35.0%
1.0
(1.4)
—
(1.3)
Total income tax expense and rate . . . . . . . . . . . . . . . . .
$73.6
37.5% $113.5
31.2% $ 95.2
33.3%
(1) Net state income taxes include changes in the valuation allowance. The 2011 benefit primarily
relates to the ability to utilize net operating losses as a result of state income tax law changes. In
addition, state tax benefits related to the settlement of state tax audits and the expiration of statutes
of limitations are included in 2012, 2011 and 2010.
(2) TDS recorded immaterial adjustments to correct deferred tax balances in 2012 and 2011 related to
tax basis adjustments and law changes that related to periods prior to 2012 and 2011, respectively.
TDS’ current Net deferred income tax asset totaled $43.4 million and $40.9 million at December 31, 2012
and 2011, respectively, and primarily represents the deferred tax effects of accrued liabilities and the
allowance for doubtful accounts on customer receivables.
69
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 4 INCOME TAXES (Continued)
TDS’ noncurrent deferred income tax assets and liabilities at December 31, 2012 and 2011 and the
temporary differences that gave rise to them were as follows:
December 31,
(Dollars in thousands)
Noncurrent deferred tax assets
2012
2011
Net operating loss (‘‘NOL’’) carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation and benefits—other
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 121,111
53,330
32,484
16,862
32,654
$103,709
46,410
17,314
13,897
20,246
Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
256,441
(69,108)
201,576
(48,714)
Total noncurrent deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
187,333
152,862
Noncurrent deferred tax liabilities
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Licenses/intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Partnership investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
666,201
250,860
127,331
5,521
608,669
224,817
123,898
4,191
Total noncurrent deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,049,913
961,575
Net noncurrent deferred income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 862,580
$808,713
At December 31, 2012, TDS and certain subsidiaries had $1,923.2 million of state NOL carryforwards
(generating a $102.0 million deferred tax asset) available to offset future taxable income. The state NOL
carryforwards expire between 2013 and 2032. Certain subsidiaries had federal NOL carryforwards
(generating a $19.1 million deferred tax asset) available to offset their future taxable income. The federal
NOL carryforwards expire between 2013 and 2032. A valuation allowance was established for certain
state NOL carryforwards and federal NOL carryforwards since it is more likely than not that a portion of
such carryforwards will expire before they can be utilized.
A summary of TDS’ deferred tax asset valuation allowance is as follows:
(Dollars in thousands)
Balance at January 1, . . . . . . . . . . . . . . . . . . . . . . . . .
Charged to income tax expense . . . . . . . . . . . . . . . .
Charged to other accounts . . . . . . . . . . . . . . . . . . .
$49,686
5,268
15,548
$ 71,014
(28,511)
7,183
$63,870
(293)
7,437
Balance at December 31, . . . . . . . . . . . . . . . . . . . . . .
$70,502
$ 49,686
$71,014
2012
2011
2010
As of December 31, 2012, the valuation allowance reduced current deferred tax assets by $1.4 million
and noncurrent deferred tax assets by $69.1 million.
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Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 4 INCOME TAXES (Continued)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(Dollars in thousands)
Unrecognized tax benefits balance at January 1,
. . . . .
Additions for tax positions of current year . . . . . . . . .
Additions for tax positions of prior years . . . . . . . . . .
Reductions for tax positions of prior years . . . . . . . .
Reductions for settlements of tax positions . . . . . . . .
Reductions for lapses in statutes of limitations . . . . .
2012
2011
2010
$28,841
7,027
1,673
(7)
(21)
(9,093)
$34,002
4,369
171
(1,973)
(976)
(6,752)
$ 45,034
5,271
179
(3,517)
(12,549)
(416)
Unrecognized tax benefits balance at December 31, . . .
$28,420
$28,841
$ 34,002
Unrecognized tax benefits are included in Accrued taxes and Other deferred liabilities and credits in the
Consolidated Balance Sheet. If these benefits were recognized, they would have reduced income tax
expense in 2012, 2011 and 2010 by $18.6 million, $18.2 million and $22.2 million, respectively, net of the
federal benefit from state income taxes.
As of December 31, 2012, TDS believes it is reasonably possible that unrecognized tax benefits could
decrease by approximately $5.5 million in the next twelve months. The nature of the uncertainty primarily
relates to state income tax positions and their resolution or the expiration of statutes of limitation.
TDS recognizes accrued interest and penalties related to unrecognized tax benefits in Income tax
expense. The amounts charged to Income tax expense related to interest and penalties resulted in a
benefit in 2012 of $1.5 million, a benefit in 2011 of $2.5 million and expense in 2010 of $1.8 million,
respectively. Net accrued interest and penalties were $13.2 million and $15.0 million at December 31,
2012 and 2011, respectively.
TDS and its subsidiaries file federal and state income tax returns. TDS remains subject to federal income
tax audits for the tax years after 2009. With only a few exceptions, TDS is no longer subject to state
income tax audits for years prior to 2008.
NOTE 5 VARIABLE INTEREST ENTITIES (VIEs)
Consolidated VIEs
As of December 31, 2012, TDS holds a variable interest in and consolidates the following VIEs under
GAAP:
(cid:127) Aquinas Wireless L.P. (‘‘Aquinas Wireless’’);
(cid:127) King Street Wireless L.P. (‘‘King Street Wireless’’) and King Street Wireless, Inc., the general partner of
King Street Wireless; and
(cid:127) Airadigm Communications, Inc.
From time to time, the FCC conducts auctions through which additional spectrum is made available for
the provision of wireless services. U.S. Cellular, TDS’ subsidiary, participated in spectrum auctions
indirectly through interests that it held at the time in Aquinas Wireless, King Street Wireless, Barat
Wireless L.P. (‘‘Barat Wireless’’) and Carroll Wireless L.P. (‘‘Carroll Wireless’’), collectively, the ‘‘limited
partnerships.’’ Each limited partnership participated in and was awarded spectrum licenses in one of four
separate spectrum auctions (FCC Auctions 78, 73, 66 and 58). Each limited partnership qualified as a
‘‘designated entity’’ and thereby was eligible for bidding credits with respect to licenses purchased in
71
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 5 VARIABLE INTEREST ENTITIES (VIEs) (Continued)
accordance with the rules defined by the FCC for each auction. In most cases, the bidding credits
resulted in a 25% discount from the gross winning bid.
On September 7, 2012, U.S. Cellular acquired 100% of the ownership interest in Barat Wireless, Inc., the
general partner of Barat Wireless, for an immaterial amount. On December 5, 2012, U.S. Cellular
acquired 100% of the ownership interest in Carroll PCS, Inc., the general partner of Carroll Wireless, for
an immaterial amount. Prior to these acquisitions, TDS consolidated Barat Wireless, Barat Wireless, Inc.,
Carroll Wireless, and Carroll PCS, Inc. as VIEs. Subsequent to the acquisition dates these entities ceased
to be VIEs but continue to be consolidated based on TDS’ controlling financial interest in the entities.
The power to direct the activities that most significantly impact the economic performance of Aquinas
Wireless and King Street Wireless 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; however, the general partner of each partnership needs consent of
the limited partner, a 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
the VIEs is shared, TDS has a disproportionate level of exposure to the variability associated with the
economic performance of the VIEs, indicating that TDS is the primary beneficiary of the VIEs in
accordance with GAAP. Accordingly, these VIEs are consolidated.
TDS has a variable interest in Airadigm as a result of a secured loan to Airadigm and the equity interest
it holds in Airadigm. TDS has the power to direct the activities that most significantly impact Airadigm’s
economic performance and the obligation to absorb losses or the right to receive benefits that could
potentially be significant to Airadigm, indicating that TDS is the primary beneficiary of Airadigm in
accordance with GAAP. In addition, TDS has a majority voting interest in Airadigm. Accordingly, Airadigm
is consolidated.
TDS’ capital contributions and advances made to VIEs totaled $10.0 million and $35.5 million in the
years ended December 31, 2012 and 2011, respectively.
The following table presents the classification of the consolidated VIEs’ assets and liabilities in TDS’
Consolidated Balance Sheet.
December 31,
(Dollars in thousands)
Assets
2012
2011
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Licenses and other Intangible assets . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . .
Other assets and deferred charges . . . . . . . . . . . . . . . . . . . .
$ 7,028
3,267
325,707
31,544
3,026
$ 13,299
3,719
501,829
27,642
3,612
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$370,572
$550,101
Liabilities
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred liabilities and credits . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,985
6,213
$ 5,944
5,481
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 16,198
$ 11,425
Other Related Matters
TDS may agree to make additional capital contributions and/or advances to Aquinas Wireless and King
Street Wireless and/or to their general partners to provide additional funding for the development of
72
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 5 VARIABLE INTEREST ENTITIES (VIEs) (Continued)
licenses granted in the various auctions. TDS may finance such amounts with a combination of cash on
hand, borrowings under its revolving credit agreement and/or 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.
The limited partnership agreements of Aquinas Wireless and King Street Wireless also provide the
general partner with a put option whereby the general partner may require the limited partner, a
subsidiary of U.S. Cellular, to purchase its interest in the limited partnership. The general partner’s put
options related to its interests in King Street Wireless and Aquinas Wireless will become exercisable in
2019 and 2020, respectively. The put option price is determined pursuant to a formula that takes into
consideration fixed interest rates and the market value of U.S. Cellular’s Common Shares. Upon exercise
of the put option, the general partner is required to repay borrowings due to U.S. Cellular. If the general
partner does not elect to exercise its put option, the general partner may trigger an appraisal process in
which the limited partner (a subsidiary of U.S. Cellular) may have the right, but not the obligation, to
purchase the general partner’s interest in the limited partnership at a price and on other terms and
conditions specified in the limited partnership agreement. In accordance with requirements under GAAP,
TDS is required to calculate a theoretical redemption value for all of the put options assuming they are
exercisable at the end of each reporting period, even though such exercise is not contractually
permitted. Pursuant to GAAP, this theoretical redemption value, net of amounts payable to U.S. Cellular
for loans and accrued interest thereon made by U.S. Cellular to the general partners the (‘‘net put
value’’), was $0.5 million at December 31, 2012. At December 31, 2011, the net put value was
$1.0 million and also included the theoretical redemption value of the put options held by the general
partners of Barat Wireless and Carroll Wireless, which were consolidated as VIEs on that date. The net
put value is recorded as Noncontrolling interests with redemption features in TDS’ Consolidated Balance
Sheet. Also in accordance with GAAP, changes in the redemption value of the put options, net of interest
accrued on the loans, are recorded as a component of Net income attributable to noncontrolling
interests, net of tax, in TDS’ Consolidated Statements of Operations.
Aquinas Wireless and King Street Wireless 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. Airadigm is a Wisconsin-based wireless service provider. As such, these entities have risks
similar to those described in the ‘‘Risk Factors’’ in TDS’ Annual Report on Form 10-K.
U.S. Cellular began offering fourth generation Long-term Evolution (‘‘4G LTE’’) service in certain cities
within its service areas during the first quarter of 2012 and has plans to continue the deployment of 4G
LTE. U.S. Cellular currently provides 4G LTE service in conjunction with King Street Wireless. Aquinas
Wireless is still in the process of developing long-term business plans.
NOTE 6 EARNINGS PER SHARE
Basic earnings per share attributable to TDS shareholders is computed by dividing Net income available
to common shareholders of TDS by the weighted average number of common shares outstanding during
the period. Diluted earnings per share attributable to TDS shareholders is computed by dividing Net
income available to common shareholders of TDS by the weighted average number of common shares,
both 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.
Shares outstanding at December 31, 2011, as well as the weighted average number of shares used in
basic and diluted earnings per share as of the beginning of 2011 and all prior periods presented, have
been retroactively restated to reflect the impact of the increased shares outstanding as a result of the
Share Consolidation. See Note 15—Common Shareholders’ Equity for additional information.
73
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 6 EARNINGS PER SHARE (Continued)
The amounts used in computing earnings per share and the effects of potentially dilutive securities on
income and the weighted average number of Common and Series A Common Shares are as follows:
Year Ended December 31,
2012
2011
2010
(Dollars and shares in thousands, except earnings per share)
Basic earnings per share attributable to TDS shareholders Net income available
to common shareholders of TDS used in basic earnings per share . . . . . . . . .
$ 81,811
$200,516
$144,799
Adjustments to compute diluted earnings
Noncontrolling interest adjustment(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred dividend adjustment(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(461)
—
(795)
49
(512)
49
Net income available to common shareholders of TDS used in diluted earnings
per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 81,350
$199,770
$144,336
Weighted average number of shares used in basic earnings per share
Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Series A Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
101,532
7,139
101,471
7,091
102,947
7,069
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
108,671
108,562
110,016
Effects of dilutive securities:
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11
255
—
262
214
60
229
195
48
Weighted average number of shares used in diluted earnings per share . . . . . . .
108,937
109,098
110,488
Basic earnings per share attributable to TDS shareholders . . . . . . . . . . . . . . . .
Diluted earnings per share attributable to TDS shareholders . . . . . . . . . . . . . . .
$
$
0.75
0.75
$
$
1.85
1.83
$
$
1.32
1.31
(1) The noncontrolling interest adjustment reflects the additional noncontrolling share of U.S. Cellular’s income
computed as if all of U.S. Cellular’s issuable securities were outstanding.
(2) The preferred dividend adjustment reflects the dividend reduction related to preferred securities that were
dilutive, and therefore treated as if converted for shares.
Certain Common Shares issuable upon the exercise of stock options, vesting of restricted stock units or
conversion of convertible preferred shares were not included in average diluted shares outstanding for
the calculation of Diluted earnings per share because their effects were antidilutive. The number of such
Common Shares excluded is shown in the table below.
(Shares in thousands)
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible preferred shares . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
2010
8,130
154
57
3,785
141
—
4,105
88
—
74
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 7 ACQUISITIONS, DIVESTITURES AND EXCHANGES
TDS assesses its existing wireless, wireline and HMS 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 companies and related service businesses. In addition, TDS
may seek to divest outright or include in exchanges for other interests those interests that are not
strategic to its long-term success.
Divestiture Transaction
On November 6, 2012, U.S. Cellular entered into a Purchase and Sale Agreement with subsidiaries of
Sprint Nextel Corporation (‘‘Sprint’’). The Purchase and Sale Agreement provides that U.S. Cellular will
transfer customers and certain PCS license spectrum to Sprint in U.S. Cellular’s Chicago, central Illinois,
St. Louis and certain Indiana/Michigan/Ohio markets (‘‘Divestiture Markets’’) in consideration for
$480 million in cash at closing, subject to pro-rations of certain assets and liabilities. The Purchase and
Sale Agreement also contemplates certain other agreements, collectively referred to as the ‘‘Divestiture
Transaction.’’
U.S. Cellular will retain other assets and liabilities related to the Divestiture Markets, including network
assets, retail stores and related equipment, and other buildings and facilities. The transaction does not
affect spectrum licenses held by U.S. Cellular or VIEs that are not currently used in the operations of the
Divestiture Markets. The Purchase and Sale Agreement also contemplates certain other agreements,
including customer and network transition services agreements, which will require that U.S. Cellular
provide customer, billing and network services to Sprint for a period of up to 24 months after the closing
date. Sprint will reimburse U.S. Cellular for providing such services at an amount equal to U.S. Cellular’s
cost, including applicable overhead allocations. In addition, these agreements will require Sprint to
reimburse U.S. Cellular up to $200 million for certain network decommissioning costs, network site lease
rent and termination costs, network access termination costs, and employee termination benefits for
specified engineering employees.
Financial impacts of the Divestiture Transaction are classified in the Consolidated Statement of
Operations within Operating income. The table below describes the amounts TDS expects to recognize
in the Consolidated Statement of Operations between the date the Purchase and Sale Agreement was
signed and the end of the transition services period, and the actual amounts incurred during the year
ended December 31, 2012 as a result of the transaction.
75
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 7 ACQUISITIONS, DIVESTITURES AND EXCHANGES (Continued)
(Dollars in thousands)
(Gain) loss on sale of business and other exit
costs, net
Proceeds from Sprint
Purchase price . . . . . . . . . . . . . . . . . . . . . . . .
Reimbursement of transition and exit costs . . . .
Net assets transferred . . . . . . . . . . . . . . . . . . . .
Non-cash charges for the write-off and write-down
of property under construction and related
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee related costs including severance,
Expected
Period of
Realization/
Incurrence(1)
Projected Range
Actual
Amount
Incurred
Year Ended
December 31,
2012
2013
2013-2014
2013
$(480,000) $(480,000)
(200,000)
170,000
(150,000)
150,000
$
—
—
—
2012-2013
5,000
15,000
10,672
retention and outplacement . . . . . . . . . . . . . . .
Contract termination costs . . . . . . . . . . . . . . . . .
Transaction costs . . . . . . . . . . . . . . . . . . . . . . . .
2012-2014
2012-2014
2012-2013
15,000
125,000
3,000
25,000
175,000
5,000
12,609
59
1,137
Total (Gain) loss on sale of business and other
exit costs, net
. . . . . . . . . . . . . . . . . . . . . . .
$(332,000) $(290,000)
$24,477
Depreciation, amortization and accretion expense
Incremental depreciation, amortization and
accretion, net of salvage values(2) . . . . . . . . . .
2012-2014
150,000
210,000
20,058
Other Operating expenses
Non-cash charges for the write-off and write-down
of various operating assets and liabilities . . . . .
2013
—
10,000
—
(Increase) decrease in Operating income . . . . . . .
$(182,000) $ (70,000)
$44,535
(1) Represents the estimated period in which a substantial majority of such amounts will be realized or
incurred.
(2) Represents incremental depreciation, amortization and accretion anticipated to be recorded in the
specified time periods as a result of revising the useful life of certain assets and revising the
settlement dates of certain asset retirement obligations in conjunction with the Divestiture
Transaction. Specifically, for the years indicated, this is estimated depreciation, amortization and
accretion recorded on assets and liabilities of the Divestiture Markets after the November 6, 2012
transaction date less depreciation, amortization and accretion that would have been recorded on
such assets and liabilities in the normal course, absent the Divestiture Transaction.
76
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 7 ACQUISITIONS, DIVESTITURES AND EXCHANGES (Continued)
As a result of the transaction, TDS recognized the following amounts in the Consolidated Balance Sheet
between the date the Purchase and Sale Agreement was signed and December 31, 2012:
(Dollars in thousands)
Accrued compensation
Employee related costs
including severance,
retention, outplacement . . . .
Other current liabilities
Contract termination costs . . .
Balance
November 6,
2012
Costs
Incurred
Cash
Non-cash
Settlements Settlements Adjustments
Balance
December 31,
2012
$—
$—
$12,609
$(304)
$
59
$ (29)
$—
$—
$—
$—
$12,305
$
30
The transaction is subject to FCC approval, compliance with the Hart-Scott-Rodino Act and other
conditions. Subject to the satisfaction or (if permitted) waiver of all conditions, the transaction is expected
to close in mid-2013.
Other Acquisitions, Divestitures and Exchanges
On November 20, 2012, U.S. Cellular acquired seven 700 MHz licenses covering portions of Illinois,
Michigan, Minnesota, Missouri, Nebraska, Oregon, Washington and Wisconsin for $57.7 million.
On August 15, 2012, U.S. Cellular acquired four 700 MHz licenses covering portions of Iowa, Kansas,
Missouri, Nebraska and Oklahoma for $34.0 million.
On June 11, 2012, TDS paid $45.0 million in cash, plus subsequent working capital adjustments of
$1.1 million, to purchase 100% of the outstanding shares of Vital Support Systems, LLC (‘‘Vital’’). Vital is
an information technology solutions provider whose service offerings complement the TDS HMS portfolio
of products. Vital is included in the TDS Telecom HMS segment for reporting purposes.
On March 14, 2012, U.S. Cellular sold the majority of the assets and liabilities of a wireless market for
$49.8 million in cash, net of working capital adjustments. At the time of the sale, a $4.2 million gain was
recorded in (Gain) loss on sale of business and other exit costs, net in the Consolidated Statement of
Operations. On May 9, 2011, pursuant to certain required terms of the partnership agreement, U.S.
Cellular paid $24.6 million in cash to purchase the remaining ownership interest in this wireless market in
which it previously held a 49% noncontrolling interest. In connection with the acquisition of the remaining
interest, a $13.4 million gain was recorded to adjust the carrying value of this 49% investment to its fair
value of $25.7 million based on an income approach valuation method. The gain was recorded in Gain
(loss) on investment in the Consolidated Statement of Operations in 2011.
On September 30, 2011, U.S. Cellular completed an exchange whereby U.S. Cellular received eighteen
700 MHz spectrum licenses covering portions of Idaho, Illinois, Indiana, Kansas, Nebraska, Oregon and
Washington in exchange for two PCS spectrum licenses covering portions of Illinois and Indiana. The
exchange of licenses will provide U.S. Cellular with additional spectrum to meet anticipated future
capacity and coverage requirements in several of its markets. No cash, customers, network assets, other
assets or liabilities were included in the exchange. As a result of this transaction, TDS recognized a gain
of $11.8 million, representing the difference between the fair value of the licenses received, calculated
using a market approach valuation method, and the carrying value of the licenses surrendered. This gain
was recorded in (Gain) loss on asset disposals and exchanges, net in the Consolidated Statement of
Operations for the year ended December 31, 2011. The Indiana PCS spectrum included in the exchange
was originally awarded to Carroll Wireless in FCC Auction 58 and was purchased by U.S. Cellular prior
to the exchange. Carroll Wireless was a VIE which TDS consolidated at the time of the exchange; see
Note 5—Variable Interest Entities for additional information.
77
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 7 ACQUISITIONS, DIVESTITURES AND EXCHANGES (Continued)
On September 23, 2011, pursuant to a plan of reorganization in the United States Bankruptcy Court for
the Western District of Wisconsin, TDS acquired 63% of Airadigm and a note for $15.5 million in
satisfaction of loans made by TDS to Airadigm and interests in Airadigm acquired by TDS from third-
parties. Airadigm is a Wisconsin-based wireless service provider. The noncontrolling interest was valued
at $0.4 million based on an income approach valuation method. TDS recognized a gain of $12.7 million
as a result of the transaction which was recorded in Gain (loss) on investment in the Consolidated
Statement of Operations for year ended December 31, 2011. Pursuant to the plan of reorganization, at
the acquisition date Airadigm owed $32.7 million to the FCC. This obligation was paid in September
2011. Airadigm operates independently from U.S. Cellular and at this time there are no plans to combine
the operations of these subsidiaries. Airadigm’s financial results are included in ‘‘Non-Reportable
segment’’ for reporting purposes.
On July 1, 2011, TDS paid $95.0 million in cash, plus a subsequent working capital adjustment of
$0.9 million, to purchase 100% of the outstanding shares of OneNeck IT Services Corporation
(‘‘OneNeck’’). OneNeck is a provider of hosted application management and managed IT hosting
services to middle market businesses. The acquisition of OneNeck is expected to complement TDS’
existing Hosted and Managed Services and is included in the HMS segment for reporting purposes.
Acquisitions and exchanges completed as of December 31, 2012 did not have a material impact on TDS’
consolidated financial statements for the periods presented, and pro forma results, assuming acquisitions
and exchanges had occurred at the beginning of each period presented, would not be materially
different from the results reported.
TDS’ acquisitions in 2012 and 2011 and the allocation of the purchase price for these acquisitions were
as follows:
Purchase
Price(1)
Goodwill(2)
Licenses
Intangible Assets
Subject to
Amortization(3)
Net Tangible
Assets (Liabilities)
Allocation of Purchase Price
(Dollars in thousands)
2012
U.S. Cellular licenses . . . . . . . . . .
TDS Telecom HMS business . . . .
$122,690
46,126
$
— $122,690
—
20,364
Total . . . . . . . . . . . . . . . . . . . .
$168,816
$20,364
$122,690
2011
U.S. Cellular licenses . . . . . . . . . .
U.S. Cellular business(4)(5) . . . . .
TDS Telecom HMS business . . . .
Non-Reportable segment
$ 4,406
24,572
95,865
$
— $ 4,406
15,592
—
—
68,107
$
—
20,300
$20,300
$
—
2,252
28,300
business . . . . . . . . . . . . . . . . .
983
515
15,220
3,194
Total . . . . . . . . . . . . . . . . . . . .
$125,826
$68,622
$ 35,218
$33,746
$
—
5,462
$ 5,462
$
—
6,728
(542)
(17,946)
$(11,760)
(1) Cash amounts paid for acquisitions may differ from the purchase price due to cash acquired in the
transactions and the timing of cash payments related to the respective transactions.
(2)
In 2012, the entire amount of Goodwill was amortizable for income tax purposes. In 2011,
$0.7 million of acquired Goodwill was amortizable for income tax purposes.
78
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 7 ACQUISITIONS, DIVESTITURES AND EXCHANGES (Continued)
(3) The weighted average amortization period for Intangible assets subject to amortization was 8.1 years
in 2012 and 8.0 years in 2011.
(4)
Includes only the acquired interest and does not include amounts attributable to U.S. Cellular’s
pre-existing noncontrolling interest described above in this Note 7.
(5) Licenses, Intangible assets subject to amortization and a portion of Net tangible assets (liabilities)
are included in amounts reported as Assets held for sale in the Consolidated Balance Sheet as of
December 31, 2011.
At December 31, 2012 and 2011, the following assets and liabilities were classified in the Consolidated
Balance Sheet as ‘‘Assets held for sale’’ and ‘‘Liabilities held for sale’’:
Current
Assets
Licenses Goodwill
Other
Intangible Plant and
Equipment
Property, Total Assets Liabilities
Held for
Held for
Sale(1)
Sale
Assets
(Dollars in thousands)
2012
Divestiture Transaction . . . . . . . . . . . $ — $140,599 $19,474 $ — $ — $160,073 $19,594
Bolingbrook Customer Care
Center(2) . . . . . . . . . . . . . . . . . . .
—
—
—
—
3,169
3,169
—
Total . . . . . . . . . . . . . . . . . . . . . . $ — $140,599 $19,474 $ — $3,169
$163,242 $19,594
2011
U.S. Cellular wireless market
. . . . . . $4,179 $ 31,920 $
— $4,611
$8,937
$ 49,647 $ 1,051
(1) Liabilities held for sale primarily consisted of Current liabilities in 2011 and Customer deposits and
deferred revenues in 2012.
(2) Effective January 1, 2013, U.S. Cellular transferred its Bolingbrook Customer Care Center operations
to an existing third party vendor.
NOTE 8 INTANGIBLE ASSETS
Changes in TDS’ Licenses and Goodwill are presented below. See Note 7—Acquisitions, Divestitures and
Exchanges for information regarding transactions which affected Licenses and Goodwill during the
periods.
Licenses
U.S.
Cellular(1)
TDS
Telecom CLEC
Non-Reportable
Segment(2)
Total
(Dollars in thousands)
Balance December 31, 2011 . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transferred to Assets held for sale . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,475,994
122,690
(140,599)
3,934
Balance December 31, 2012 . . . . . . . . . . . . . . . . . .
$1,462,019
Balance December 31, 2010 . . . . . . . . . . . . . . . . . .
Acquisitions(3)
. . . . . . . . . . . . . . . . . . . . . . . . . .
Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,457,326
4,406
11,842
2,420
Balance December 31, 2011 . . . . . . . . . . . . . . . . . .
$1,475,994
$2,800
—
—
—
$2,800
$2,800
—
—
—
$2,800
$15,220
—
—
—
$15,220
$
—
15,220
—
—
$15,220
$1,494,014
122,690
(140,599)
3,934
$1,480,039
$1,460,126
19,626
11,842
2,420
$1,494,014
79
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 8 INTANGIBLE ASSETS (Continued)
Goodwill
U.S. Cellular(1)
ILEC
CLEC
HMS
TDS Telecom
Non-
Reportable
Segment(2)
Total
(Dollars in thousands)
Assigned value at time of acquisition
Accumulated impairment losses in
prior periods . . . . . . . . . . . . . .
Balance December 31, 2011 . . . . . .
Acquisitions . . . . . . . . . . . . . . . .
Impairment
. . . . . . . . . . . . . . . .
Transferred to Assets held for sale
Other . . . . . . . . . . . . . . . . . . . .
$ 622,681
$420,716
$ 29,440
$ 83,263
$4,317
$1,160,417
(333,900)
288,781
—
—
(19,474)
—
— (29,440)
420,716
—
—
—
(258)
—
—
—
—
—
—
83,263
20,364
—
—
—
—
(363,340)
4,317
—
(515)
—
—
797,077
20,364
(515)
(19,474)
(258)
Balance December 31, 2012 . . . . . .
$ 269,307
$420,458
$
— $103,627
$3,802
$ 797,194
Assigned value at time of acquisition
Accumulated impairment losses in
prior periods . . . . . . . . . . . . . .
Balance December 31, 2010 . . . . . .
Acquisitions . . . . . . . . . . . . . . . .
$ 622,681
$420,716
$ 29,440
$ 15,156
$3,802
$1,091,795
(333,900)
288,781
—
— (29,440)
420,716
—
—
—
—
15,156
68,107
—
3,802
515
(363,340)
728,455
68,622
Balance December 31, 2011 . . . . . .
$ 288,781
$420,716
$
— $ 83,263
$4,317
$ 797,077
(1) Prior to January 1, 2009, TDS accounted for U.S. Cellular’s share repurchases as step acquisitions, allocating a
portion of the share repurchase value to TDS’ Licenses and Goodwill, as required by GAAP in effect at that
time. Consequently, U.S. Cellular’s Licenses and Goodwill on a stand-alone basis do not match the TDS
consolidated Licenses and Goodwill related to U.S. Cellular.
(2)
‘‘Non-Reportable segment’’ consists of amounts related to Suttle-Straus and Airadigm. During the second
quarter of 2012, a sustained decrease in TDS’ stock price resulted in a triggering event, as defined by GAAP,
requiring an interim impairment test of Licenses and Goodwill as of June 30, 2012. Based on this test, TDS
concluded that the entire amount of Goodwill related to Airadigm was impaired resulting in an impairment loss
of $0.5 million and no impairment of Licenses.
(3) Does not include amounts reported as Assets held for sale in the Consolidated Balance Sheet as of
December 31, 2011.
See Note 1—Summary of Significant Accounting Policies and Recent Accounting Pronouncements for a
description of accounting policies related to Licenses and Goodwill.
80
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 9 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 as shown in the following table:
December 31,
(Dollars in thousands)
Equity method investments:
2012
2011
Capital contributions, loans and advances . . . . . . . . . . . . .
Cumulative share of income . . . . . . . . . . . . . . . . . . . . . . .
Cumulative share of distributions . . . . . . . . . . . . . . . . . . . .
$
21,543
1,050,618
(907,509)
$ 25,067
958,635
(825,261)
Cost method investments . . . . . . . . . . . . . . . . . . . . . . . . . .
164,652
15,269
158,441
15,269
Total investments in unconsolidated entities . . . . . . . . . . . . .
$ 179,921
$ 173,710
Equity in earnings of unconsolidated entities totaled $92.9 million, $82.5 million and $98.1 million in
2012, 2011 and 2010, respectively; of those amounts, TDS’ investment in the Los Angeles SMSA Limited
Partnership (‘‘LA Partnership’’) contributed $67.2 million, $55.3 million and $64.8 million in 2012, 2011
and 2010, respectively. TDS held a 5.5% ownership interest in the LA Partnership throughout and at the
end of each of these years.
The following tables, which are based on information provided in part by third parties, summarize the
combined assets, liabilities and equity, and the combined results of operations of TDS’ equity method
investments:
December 31,
(Dollars in thousands)
Assets
2012
2011
Current
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 477,673
298,707
1,951,887
$ 435,732
199,167
1,988,331
Liabilities and Equity
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term capital lease obligations . . . . . . . . . . . . . . . . .
Partners’ capital and stockholders’ equity . . . . . . . . . . . . .
Year Ended December 31,
(Dollars in thousands)
Results of Operations
$2,728,267
$2,623,230
$ 353,044
84,672
33,856
405
2,256,290
$ 304,742
82,371
36,056
234
2,199,827
$2,728,267
$2,623,230
2012
2011
2010
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,825,150
4,381,731
$5,540,220
4,301,758
$4,971,525
3,567,131
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,443,419
7,190
1,238,462
960
1,404,394
36,168
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,450,609
$1,239,422
$1,440,562
81
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 10 PROPERTY, PLANT AND EQUIPMENT
U.S. Cellular’s Property, plant and equipment in service and under construction, and related accumulated
depreciation and amortization, as of December 31, 2012 and 2011 were as follows:
December 31,
Useful Lives (Years)
2012
2011
(Dollars in thousands)
Land . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . .
Leasehold and land improvements . . . .
Cell site equipment . . . . . . . . . . . . . . .
Switching equipment . . . . . . . . . . . . . .
Office furniture and equipment . . . . . . .
Other operating assets and equipment .
System development . . . . . . . . . . . . . .
Work in process . . . . . . . . . . . . . . . . .
Accumulated depreciation and
amortization . . . . . . . . . . . . . . . . . . .
N/A
20
1-30
6-25
1-8
3-5
5-25
3-7
N/A
$
33,947
341,852
1,188,720
3,100,916
1,155,114
535,656
128,290
631,184
362,749
$
30,807
330,925
1,129,818
2,874,397
1,113,780
570,776
127,253
545,193
285,500
7,478,428
7,008,449
(4,455,840)
(4,218,147)
$ 3,022,588
$ 2,790,302
U.S. Cellular’s depreciation and amortization expense totaled $597.7 million, $565.1 million and
$559.0 million in 2012, 2011 and 2010, respectively. As a result of the Divestiture Transaction, U.S.
Cellular recognized incremental depreciation and amortization in 2012. See Note 7—Acquisitions,
Divestitures and Exchanges for additional information.
TDS Telecom’s (including ILEC, CLEC, and HMS) Property, plant and equipment in service and under
construction, and related accumulated depreciation, as of December 31, 2012 and 2011 were as follows:
December 31,
Useful Lives (Years)
2012
2011
(Dollars in thousands)
Land . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . .
Cable and wire . . . . . . . . . . . . . . . . . .
Network electronic equipment
. . . . . . .
Office furniture and equipment . . . . . . .
Other equipment . . . . . . . . . . . . . . . . .
System development . . . . . . . . . . . . . .
Work in process . . . . . . . . . . . . . . . . .
Accumulated depreciation and
amortization . . . . . . . . . . . . . . . . . . .
N/A
30
15-20
5-12
5-10
10-15
3-7
N/A
$
9,004
147,177
1,445,270
888,425
312,843
127,566
196,185
87,043
$
9,004
135,883
1,410,706
853,458
286,593
114,788
165,812
88,924
3,213,513
3,065,168
(2,279,325)
(2,128,411)
$
934,188
$
936,757
The provision for TDS Telecom’s ILEC companies’ depreciation as a percentage of depreciable property
was 5.5% in 2012, 5.5% in 2011 and 5.7% in 2010. TDS Telecom’s depreciation and amortization
expense related to Property, plant and equipment totaled $177.3 million, $168.2 million and
$165.9 million in 2012, 2011 and 2010, respectively.
82
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 10 PROPERTY, PLANT AND EQUIPMENT (Continued)
Corporate and other Property, plant and equipment in service and under construction, and related
accumulated depreciation, as of December 31, 2012 and 2011 were as follows:
December 31,
2012
2011
(Dollars in thousands)
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation and amortization . . . . . . . . . . . . . . .
$116,558
(76,068)
$123,979
(66,503)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 40,490
$ 57,476
Corporate and other fixed assets consist of assets at the TDS corporate offices, Suttle-Straus and
Airadigm. Corporate and other depreciation and amortization expense related to Property, plant and
equipment totaled $10.3 million, $8.3 million and $7.3 million in 2012, 2011 and 2010, respectively.
In 2012, 2011 and 2010, (Gain) loss on asset disposals and exchanges, net included charges of
$19.7 million, $11.0 million and $11.8 million, respectively, related to disposals of assets, trade-ins of
older assets for replacement assets and other retirements of assets from service in the normal course of
business. The 2011 (Gain) loss on asset disposals and exchanges, net also included a gain on the
exchange of licenses, as described in Note 7—Acquisitions, Divestitures and Exchanges.
NOTE 11 ASSET RETIREMENT OBLIGATIONS
Asset retirement obligations are included in Other deferred liabilities and credits in the Consolidated
Balance Sheet.
In 2012 and 2011, U.S. Cellular and TDS Telecom performed a review of the assumptions and estimated
costs related to asset retirement obligations. The results of the reviews (identified as ‘‘Revisions in
estimated cash outflows’’) and other changes in asset retirement obligations during 2012 and 2011,
including the Divestiture Transaction, were as follows:
U.S.
Cellular
TDS
Telecom
Non-
Reportable
Segment
TDS
Consolidated
(Dollars in thousands)
Balance December 31, 2011 . . . . . . . . . . . . . . . . . .
Additional liabilities accrued . . . . . . . . . . . . . . . . .
Revisions in estimated cash outflows(1) . . . . . . . . .
Disposition of assets . . . . . . . . . . . . . . . . . . . . . .
Accretion expense(2) . . . . . . . . . . . . . . . . . . . . . .
$143,402
5,578
22,588
(2,674)
10,713
$65,209
367
—
(298)
4,691
Balance December 31, 2012 . . . . . . . . . . . . . . . . . .
$179,607
$69,969
Balance December 31, 2010 . . . . . . . . . . . . . . . . . .
Additional liabilities accrued . . . . . . . . . . . . . . . . .
Revisions in estimated cash outflows . . . . . . . . . . .
Acquisitions of assets . . . . . . . . . . . . . . . . . . . . . .
Disposition of assets . . . . . . . . . . . . . . . . . . . . . .
Accretion expense . . . . . . . . . . . . . . . . . . . . . . . .
$128,709
2,105
5,888
—
(1,323)
8,023
$61,036
559
—
140
(929)
4,403
Balance December 31, 2011 . . . . . . . . . . . . . . . . . .
$143,402
$65,209
$3,806
—
—
—
228
$4,034
$ —
—
—
3,751
—
55
$3,806
$212,417
5,945
22,588
(2,972)
15,632
$253,610
$189,745
2,664
5,888
3,891
(2,252)
12,481
$212,417
(1)
(2)
In 2012, U.S. Cellular included $14.9 million as a result of changes in expected settlement dates
related to the Divestiture Transaction.
In 2012, U.S. Cellular included $0.2 million of incremental accretion related to the Divestiture
Transaction.
83
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 12 DEBT
Revolving Credit Facilities
At December 31, 2012, TDS and U.S. Cellular had revolving credit facilities available for general
corporate purposes. Amounts under the revolving credit facilities may be borrowed, repaid and
reborrowed from time to time until maturity. Neither TDS nor U.S. Cellular borrowed under their current or
previous revolving credit facilities in 2012, 2011 or 2010 except for letters of credit.
TDS’ and U.S. Cellular’s interest cost on their revolving credit facilities is subject to increase if their
current credit ratings from nationally recognized credit rating agencies are lowered, and is subject to
decrease if the ratings are raised. The credit facilities would not cease to be available nor would the
maturity date accelerate solely as a result of a downgrade in TDS’ or U.S. Cellular’s credit rating.
However, a downgrade in TDS’ or U.S. Cellular’s credit rating could adversely affect their ability to renew
the credit facilities or obtain access to other credit facilities in the future.
The maturity date of any borrowings under the TDS and U.S. Cellular revolving credit facilities would
accelerate in the event of a change in control.
In 2012, each of the TDS and U.S. Cellular revolving credit facilities were amended to extend the maturity
date from December 2015 to December 2017.
The following table summarizes the terms of such revolving credit facilities as of December 31, 2012:
(Dollars in millions)
Maximum borrowing capacity . . . . . . . . . . . . . . . . . . . . . .
Letters of credit outstanding . . . . . . . . . . . . . . . . . . . . . . .
Amount borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount available for use . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowing rate: One-month London Interbank Offered Rate
(‘‘LIBOR’’) plus contractual spread(1) . . . . . . . . . . . . . . . .
LIBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contractual spread . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Range of commitment fees on amount available for use(2)
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
TDS
U.S. Cellular
400.0
$
$
0.2
— $
$
399.8
1.46%
0.21%
1.25%
0.13%
0.30%
300.0
0.2
—
299.8
1.46%
0.21%
1.25%
0.13%
0.30%
Agreement date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 2010 December 2010
Maturity date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 2017 December 2017
Fees incurred attributable to the Revolving Credit Facility are
as follows:
Fees incurred as a percent of Maximum borrowing capacity
for 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fees incurred, amount
0.33%
0.38%
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
1.3
1.5
4.8
$
$
$
1.1
1.2
3.8
(1) Borrowings under the revolving credit facility bear interest at LIBOR plus a contractual spread based
on TDS or U.S. Cellular’s credit rating or, at TDS or U.S. Cellular’s option, an alternate ‘‘Base Rate’’ as
defined in the revolving credit agreement. TDS and U.S. Cellular may select a borrowing period of
either one, two, three or six months (or other period of twelve months or less if requested by TDS or
U.S. Cellular and approved by the lenders). If TDS or U.S. Cellular provides notice of intent to borrow
less than three business days in advance of a borrowing, interest on borrowing is at the Base Rate
plus the contractual spread.
(2) The revolving credit facility has commitment fees based on the unsecured senior debt ratings assigned
to TDS and U.S. Cellular by certain ratings agencies.
84
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 12 DEBT (Continued)
The continued availability of the revolving credit facilities requires TDS and U.S. Cellular to comply with
certain negative and affirmative covenants, maintain certain financial ratios and make representations
regarding certain matters at the time of each borrowing. TDS and U.S. Cellular believe they were in
compliance as of December 31, 2012 with all covenants and other requirements set forth in the revolving
credit facilities.
In connection with U.S. Cellular’s revolving credit facility, TDS and U.S. Cellular entered into a
subordination agreement dated December 17, 2010 together with the administrative agent for the lenders
under U.S. Cellular’s revolving credit agreement. Pursuant to this subordination agreement, (a) any
consolidated funded indebtedness from U.S. Cellular to TDS will be unsecured and (b) any
(i) consolidated funded indebtedness from U.S. Cellular to TDS (other than ‘‘refinancing indebtedness’’
as defined in the subordination agreement) in excess of $105,000,000, and (ii) refinancing indebtedness
in excess of $250,000,000, will be subordinated and made junior in right of payment to the prior payment
in full of obligations to the lenders under U.S. Cellular’s revolving credit agreement. As of December 31,
2012, U.S. Cellular had no outstanding consolidated funded indebtedness or refinancing indebtedness
that was subordinated to the revolving credit agreement pursuant to the subordination agreement.
At December 31, 2012, TDS had recorded $7.6 million of issuance costs related to the revolving credit
facilities which is included in Other assets and deferred charges in the Consolidated Balance Sheet.
Long-Term Debt
In November 2012, TDS issued $195 million aggregate principal amount of 5.875% Senior notes. TDS
expects to use the net proceeds for general corporate purposes, including acquisitions.
Long-term debt as of December 31, 2012 and 2011 was as follows:
December 31,
(Dollars in thousands)
TDS:
Unsecured Senior Notes
Issuance date
Maturity date
Call date
2012
2011
6.625% . . . . . . . . . . . . . . . . . . March 2005
6.875% . . . . . . . . . . . . . . . . . .
7.0% . . . . . . . . . . . . . . . . . . . March 2011
5.875% . . . . . . . . . . . . . . . . . .
November 2012
November 2010
Purchase contract at 6.0% . . . . . . . October 2001
Total Parent . . . . . . . . . . . . .
Subsidiaries:
U.S. Cellular—
Unsecured Senior Notes
6.7% . . . . . . . . . . . . . . . . . . .
Less: 6.7% Unamortized discount .
December 2003 and
June 2004
March 2045
November 2059
March 2060
December 2061
October 2021
March 2010
November 2015
March 2016
December 2017
$ 116,250
225,000
300,000
195,000
1,097
$ 116,250
225,000
300,000
—
1,097
837,347
642,347
December 2033
December 2003
544,000
544,000
6.95% . . . . . . . . . . . . . . . . . . May 2011
May 2060
May 2016
Obligation on capital leases . . . . . .
TDS Telecom—
Rural Utilities Service (‘‘RUS’’) and
other notes . . . . . . . . . . . . . . .
Non-Reportable Segment—
Long-term notes, 3.7% to 4.8% . . . .
Obligation on capital leases . . . . . .
Total Subsidiaries . . . . . . . . .
Total long-term debt . . . . . . . . . . . . .
Long-term debt, current . . . . . . . .
. . . . .
Long-term debt, noncurrent
Through 2016
85
(11,806)
(9,889)
532,194
342,000
4,756
534,111
342,000
4,336
844
1,976
5,663
—
6,478
118
885,457
889,019
1,722,804
1,531,366
1,233
$1,721,571
1,509
$1,529,857
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 12 DEBT (Continued)
TDS may redeem its callable notes and U.S. Cellular may redeem its 6.95% Senior Notes, in whole or in
part at any time after the respective call date, at a redemption price equal to 100% of the principal
amount redeemed plus accrued and unpaid interest. U.S. Cellular may redeem the 6.7% Senior Notes, in
whole or in part, at any time prior to maturity at a redemption price equal to the greater of (a) 100% of
the principal amount of such notes, plus accrued and unpaid interest, or (b) the sum of the present
values of the remaining scheduled payments of principal and interest thereon discounted to the
redemption date on a semi-annual basis at the Treasury Rate plus 30 basis points.
Interest on the notes is payable quarterly on Senior Notes outstanding at December 31, 2012, with the
exception of U.S. Cellular’s 6.7% note in which interest is payable semi-annually.
Capitalized debt issuance costs for Unsecured Senior Notes totaled $44.6 million and are included in
Other assets and deferred charges (a long-term asset account). These costs are amortized over the life
of the notes using the effective interest method.
The annual requirements for principal payments on long-term debt are approximately $1.2 million,
$1.6 million, $1.2 million, $3.0 million and $0.2 million for the years 2013 through 2017, respectively.
The covenants associated with TDS and its subsidiaries’ long-term debt obligations, among other things,
restrict TDS’ ability, subject to certain exclusions, to incur additional liens, enter into sale and leaseback
transactions, and sell, consolidate or merge assets.
TDS’ long-term debt indentures do not contain any provisions resulting in acceleration of the maturities
of outstanding debt in the event of a change in TDS’ credit rating. However, a downgrade in TDS’ credit
rating could adversely affect its ability to obtain long-term debt financing in the future.
86
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 13 EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
TDS sponsors a qualified noncontributory defined contribution pension plan. The plan provides benefits
for the employees of TDS Corporate, TDS Telecom and U.S. Cellular. Under this plan, pension costs are
calculated separately for each participant and are funded annually. Total pension costs were
$18.4 million, $17.5 million and $17.5 million in 2012, 2011 and 2010, respectively. In addition, TDS
sponsors a defined contribution retirement savings plan (‘‘401(k)’’) plan. Total costs incurred from TDS’
contributions to the 401(k) plan were $25.0 million, $22.1 million and $21.6 million in 2012, 2011 and
2010, respectively.
TDS also sponsors an unfunded nonqualified deferred supplemental executive retirement plan for certain
employees to offset the reduction of benefits caused by the limitation on annual employee compensation
under the tax laws.
Other Post-Retirement Benefits
TDS sponsors a defined benefit post-retirement plan that provides medical benefits and that covers most
of the employees of TDS Corporate, TDS Telecom and the subsidiaries of TDS Telecom. The plan is
contributory, with retiree contributions adjusted annually.
The following amounts are included in Accumulated other comprehensive loss in the Consolidated
Balance Sheet before affecting such amounts for income taxes:
December 31,
(Dollars in thousands)
Net prior service costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
$ 22,438
(36,510)
$ 26,173
(39,117)
$(14,072) $(12,944)
The estimated net actuarial loss and prior service cost gain for the postretirement benefit plans that will
be amortized from Accumulated other comprehensive loss into net periodic benefit cost during 2013 are
$2.5 million and $3.6 million, respectively.
The following amounts are included in Comprehensive income in the Consolidated Statement of
Comprehensive Income:
Year Ended December 31, 2012
(Dollars in thousands)
Net actuarial gains (losses) . . . . . . . . . . . . . . . .
Amortization of prior service costs . . . . . . . . . . .
Amortization of actuarial losses . . . . . . . . . . . . .
Before-Tax
$
90
(3,735)
2,517
Total gains (losses) recognized in
Deferred Income
Tax Benefit
(Expense)
$ (143)
5,950
(4,010)
Net-of-Tax
$
(53)
2,215
(1,493)
Comprehensive income . . . . . . . . . . . . . . . . .
$(1,128)
$ 1,797
$
669
87
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 13 EMPLOYEE BENEFIT PLANS (Continued)
Year Ended December 31, 2011
(Dollars in thousands)
Net actuarial gains (losses) . . . . . . . . . . . . . . . .
Amortization of prior service costs . . . . . . . . . . .
Amortization of actuarial losses . . . . . . . . . . . . .
Before-Tax
$ (9,625)
(3,815)
1,934
Total gains (losses) recognized in
Deferred Income
Tax Benefit
(Expense)
$4,787
1,897
(962)
Net-of-Tax
$(4,838)
(1,918)
972
Comprehensive income . . . . . . . . . . . . . . . . .
$(11,506)
$5,722
$(5,784)
The following table reconciles the beginning and ending balances of the benefit obligation and the fair
value of plan assets for the other post-retirement benefit plans.
December 31,
(Dollars in thousands)
Change in benefit obligation
2012
2011
Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prescription drug subsidy . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$50,113
1,197
2,297
3,179
542
(2,760)
$44,270
1,116
2,368
5,158
263
(3,062)
Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . .
54,568
50,113
Change in plan assets
Fair value of plan assets at beginning of year . . . . . . . . . . . . . .
Actual return (loss) on plan assets . . . . . . . . . . . . . . . . . . . . . .
Employer contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41,267
6,264
276
(2,760)
45,023
(971)
277
(3,062)
Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . .
45,047
41,267
Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (9,521) $ (8,846)
The funded status identified above is recorded as a component of Other deferred liabilities and credits in
TDS’ Consolidated Balance Sheet.
88
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 13 EMPLOYEE BENEFIT PLANS (Continued)
The following table sets forth by level within the fair value hierarchy the plans’ assets at fair value, as of
December 31, 2012 and 2011. See Note 1—Summary of Significant Accounting Policies and Recent
Accounting Pronouncements for definitions of the levels in the fair value hierarchy.
December 31, 2012
(Dollars in thousands)
Mutual funds
Level 1
Level 2
Level 3
Total
Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International equity . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
Money market
US large cap . . . . . . . . . . . . . . . . . . . . . . .
US small cap . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
$11,285
8,868
1,983
18,823
4,074
—
$ — $ — $11,285
—
8,868
1,983
—
— 18,823
4,074
—
14
14
—
—
—
—
—
Total plan assets at fair value . . . . . . . . . . . .
$45,033
$ — $
14
$45,047
December 31, 2011
(Dollars in thousands)
Mutual funds
Level 1
Level 2
Level 3
Total
Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International equity . . . . . . . . . . . . . . . . . . .
Money market
. . . . . . . . . . . . . . . . . . . . . .
US large cap . . . . . . . . . . . . . . . . . . . . . . .
US small cap . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
$10,098
7,304
2,031
18,100
3,723
—
$ — $ — $10,098
7,304
—
—
2,031
— 18,100
3,723
—
11
11
—
—
—
—
—
Total plan assets at fair value . . . . . . . . . . . .
$41,256
$ — $
11
$41,267
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that
is significant to the fair value measurement. A financial instrument’s level within the fair value hierarchy is
not representative of its expected performance or its overall risk profile, and therefore Level 3 assets are
not necessarily higher risk than Level 2 assets or Level 1 assets.
Mutual funds are valued based on the closing price reported on the active market on which the
individual securities are traded. The investment strategy for each type of mutual fund is identified below:
Bond—The funds seek to achieve a maximum total return, consistent with preservation of capital
and prudent investment management by investing in a wide spectrum of fixed income instruments
including bonds, debt securities and other similar instruments issued by government and private-
sector entities.
International equity—The funds seek to provide long-term capital appreciation by investing in the
stocks of companies located outside the United States that are considered to have the potential for
above-average capital appreciation.
Money market—The fund seeks as high a level of current income as is consistent with the
preservation of capital and the maintenance of liquidity by investing in a diversified portfolio of
high-quality, dollar-denominated short-term debt securities.
US large cap—The funds seek to track the performance of several benchmark indices that measure
the investment return of large-capitalization stocks. The funds attempt to replicate the indices by
investing substantially all of their assets in the stocks that make up the various indices in
approximately the same proportion as the weighting in the indices.
89
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 13 EMPLOYEE BENEFIT PLANS (Continued)
US small cap—The fund seeks to track the performance of a benchmark index that measures the
investment return of small-capitalization stocks. The fund attempts to replicate the index by investing
substantially all of its assets in the stocks that make up the index in approximately the same
proportion as the weighting in the index.
The following table summarizes how plan assets are invested.
Investment Category
Target Asset
Allocation
U.S. equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50%
20%
30%
Allocation of
Plan Assets
at December 31,
2012
2011
50.8%
19.7%
29.5%
52.9%
17.7%
29.4%
The post-retirement benefit fund engages multiple asset managers to ensure proper diversification of the
investment portfolio within each asset category. The investment objective is to meet or exceed the rate of
return of a performance index comprised of 50% Dow Jones U.S. Total Stock Market Index, 20% FTSE
All World (excluding U.S.) Stock Index, and 30% Barclays Capital Aggregate Bond Index. The three-year
and five-year average rates of return for TDS’ post-retirement benefit fund are 8.76% and 3.63%,
respectively.
The post-retirement benefit fund does not hold any debt or equity securities issued by TDS, U.S. Cellular
or any related parties.
TDS is not required to set aside current funds for its future retiree health and life insurance benefits. The
decision to contribute to the plan assets is based upon several factors, including the funded status of the
plan, market conditions, alternative investment opportunities, tax benefits and other circumstances. In
accordance with applicable income tax regulations, total accumulated contributions to fund the costs of
future retiree medical benefits are restricted to an amount not to exceed 25% of the total accumulated
contributions to the trust. An additional contribution equal to a reasonable amortization of the past
service cost may be made without regard to the 25% limitation. TDS has not determined whether it will
make a contribution to the plan in 2013.
Net periodic benefit cost recorded in the Consolidated Statement of Operations includes the following
components:
Year Ended December 31,
2012
2011
2010
(Dollars in thousands)
Service cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
Amortization of prior service costs(1)
. . . . . . . . . . . . . . . . .
Amortization of actuarial losses(2)
$ 1,197
2,297
(2,995)
(3,735)
2,517
$ 1,116
2,368
(3,496)
(3,815)
1,934
$ 1,175
2,325
(3,395)
(3,815)
2,158
Net post-retirement cost . . . . . . . . . . . . . . . . . . . . . . . . .
$ (719) $(1,893) $(1,552)
(1) Based on straight-line amortization over the average time remaining before active
employees become fully eligible for plan benefits.
(2) Based on straight-line amortization over the average time remaining before active
employees retire.
90
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 13 EMPLOYEE BENEFIT PLANS (Continued)
The following assumptions were used to determine benefit obligations and net periodic benefit cost:
December 31,
2012
2011
Benefit obligations
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.00% 4.70%
Net periodic benefit cost
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.70% 5.50%
7.50% 8.00%
The discount rate for 2012 and 2011 was determined using a hypothetical Aa spot yield curve
represented by a series of annualized individual spot discount rates from six months to 99 years. The
spot rate curve was derived from a direct calculation of the implied forward rate curve based on the
included bond cash flows. This yield curve, when populated with projected cash flows that represent the
expected timing and amount of TDS plan benefit payments, produces a single effective interest discount
rate that is used to measure the plan’s liabilities.
The measurement date for actuarial determination was December 31, 2012. For measurement purposes,
the annual rate of increase in the per capita cost of covered health care benefits was assumed for 2012
to be 7.3% for plan participants aged 65 and above, and 8.1% for participants under age 65. For all
participants the 2012 annual rate of increase is expected to decrease to 5.0% by 2020. The 2011
expected rate of increase was 7.9% for plan participants aged 65 and above, and 8.0% for participants
under age 65, decreasing to 5.0% for all participants by 2020.
A 1% increase or decrease in assumed health care cost trend rates would have the following effects as
of and for the year ended December 31, 2012:
(Dollars in thousands)
Effect on total service and interest cost components . . . . . . . . . . .
Effect on post-retirement benefit obligation . . . . . . . . . . . . . . . . . .
One Percent
Increase
Decrease
$ 14
$323
$ (13)
$(299)
The following estimated future benefit payments, which reflect expected future service, are expected to
be paid:
Year
Estimated Future
Post-Retirement
Benefit Payments
(Dollars in thousands)
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018-2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,291
2,329
2,289
2,336
2,286
13,710
91
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 14 COMMITMENTS AND CONTINGENCIES
Agreements
As previously disclosed, on August 17, 2010, U.S. Cellular and Amdocs Software Systems Limited
(‘‘Amdocs’’) entered into a Software License and Maintenance Agreement (‘‘SLMA’’) and a Master
Service Agreement (‘‘MSA’’) (collectively, the ‘‘Amdocs Agreements’’) to develop a Billing and
Operational Support System (‘‘B/OSS’’). Pursuant to an updated Statement of Work dated June 29,
2012, the implementation of B/OSS is expected to take until the end of 2013 to complete and total
payments to Amdocs are estimated to be approximately $162.2 million (subject to certain potential
adjustments) over the period from commencement of the SLMA in 2010 through the second half of 2013.
As of December 31, 2012, $83.9 million had been paid to Amdocs.
Lease Commitments
TDS and its subsidiaries have leases for certain plant facilities, office space, retail store sites, cell sites,
data centers and data-processing equipment which are accounted for as operating leases. Certain leases
have renewal options and/or fixed rental increases. Renewal options that are reasonably assured of
exercise are included in determining the lease term. Any rent abatements or lease incentives, in addition
to fixed rental increases, are included in the calculation of rent expense and calculated on a straight-line
basis over the defined lease term.
As of December 31, 2012, future minimum rental payments required under operating leases and rental
receipts expected under operating leases that have noncancellable lease terms in excess of one year
were as follows:
Operating Leases Operating Leases
Future Minimum
Future Minimum
Rental Receipts
Rental Payments
(Dollars in thousands)
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 171,449
145,112
121,198
99,753
79,391
810,548
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,427,451
$ 40,737
35,317
25,924
15,294
6,476
398
$124,146
For 2012, 2011 and 2010, rent expense for noncancellable long-term leases was $204.1 million,
$187.4 million and $178.1 million, respectively; and rent expense under cancellable short-term leases
was $10.4 million, $9.0 million and $10.9 million, respectively.
Rent revenue totaled $41.6 million, $39.2 million and $35.4 million in 2012, 2011 and 2010, respectively.
Indemnifications
TDS enters into agreements in the normal course of business that provide for indemnification of
counterparties. The terms of the indemnifications vary by agreement. The events or circumstances that
would require TDS to perform under these indemnities are transaction specific; however, these
agreements may require TDS to indemnify the counterparty for costs and losses incurred from litigation
or claims arising from the underlying transaction. TDS is unable to estimate the maximum potential
liability for these types of indemnifications as the amounts are dependent on the outcome of future
events, the nature and likelihood of which cannot be determined at this time. Historically, TDS has not
made any significant indemnification payments under such agreements.
92
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 14 COMMITMENTS AND CONTINGENCIES (Continued)
Legal Proceedings
TDS is involved or may be involved from time to time in legal proceedings before the FCC, other
regulatory authorities, and/or various state and federal courts. If TDS believes that a loss arising from
such legal proceedings is probable and can be reasonably estimated, an amount is accrued in the
financial statements for the estimated loss. If only a range of loss can be determined, the best estimate
within that range is accrued; if none of the estimates within that range is better than another, the low end
of the range is accrued. The assessment of the expected outcomes of legal proceedings is a highly
subjective process that requires judgments about future events. The legal proceedings are reviewed at
least quarterly to determine the adequacy of accruals and related financial statement disclosures. The
ultimate outcomes of legal proceedings could differ materially from amounts accrued in the financial
statements.
TDS has accrued $1.7 million and $1.9 million with respect to legal proceedings and unasserted claims
as of December 31, 2012 and 2011, respectively. TDS has not accrued any amount for legal proceedings
if it cannot estimate the amount of the possible loss or range of loss. TDS does not believe that the
amount of any contingent loss in excess of the amounts accrued would be material.
NOTE 15 COMMON SHAREHOLDERS’ EQUITY
Share Consolidation Amendment
On January 13, 2012, TDS shareholders approved certain amendments to the Restated Certificate of
Incorporation of TDS (‘‘Charter Amendments’’).
These approved Charter Amendments include (a) a Share Consolidation Amendment to reclassify
(i) each Special Common Share as one Common Share, (ii) each Common Share as 1.087 Common
Shares, and (iii) each Series A Common Share as 1.087 Series A Common Shares, (b) a Vote
Amendment to fix the percentage voting power in certain matters and (c) amendments to eliminate
obsolete and inoperative provisions as more fully described in TDS’ Current Report on Form 8-K dated
January 24, 2012.
These approved Charter Amendments were effected on January 24, 2012 at which time each
outstanding Special Common Share was reclassified as one Common Share and the Special Common
Shares ceased to be outstanding and consequently ceased trading on the New York Stock Exchange
under the symbol ‘‘TDS.S.’’
As of January 24, 2012, immediately prior to the reclassification, there were outstanding 6,549,000
Series A Common Shares, 49,980,000 Common Shares, 47,012,000 Special Common Shares and 8,300
Preferred Shares. As of January 24, 2012 immediately following the reclassification, there were
outstanding 7,119,000 Series A Common Shares, 101,340,000 Common Shares and 8,300 Preferred
Shares.
As a result of the share reclassification, shares outstanding at December 31, 2011, as well as average
basic and diluted shares outstanding used to calculate earnings per share, as of the beginning of 2011
and all prior periods presented in this Form 10-K have been retroactively restated to reflect the impact of
the increased shares outstanding.
TDS Consolidated Balance Sheet as of December 31, 2011 has also been retroactively adjusted to reflect
the incremental shares issued to Common and Series A shareholders based on the closing price of TDS
Common Shares as of December 31, 2011. As a result of the reclassification, an increase in Common
Shares, Series A Common Shares and Capital in Excess of Par was offset by a corresponding decrease
in Retained Earnings with no change to the overall amount of shareholders’ equity.
93
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 15 COMMON SHAREHOLDERS’ EQUITY (Continued)
Common Stock
As of December 31, 2011, the holders of Common Shares and Special Common Shares were entitled to
one vote per share. The holders of Common Shares had full voting rights; the holders of Special
Common Shares had limited voting rights. Other than the election of directors, the Special Common
Shares had no votes except as otherwise required by law. The holders of Series A Common Shares were
entitled to ten votes per share. TDS shareholders approved a Share Consolidation Amendment and a
Vote Amendment to the Restated Certificate of Incorporation of TDS effective January 24, 2012. Pursuant
to the Share Consolidation Amendment, among other things, each Special Common Share was
reclassified into one Common Share and there are no longer any Special Common Shares authorized,
issued or outstanding. Pursuant to the Vote Amendment, the voting power of the Series A Common
Shares and the Common Shares, are fixed at 56.7% and 43.3%, respectively, of the total voting power in
matters other than the election of directors where voting power is subject to adjustment due to changes
in the number of outstanding Series A Common Shares. The Series A Common Shares continue to have
ten votes per share in such matters and the vote per share of the Common Shares floats and is
determined each time there is a vote on matters other than the election of directors.
As of December 31, 2012, Series A Common Shares were convertible, on a share for share basis, into
Common Shares and 7,160,000 Common Shares were reserved for possible issuance upon conversion
of Series A Common Shares.
The following table summarizes the number of Common, Special Common and Series A Common
Shares issued and repurchased.
(Shares in thousands)
Balance December 31, 2009 . . . . . . . . . . . . . . . . . . .
Repurchase of shares . . . . . . . . . . . . . . . . . . . . . .
Conversion of Series A Common Shares . . . . . . . .
Dividend reinvestment, incentive and compensation
plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance December 31, 2010 . . . . . . . . . . . . . . . . . . .
Repurchase of shares . . . . . . . . . . . . . . . . . . . . . .
Dividend reinvestment, incentive and compensation
plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification as a result of Share Consolidation
Common
Shares
Special
Common
Shares
Common
Treasury
Shares
Special
Common
Treasury
Shares
Series A
Common
Shares
57,082
—
11
63,442
—
—
7,277
—
—
13,717
2,394
—
—
—
(79)
(200)
57,093
—
63,442
—
7,198
—
15,911
748
6,492
—
(11)
29
6,510
—
—
—
(86)
(226)
39
Amendment(1)
. . . . . . . . . . . . . . . . . . . . . . . . .
68,409
(63,442)
17,053
(16,433)
570
Balance December 31, 2011 . . . . . . . . . . . . . . . . . . .
Repurchase of shares . . . . . . . . . . . . . . . . . . . . . .
Conversion of Series A Common Shares . . . . . . . .
Dividend reinvestment, incentive and compensation
plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
125,502
—
10
—
Balance December 31, 2012 . . . . . . . . . . . . . . . . . . .
125,512
— 24,165
868
—
—
—
—
(392)
— 24,641
— 7,119
—
—
(10)
—
—
51
— 7,160
(1) Reflects the impact of the Share Consolidation Amendment to the Restated Certificate of
Incorporation of TDS, as approved by the TDS shareholders on January 13, 2012.
94
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 15 COMMON SHAREHOLDERS’ EQUITY (Continued)
Tax-Deferred Savings Plan
TDS has reserved 90,000 Common Shares at December 31, 2012, for issuance under the TDS
Tax-Deferred Savings Plan, a qualified profit-sharing plan pursuant to Sections 401(a) and 401(k) of the
Internal Revenue Code. Participating employees have the option of investing their contributions and TDS’
contributions in a TDS Common Share fund, a U.S. Cellular Common Share fund or certain unaffiliated
funds.
Share Repurchase Programs
On November 19, 2009, the Board of Directors of TDS authorized a $250 million stock repurchase
program for both TDS Common and Special Common Shares from time to time pursuant to open market
purchases, block transactions, private purchases or otherwise, depending on market conditions. This
authorization expired on November 19, 2012.
As a result of the Share Consolidation Amendment that became effective on January 24, 2012, Special
Common Shares ceased to be authorized, issued or outstanding. Accordingly, the foregoing share
repurchase authorization applied only to Common Shares subsequent to January 24, 2012 until its
expiration date.
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 prices and other conditions. This
authorization does not have an expiration date.
Share repurchases made under these authorizations and prior authorizations, were as follows:
Year Ended December 31,
(Dollars amounts and shares in thousands)
2012
Number of
Shares
Average Cost
Per Share
Amount(1)
U.S. Cellular Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . .
TDS Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
U.S. Cellular Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . .
TDS Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TDS Special Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
U.S. Cellular Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . .
TDS Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TDS Special Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . .
571
868
1,276
—
748
1,235
—
2,394
$35.11
23.08
$48.82
—
28.73
$42.76
—
28.42
$20,045
20,026
$62,294
—
21,500
$52,827
—
68,053
(1) Amounts reported in the Consolidated Statement of Cash Flows may differ from these amounts due
to repurchases and subsequent cash settlements occurring in different years.
95
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 16 STOCK-BASED COMPENSATION
TDS Consolidated
The following table summarizes stock-based compensation expense recognized during 2012, 2011 and
2010:
Year Ended December 31,
2012
2011
2010
(Dollars in thousands)
Stock option awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock unit awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation bonus and matching stock unit awards . . . . . .
Employee stock purchase plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Awards under Non-Employee Director compensation plan . . . . . . . . . .
$ 20,884
19,025
749
—
1,213
$ 20,443
14,905
124
485
880
$ 18,623
14,781
269
566
889
Total stock-based compensation, before income taxes . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41,871
(15,848)
36,837
(13,862)
35,128
(13,288)
Total stock-based compensation expense, net of income taxes . . . . . . .
$ 26,023
$ 22,975
$ 21,840
At December 31, 2012, unrecognized compensation cost for all stock-based compensation awards was
$35.7 million and is expected to be recognized over a weighted average period of 1.7 years.
The following table provides a summary of the stock-based compensation expense included in the
Consolidated Statement of Operations for the years ended:
December 31,
2012
2011
2010
(Dollars in thousands)
Selling, general and administrative expense . . . . . . . . .
Cost of services and products . . . . . . . . . . . . . . . . . . .
$38,563
3,308
$33,949
2,888
$32,838
2,290
Total stock-based compensation . . . . . . . . . . . . . . . . . .
$41,871
$36,837
$35,128
TDS’ tax benefits realized from the exercise of stock options and other awards totaled $5.1 million in
2012.
TDS (excluding U.S. Cellular)
The information in this section relates to stock-based compensation plans using the equity instruments of
TDS. Participants in these plans are employees of TDS Corporate and TDS Telecom and Non-employee
Directors of TDS, although U.S. Cellular employees were eligible to participate in the TDS Employee
Stock Purchase Plan before it was terminated in the fourth quarter of 2011. Information related to plans
using the equity instruments of U.S. Cellular are shown in the U.S. Cellular section following the TDS
section.
Under the TDS 2011 Long-Term Incentive Plan, TDS may grant fixed and performance based incentive
and non-qualified stock options, restricted stock, restricted stock units, and deferred compensation stock
unit awards to key employees. On January 13, 2012, TDS shareholders approved Amendments to the
Restated Certificate of Incorporation of TDS which included both a Share Consolidation Amendment and
adoption of the TDS 2011 Long-Term Incentive Plan, which replaced the TDS 2004 Long-Term Incentive
Plan. See Note 15—Common Shareholders’ Equity for additional information.
As a result of the effectiveness of the Share Consolidation Amendment on January 24, 2012, there are
no longer any Special Common Shares authorized or outstanding. As a result, outstanding awards were
adjusted to reflect the reclassification, and such awards will be settled only in Common Shares. Such
adjustment was made consistent with the share consolidation.
96
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 16 STOCK-BASED COMPENSATION (Continued)
TDS had reserved 13,952,000 Common Shares at December 31, 2012 for equity awards granted and to
be granted under the TDS Long-Term Incentive Plans in effect. At December 31, 2012, the only types of
awards outstanding are fixed non-qualified stock option awards, restricted stock unit awards, and
deferred compensation stock unit awards. As of December 31, 2012, there were no shares reserved
under any employee stock purchase plan, since this plan was terminated in the fourth quarter of 2011.
TDS has also established a Non-Employee Directors’ compensation plan under which it has reserved
33,000 TDS Common Shares at December 31, 2012 for issuance as compensation to members of the
Board of Directors who are not employees of TDS.
TDS uses treasury stock to satisfy requirements for shares issued pursuant to its various stock-based
compensation plans.
Long-Term Incentive Plan—Stock Options—Stock options granted to key employees are exercisable over
a specified period not in excess of ten years. Stock options generally vest over periods up to three years
from the date of grant. Stock options outstanding at December 31, 2012 expire between 2013 and 2022.
However, vested stock options typically expire 30 days after the effective date of an employee’s
termination of employment for reasons other than retirement. Employees who leave at the age of
retirement have 90 days (or one year if they satisfy certain requirements) within which to exercise their
vested stock options. The exercise price of options equals the market value of TDS common stock on
the date of grant.
TDS estimated the fair value of stock options granted in 2012, 2011 and 2010 using the Black-Scholes
valuation model and the assumptions shown in the table below:
Expected life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected annual volatility rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated annual forfeiture rate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
2010
5.5 Years
5.5 Years
5.3 Years
41.1%
2.4%
0.9%
2.9%
37.6%
1.6%
2.1%
3.0%
37.8%
1.7%
2.1%
3.0%
The fair value of options is recognized as compensation cost using an accelerated attribution method
over the requisite service periods of the awards, which is generally the vesting period.
Until the time of the effectiveness of the Share Consolidation Amendment on January 24, 2012, any
employee with stock options granted prior to the date of the TDS Special Common Share dividend on
May 13, 2005, received one Common Share and one Special Common Share per tandem option
exercised. Each tandem option was exercisable at its original exercise price. As a result of the Share
Consolidation Amendment each Special Common Share was reclassified as a Common Share on a
one-for-one basis and each Common Share was reclassified as 1.087 Common Shares. Consequently,
each tandem option was adjusted to reflect the reclassification into 2.087 Common Shares upon exercise
and the exercise price of the award was also adjusted to 1⁄2.087 of the original exercise price of the
award.
Any employee with TDS stock options granted after May 13, 2005 was entitled to receive one Special
Common Share per option exercised. As a result of the Share Consolidation Amendment each Special
Common option was reclassified into one Common Share option. The reclassification did not change the
exercise price of these awards.
A summary of TDS stock options (total and portion exercisable) and changes during the three years
ended December 31, 2012, is presented in the tables and narrative below. The December 31, 2011
97
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 16 STOCK-BASED COMPENSATION (Continued)
amounts in the tables below reflect the impact of the Share Consolidation Amendment to the Restated
Certificate of Incorporation of TDS:
Tandem Options
Outstanding at December 31, 2009 . . . . . . . . . . . . . . . . . .
(901,000 exercisable) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2010 . . . . . . . . . . . . . . . . . .
(651,000 exercisable) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification of Tandem Options due to Share
Number of
Options
901,000
(2,000)
—
(248,000)
651,000
(2,000)
—
(78,000)
Weighted Weighted
Average
Average
Grant Date
Exercise
Fair Value
Price
Aggregate
Intrinsic
Value
$ 81.73
81.73
45.53
—
113.56
$ 69.60
69.60
53.77
—
99.23
$ 46,000
$ 30,000
Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(571,000)
65.64
$158,000
Outstanding at December 31, 2011 . . . . . . . . . . . . . . . . . .
—
98
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 16 STOCK-BASED COMPENSATION (Continued)
Special Common Share Options
Outstanding at December 31, 2009 . . . . . . . . . . . . . . . . .
(1,732,000 exercisable) . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2010 . . . . . . . . . . . . . . . . .
(2,506,000 exercisable) . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification of Special Common Options due to
Number of
Options
3,860,000
1,387,000
(5,000)
(105,000)
(29,000)
5,108,000
1,034,000
(5,000)
(34,000)
(79,000)
Weighted Weighted
Average
Average
Grant Date
Exercise
Fair Value
Prices
Aggregate
Intrinsic
Value
$38.46
48.91
26.66
26.95
29.64
45.16
$35.41
43.14
29.94
26.95
28.12
35.00
$8.37
$17,000
$9.59
$19,000
Share Consolidation . . . . . . . . . . . . . . . . . . . . . . . . .
(6,024,000)
$34.38
$
—
Outstanding at December 31, 2011 . . . . . . . . . . . . . . . . .
—
Common Share Options
Number of
Options
Weighted Weighted
Average
Average
Grant Date
Exercise
Fair Value
Prices
Aggregate
Intrinsic
Value
Weighted
Average
Remaining
Contractual
Life
(in years)
Outstanding at December 31, 2010 . . . . . . .
Reclassification of Tandem Options due to
Share Consolidation . . . . . . . . . . . . . . . .
Reclassification of Special Common Options
due to Share Consolidation . . . . . . . . . . .
Outstanding at December 31, 2011 . . . . . . .
(4,865,000 exercisable) . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2012 . . . . . . .
(5,782,000 exercisable) . . . . . . . . . . . . . . . .
— $ —
1,192,000
31.45
6,024,000
34.38
7,216,000
1,702,000
(1,000)
(106,000)
(298,000)
8,513,000
$33.89
36.67
20.79
20.65
23.81
30.12
$31.53
$35.12
$6.28
$
4,000
$2,279,000
68,000
$
6.4
5.2
The aggregate intrinsic value in the tables above represents the total pre-tax intrinsic value (the
difference between TDS’ closing stock prices and the exercise price, multiplied by the number of
in-the-money options) that was received by the option holders upon exercise or that would have been
received by option holders had all options been exercised on December 31, 2012.
Long-Term Incentive Plan—Restricted Stock Units—TDS also grants restricted stock unit awards to key
employees. As of December 31, 2011, each restricted stock unit outstanding was convertible into one
Special Common Share upon the vesting of such restricted stock units. As a result of the Share
Consolidation Amendment each outstanding restricted stock unit was reclassified and became
99
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 16 STOCK-BASED COMPENSATION (Continued)
convertible into one Common Share Award. The restricted stock unit awards currently outstanding were
granted in 2011 and 2012 and will vest in December 2013 and 2014, respectively.
TDS estimates the fair value of restricted stock units by reducing the grant-date price of the Company’s
shares by the present value of the dividends expected to be paid on the underlying shares during the
requisite service period, discounted at the appropriate risk-free interest rate, since employees are not
entitled to dividends declared on the underlying shares while the restricted stock or RSU is unvested.
The fair value is then recognized as compensation cost on a straight-line basis over the requisite service
periods of the awards, which is generally the vesting period.
A summary of TDS nonvested restricted stock units and changes during the year ended December 31,
2012 is presented in the table below. The December 31, 2011 amounts in the table below reflect the
impact of the Share Consolidation Amendment to the Restated Certificate of Incorporation of TDS.
Common Restricted Stock Units
Nonvested at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted
Average
Grant Date
Fair Value
$27.45
$19.62
$25.73
$24.10
Number
389,000
333,000
(151,000)
(24,000)
Nonvested at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
547,000
$23.44
The total fair values as of the respective vesting dates of restricted stock units vested during 2012, 2011
and 2010 were $3.4 million, $4.1 million and $4.2 million, respectively. The weighted average grant date
fair value of restricted stock units granted in 2012, 2011 and 2010 was $19.62, $28.73 and $25.53,
respectively.
Long-Term Incentive Plan—Deferred Compensation Stock Units—Certain TDS employees may elect to
defer receipt of all or a portion of their annual bonuses and to receive a company matching contribution
on the amount deferred. All bonus compensation that is deferred by employees electing to participate is
immediately vested and is deemed to be invested in TDS Common Share units. The amount of TDS’
matching contribution depends on the portion of the annual bonus that is deferred. Participants receive a
25% stock unit match for amounts deferred up to 50% of their total annual bonus and a 33% match for
amounts that exceed 50% of their total annual bonus; such matching contributions also are deemed to
be invested in TDS Common Share units.
The total fair values of deferred compensation stock units that vested during 2012, 2011 and 2010 were
$0.1 million, $0.1 million and $0.1 million, respectively. The weighted average grant date fair value of
deferred compensation stock units granted in 2012, 2011 and 2010 was $24.18, $28.15 and $28.72,
respectively. As of December 31, 2012, there were 205,000 vested but unissued deferred compensation
stock units valued at $4.5 million.
Employee Stock Purchase Plan—The TDS 2009 Employee Stock Purchase Plan was terminated in the
fourth quarter of 2011.
Compensation of Non-Employee Directors—TDS issued 22,000, 19,000 and 19,000 Common Shares
under its Non-Employee Director plan in 2012, 2011 and 2010, respectively.
Dividend Reinvestment Plans (‘‘DRIP’’)—TDS had reserved 260,000 Common Shares at December 31,
2012, for issuance under Automatic Dividend Reinvestment and Stock Purchase Plans and 18,000
100
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 16 STOCK-BASED COMPENSATION (Continued)
Series A Common Shares for issuance under the Series A Common Share Automatic Dividend
Reinvestment Plan. These plans enabled holders of TDS’ Common Shares and Preferred Shares to
reinvest cash dividends in Common Shares and holders of Series A Common Shares to reinvest cash
dividends in Series A Common Shares. The purchase price of the shares is 95% of the market value,
based on the average of the daily high and low sales prices for TDS’ Common Shares on the New York
Stock Exchange for the ten trading days preceding the date on which the purchase is made. These
plans are considered non-compensatory plans, therefore no compensation expense is recognized for
stock issued under these plans.
U.S. Cellular
The information in this section relates to stock-based compensation plans using the equity instruments of
U.S. Cellular. Participants in these plans are employees of U.S. Cellular and Non-employee Directors of
U.S. Cellular. Information related to plans using the equity instruments of TDS are shown in the previous
section.
U.S. Cellular has established the following stock-based compensation plans: a long-term incentive plan
and a Non-Employee Director compensation plan, and had an employee stock purchase plan that was
terminated in the fourth quarter of 2011. In addition, U.S. Cellular employees were eligible to participate
in the TDS employee stock purchase plan before that plan also was terminated in the fourth quarter of
2011.
Under the U.S. Cellular 2005 Long-Term Incentive Plan, U.S. Cellular may grant fixed and performance
based incentive and non-qualified stock options, restricted stock, restricted stock units, and deferred
compensation stock unit awards to key employees. At December 31, 2012, the only types of awards
outstanding are fixed non-qualified stock option awards, restricted stock unit awards, and deferred
compensation stock unit awards.
At December 31, 2012, U.S. Cellular had reserved 5,662,000 Common Shares for equity awards granted
and to be granted under the 2005 Long-Term Incentive Plan. No Common Shares were reserved for
issuance to employees under any employee stock purchase plan since this plan was terminated in the
fourth quarter of 2011.
U.S. Cellular also has established a Non-Employee Director compensation plan under which it has
reserved 25,000 Common Shares at December 31, 2012 for issuance as compensation to members of
the Board of Directors who are not employees of U.S. Cellular or TDS.
U.S. Cellular uses treasury stock to satisfy requirements for Common Shares issued pursuant to its
various stock-based compensation plans.
Long-Term Incentive Plan—Stock Options—Stock options granted to key employees are exercisable over
a specified period not in excess of ten years. Stock options generally vest over a period of three years
from the date of grant. Stock options outstanding at December 31, 2012 expire between 2013 and 2022.
However, vested stock options typically expire 30 days after the effective date of an employee’s
termination of employment for reasons other than retirement. Employees who leave at the age of
retirement have 90 days (or one year if they satisfy certain requirements) within which to exercise their
vested stock options. The exercise price of options equals the market value of U.S. Cellular Common
Shares on the date of grant.
101
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 16 STOCK-BASED COMPENSATION (Continued)
U.S. Cellular estimated the fair value of stock options granted during 2012, 2011, and 2010 using the
Black-Scholes valuation model and the assumptions shown in the table below.
2012
2011
2010
Expected life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated annual forfeiture rate . . . . . . . . . . . . . . . . . . . .
4.5 years
4.3 years
0.9-8.0 years
40.7%-42.6% 43.4%-44.8% 26.9%-43.9%
0%
0.4%-3.1%
0.0%-8.4%
0%
0.7%-2.0%
0.0%-7.8%
0%
0.5%-0.9%
0.0%-9.1%
The fair value of options is recognized as compensation cost using an accelerated attribution method
over the requisite service periods of the awards, which is generally the vesting period.
A summary of U.S. Cellular stock options outstanding (total and portion exercisable) and changes during
the three years ended December 31, 2012, is presented in the table below:
Outstanding at December 31, 2009 . . . . . . .
(1,046,000 exercisable) . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2010 . . . . . . .
(1,151,000 exercisable) . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2011 . . . . . . .
(1,321,000 exercisable) . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2012 . . . . . . .
(1,657,000 exercisable) . . . . . . . . . . . . . . . .
Number of
Options
2,029,000
831,000
(317,000)
(88,000)
(193,000)
2,262,000
595,000
(173,000)
(72,000)
(175,000)
2,437,000
580,000
(41,000)
(97,000)
(116,000)
2,763,000
Weighted Weighted
Average
Average
Grant Date
Exercise
Fair Value
Price
Aggregate
Intrinsic
Value
Weighted
Average
Remaining
Contractual
Life
(in years)
$51.37
54.40
41.98
38.60
44.28
61.50
$49.12
54.64
51.70
37.50
45.97
57.05
$50.10
53.68
40.70
34.27
44.81
52.92
$48.43
$51.20
$13.75
$1,555,000
$19.42
$2,099,000
$14.71
$ 205,000
$ 513,000
$ 513,000
6.60
5.30
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference
between U.S. Cellular’s closing stock price and the exercise price multiplied by the number of
in-the-money options) that was received by the option holders upon exercise or that would have been
received by option holders had all options been exercised on December 31, 2012.
Long-Term Incentive Plan—Restricted Stock Units—U.S. Cellular grants restricted stock unit awards,
which generally vest after three years, to key employees.
102
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 16 STOCK-BASED COMPENSATION (Continued)
U.S. Cellular estimates the fair value of restricted stock units based on the closing market price of U.S.
Cellular shares on the date of grant. The fair value is then recognized as compensation cost on a
straight-line basis over the requisite service periods of the awards, which is generally the vesting period.
A summary of U.S. Cellular nonvested restricted stock units at December 31, 2012 and changes during
the year then ended is presented in the table below:
Nonvested at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number
845,000
468,000
(225,000)
(75,000)
Nonvested at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,013,000
Weighted Average
Grant Date Fair
Value
$42.48
39.75
32.96
43.74
$43.24
The total fair value of restricted stock units that vested during 2012, 2011 and 2010 was $8.9 million,
$9.5 million and $4.7 million, respectively, as of the respective vesting dates. The weighted average grant
date fair value of restricted stock units granted in 2012, 2011 and 2010 was $39.75, $49.35 and $42.21,
respectively.
Long-Term Incentive Plan—Deferred Compensation Stock Units—Certain U.S. Cellular employees may
elect to defer receipt of all or a portion of their annual bonuses and to receive a company matching
contribution on the amount deferred. All bonus compensation that is deferred by employees electing to
participate is immediately vested and is deemed to be invested in U.S. Cellular Common Share stock
units. The amount of U.S. Cellular’s matching contribution depends on the portion of the annual bonus
that is deferred. Participants receive a 25% match for amounts deferred up to 50% of their total annual
bonus and a 33% match for amounts that exceed 50% of their total annual bonus; such matching
contributions also are deemed to be invested in U.S. Cellular Common Share stock units.
The total fair value of deferred compensation stock units that vested was less than $0.1 million during
2012 and 2011. The fair value of units vested during 2010 was $0.4 million. The weighted average grant
date fair value of deferred compensation stock units granted in 2012, 2011 and 2010 was $42.37, $48.72
and $40.76, respectively. As of December 31, 2012, there were 7,000 vested but unissued deferred
compensation stock units valued at $0.2 million.
Employee Stock Purchase Plan—The U.S. Cellular 2009 Employee Stock Purchase Plan was terminated
in the fourth quarter of 2011.
Compensation of Non-Employee Directors—U.S. Cellular issued 7,600, 6,600 and 9,000 Common Shares
in 2012, 2011 and 2010, respectively, under its Non-Employee Director compensation plan.
NOTE 17 BUSINESS SEGMENT INFORMATION
U.S. Cellular and TDS Telecom are billed for all services they receive from TDS, consisting primarily of
information processing 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.
103
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 17 BUSINESS SEGMENT INFORMATION (Continued)
Financial data for TDS’ business segments for 2012, 2011 and 2010 is as follows. TDS Telecom’s
incumbent local exchange carriers are designated as ‘‘ILEC’’ in the table, its competitive local exchange
carriers is designated as ‘‘CLEC’’ and hosted and managed services operations are designated as
‘‘HMS.’’ During the quarter ended March 31, 2012, TDS reevaluated and changed its reportable business
segments. Periods presented for comparative purposes have been re-presented to conform to the
revised presentation. See Note 1—Summary of Significant Accounting Policies and Recent Accounting
Pronouncements for additional information.
Year Ended or at December 31, 2012
U.S.
Cellular
ILEC
CLEC
HMS
TDS
Telecom
Eliminations
TDS
Telecom
Total
Non-
Other
Reportable Reconciling
Segment(1)
Items(2)
Total
TDS Telecom
(Dollars in thousands)
Operating revenues . . . . . . . . . . . $4,452,084 $ 578,412 $173,397 $113,010
Cost of services and products
$(10,313) $ 854,506
$60,830
$ (22,143) $5,345,277
(excluding Depreciation, amortization
and accretion reported below)
Selling, general and administrative
. . . .
1,882,752
192,514
89,949
75,781
(8,650)
349,594
42,150
(1,926)
2,272,570
expense . . . . . . . . . . . . . . . . .
1,764,933
170,493
66,886
34,193
(1,663)
269,909
16,189
(17,130)
2,033,901
Adjusted OIBDA(3) . . . . . . . . . . . .
Depreciation, amortization and accretion
expense . . . . . . . . . . . . . . . . .
Loss on impairment of assets . . . . . .
(Gain) loss on asset disposals and
804,399
215,405
16,562
3,036
608,633
—
150,557
—
21,969
—
20,568
—
exchanges, net
. . . . . . . . . . . . .
18,088
(Gain) loss on sale of business and
other exit costs, net . . . . . . . . . . .
21,022
535
39
485
—
108
—
Operating income (loss)
Equity in earnings of unconsolidated
. . . . . . . .
entities . . . . . . . . . . . . . . . . . .
Interest and dividend income . . . . . .
. . . . . . . .
Gain (loss) on investment
Interest expense (Capitalized interest)
.
Other, net . . . . . . . . . . . . . . . . . .
156,656
64,274
(5,892)
(17,640)
90,364
3,644
(3,718)
42,393
500
10
2,805
—
(2,458)
(353)
—
280
—
(216)
—
—
25
—
1,160
(1)
Income before income taxes . . . . . .
205,053
69,194
(5,396)
(18,776)
—
—
—
—
—
—
—
—
—
—
—
—
235,003
2,491
(3,087)
1,038,806
193,094
—
6,102
515
5,797
—
813,626
515
1,128
39
(1)
—
526
—
19,741
21,061
40,742
(4,125)
(9,410)
183,863
10
3,110
—
(1,514)
(354)
—
8
—
3,938
575
2,493
2,486
—
41,928
(1)
92,867
9,248
(3,718)
86,745
720
45,022
(7,480)
(46,360)
196,235
—
Investments in unconsolidated entities .
Total assets . . . . . . . . . . . . . . . . .
267,798
Capital expenditures . . . . . . . . . . . . $ 836,748 $ 137,115 $ 21,465 $ 15,344
3,809
1,407,892
144,531
6,587,450
—
111,806
3,809
—
— 1,787,496
— $ 173,924
—
62,931
$ 1,789
31,581
186,023
179,921
8,623,900
$ (7,840) $1,004,621
$
104
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 17 BUSINESS SEGMENT INFORMATION (Continued)
Year Ended or at December 31, 2011
U.S.
Cellular
ILEC
CLEC
HMS
TDS
Telecom
Eliminations
TDS
Telecom
Total
Non-
Other
Reportable Reconciling
Segment(1)
Items(2)
Total
TDS Telecom
(Dollars in thousands)
Operating revenues . . . . . . . . . . . $4,343,346 $ 597,811 $180,332 $ 47,180
Cost of services and products
$(9,935)
$ 815,388
$45,133
$ (23,396) $5,180,471
(excluding Depreciation, amortization
and accretion reported below)
Selling, general and administrative
. . . .
1,721,181
191,591
91,348
23,502
(8,238)
298,203
32,952
(1,692)
2,050,644
expense . . . . . . . . . . . . . . . . .
1,769,701
158,302
64,509
15,647
(1,697)
Adjusted OIBDA(3) . . . . . . . . . . . .
Depreciation, amortization and accretion
expense . . . . . . . . . . . . . . . . .
Loss on impairment of assets . . . . . .
(Gain) loss on asset disposals and
852,464
247,918
24,475
8,031
573,557
—
145,687
—
21,976
—
12,867
—
exchanges, net
. . . . . . . . . . . . .
(1,873)
1,043
85
115
Operating income (loss)
Equity in earnings of unconsolidated
. . . . . . . .
entities . . . . . . . . . . . . . . . . . .
Interest and dividend income . . . . . .
Gain (loss) on investment
. . . . . . . .
.
Interest expense (Capitalized interest)
Other, net . . . . . . . . . . . . . . . . . .
280,780
101,188
2,414
(4,951)
83,566
3,395
11,373
65,614
(678)
8
3,252
—
(2,406)
2,720
—
296
—
(296)
(1)
—
—
—
78
(9)
Income before income taxes . . . . . .
312,822
109,574
3,005
(5,038)
—
—
—
—
—
—
—
—
—
—
—
236,761
280,424
180,530
—
1,243
98,651
8
3,548
—
(2,624)
2,710
8,609
3,572
3,021
—
(197)
748
—
2
—
1,359
650
(12,712)
2,002,359
(8,992)
1,127,468
8,668
—
765,776
—
17
(810)
(17,677)
362,502
(1,036)
2,200
12,730
53,852
976
82,538
9,145
24,103
118,201
3,658
107,541
41
(56,659)
363,745
—
Investments in unconsolidated entities .
Total assets . . . . . . . . . . . . . . . . .
209,109
Capital expenditures . . . . . . . . . . . . $ 782,526 $ 141,802 $ 22,361 $ 26,999
3,808
1,376,131
138,096
6,327,976
—
118,231
—
—
3,808
1,703,471
$ — $ 191,162
—
68,870
$ 3,206
31,806
100,688
$ 10,324
173,710
8,201,005
$ 987,218
105
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 17 BUSINESS SEGMENT INFORMATION (Continued)
Year Ended or at December 31, 2010
U.S.
Cellular
ILEC
CLEC
HMS
TDS
Telecom
Eliminations
TDS
Telecom
Total
Non-
Other
Reportable Reconciling
Segment(1)
Items(2)
Total
TDS Telecom
(Dollars in thousands)
Operating revenues . . . . . . . . . . . . $4,177,681 $ 606,844 $187,984 $10,550
Cost of services and products (excluding
$(9,536)
$ 795,842
$40,167
$ (26,861) $4,986,829
Depreciation, amortization and
accretion reported below) . . . . . . . .
Selling, general and administrative
1,611,221
192,699
96,934
3,599
(8,848)
284,384
31,019
(1,761)
1,924,863
expense . . . . . . . . . . . . . . . . . .
1,783,315
168,783
64,107
Adjusted OIBDA(3)
Depreciation, amortization and accretion
. . . . . . . . . . . .
expense . . . . . . . . . . . . . . . . . .
Loss on impairment of assets . . . . . . .
(Gain) loss on asset disposals and
783,145
245,362
26,943
570,955
—
146,351
—
24,679
—
exchanges, net
. . . . . . . . . . . . . .
10,717
572
362
Operating income (loss)
Equity in earnings of unconsolidated
. . . . . . . . .
entities . . . . . . . . . . . . . . . . . . .
Interest and dividend income . . . . . . .
. . . . . . . . .
Gain (loss) on investment
. .
Interest expense (Capitalized interest)
. . . . . . . . . . . . . . . . . .
Other, net
201,473
98,439
1,902
97,318
3,808
—
61,555
72
13
2,833
—
(711)
(2,474)
—
293
—
(180)
—
4,237
2,714
3,024
—
197
(507)
—
1
—
59
(4)
Income before income taxes . . . . . . .
241,116
99,522
2,375
(569)
(688)
—
—
—
—
—
—
—
—
—
—
—
236,439
275,019
174,054
—
6,307
2,841
1,888
—
(27,598)
1,998,463
2,498
1,063,503
8,752
—
755,649
—
1,131
(76)
(9)
11,763
99,834
1,029
(6,245)
296,091
13
3,127
—
(832)
(2,478)
—
—
—
430
616
743
3,573
—
55,657
(299)
98,074
10,508
—
116,810
(2,089)
101,328
1,215
(57,885)
285,774
—
Investments in unconsolidated entities . .
Total assets . . . . . . . . . . . . . . . . .
34,537
Capital expenditures . . . . . . . . . . . . $ 583,134 $ 123,645 $ 20,303 $13,357
13
1,443,548
160,847
5,875,549
—
123,762
—
—
13
1,601,847
$ — $ 157,305
—
22,709
$ 1,029
37,062
196,012
$ 13,564
197,922
7,696,117
$ 755,032
(1)
(2)
(3)
Represents Suttle-Straus and, as of September 23, 2011, Airadigm.
Consists of corporate operations and intercompany eliminations between U.S. Cellular, TDS Telecom, the Non-Reportable Segment and
corporate operations.
Adjusted OIBDA is defined as operating income excluding the effects of: depreciation, amortization and accretion (OIBDA); the loss on
impairment of assets (if any); the net gain or loss on asset disposals and exchanges (if any); and the net gain or loss on sale of business and
other exit costs (if any). Adjusted OIBDA excludes the loss on impairment of assets (if any), the net gain or loss on asset disposals and
exchanges (if any), and the net gain or loss on sale of business and other exit costs (if any) in order to show operating results on a more
comparable basis from period to period. TDS does not intend to imply that any of such amounts that are excluded are non-recurring, infrequent
or unusual; such gains or losses may occur in the future.
Adjusted OIBDA 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. This amount may also be commonly referred to by management as operating
cash flow. TDS believes this measure provides useful information to investors regarding TDS’ financial condition and results of operations
because it highlights certain key cash and non-cash items and their impacts on cash flows from operating activities. This amount should not be
confused with Cash flows from operating activities, which is a component of the Consolidated Statement of Cash Flows.
106
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 18 SUPPLEMENTAL CASH FLOW DISCLOSURES
Following are supplemental cash flow disclosures regarding interest paid and income taxes paid.
Year Ended December 31,
2012
2011
2010
(Dollars in thousands)
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes paid (refunded)
$ 88,208
(62,042)
$ 96,174
(66,994)
$114,996
87,139
Following are supplemental cash flow disclosures regarding transactions related to stock-based
compensation awards:
TDS:
Year Ended December 31,
2012
2011
2010
(Dollars in thousands)
Common Shares withheld(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special Common Shares withheld(1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aggregate value of Common Shares withheld . . . . . . . . . . . . . . . . . . . . .
Aggregate value of Special Common Shares withheld . . . . . . . . . . . . . . .
Cash receipts upon exercise of stock options . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Cash disbursements for payment of taxes(2)
49,840
1,381
$ 1,102
33
$
16
(1,135)
— $
—
65,638
$
$ 1,537
1,463
(1,431)
—
43,580
—
$ 1,348
1,657
(1,348)
Net cash receipts from exercise of stock options and vesting of other
stock awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (1,119) $
32
$
309
U.S. Cellular:
Year Ended December 31,
(Dollars in thousands)
Common Shares withheld(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aggregate value of Common Shares withheld . . . . . . . . . . . . . . . . . . . . .
Cash receipts upon exercise of stock options . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Cash disbursements for payment of taxes(2)
Net cash receipts (disbursements) from exercise of stock options and
2012
2011
2010
92,846
$ 3,604
900
(3,105)
120,250
$ 5,952
5,447
(3,512)
310,388
$13,527
3,574
(3,065)
vesting of other stock awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (2,205) $ 1,935
$
509
(1) Such shares were withheld to cover the exercise price of stock options, if applicable, and required
tax withholdings.
(2)
In certain situations, TDS and U.S. Cellular withhold shares that are issuable upon the exercise of
stock options or the vesting of restricted shares to cover, and with a value equivalent to, the exercise
price and/or the amount of taxes required to be withheld from the stock award holder at the time of
the exercise or vesting. TDS and U.S. Cellular then pay the amount of the required tax withholdings
to the taxing authorities in cash.
NOTE 19 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following persons are partners of Sidley Austin LLP, the principal law firm of TDS and its subsidiaries:
Walter C.D. Carlson, a trustee and beneficiary of a voting trust that controls TDS, the non-executive
Chairman of the Board and member of the Board of Directors of TDS and a director of U.S. Cellular, a
subsidiary of TDS; William S. DeCarlo, the General Counsel of TDS and an Assistant Secretary of TDS
and certain subsidiaries of TDS; and Stephen P. Fitzell, the General Counsel of U.S. Cellular and TDS
Telecommunications Corporation and an Assistant Secretary of certain subsidiaries of TDS. Walter C.D.
Carlson does not provide legal services to TDS or its subsidiaries. TDS, U.S. Cellular and their
subsidiaries incurred legal costs from Sidley Austin LLP of $13.6 million in 2012, $13.7 million in 2011
and $14.0 million in 2010.
107
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 19 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
On September 29, 2010, TDS repurchased 272,323 Special Common Shares at the then current market
price on the NYSE for a total price of $7.7 million, or an average of $28.24 per Special Common Share
including broker fees, from an affiliate of Southeastern Asset Management, Inc. (‘‘SEAM’’). This
transaction was not solicited by TDS and TDS did not enter into any agreements with SEAM. The
September 29, 2010, transaction was effected by TDS’ broker pursuant to TDS’ existing institutional
brokerage account agreement on the NYSE pursuant to Rule 10b-18 under the Securities Exchange Act
of 1934, as amended (‘‘Exchange Act’’). The repurchase was made under TDS’ share repurchase
authorization that was in effect at the time of such repurchase. At the time of the share repurchase by
TDS, SEAM was a related party as defined by the SEC because it was a beneficial owner of more than
5% of TDS Special Common Shares.
The Audit Committee of the Board of Directors is responsible for the review and evaluation of all related-
party transactions as such term is defined by the rules of the New York Stock Exchange.
NOTE 20 SUBSEQUENT EVENTS
On February 25, 2013, TDS entered into an Asset Purchase Agreement with Baja Broadband, LLC
(‘‘Baja’’) to acquire substantially all of the assets of Baja for $267.5 million in cash, subject to a working
capital adjustment. Baja is a cable company that passes approximately 212,000 households in markets
in Colorado, New Mexico, Texas, and Utah and offers video, broadband and voice services. The
transaction is subject to governmental regulatory approvals, compliance with the Hart-Scott-Rodino Act
and other conditions. Subject to approvals, the transaction is expected to close in the third quarter of
2013.
108
Telephone and Data Systems, Inc.
REPORTS OF MANAGEMENT
Management’s Responsibility for Financial Statements
Management of Telephone and Data Systems, Inc. has the responsibility for preparing the accompanying
consolidated financial statements and for their integrity and objectivity. The statements were prepared in
accordance with accounting principles generally accepted in the United States of America and, in
management’s opinion, were fairly presented. The financial statements included amounts that were
based on management’s best estimates and judgments. Management also prepared the other
information in the annual report and is responsible for its accuracy and consistency with the financial
statements.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited these
consolidated financial statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States) and has expressed herein its unqualified opinion on these financial
statements.
/s/ LeRoy T. Carlson, Jr.
/s/ Kenneth R. Meyers
/s/ Douglas D. Shuma
LeRoy T. Carlson, Jr.
President and
Chief Executive Officer
(principal executive officer)
Kenneth R. Meyers
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Douglas D. Shuma
Senior Vice President and
Corporate Controller
(principal accounting officer)
109
Management’s Report on Internal Control Over Financial Reporting
Telephone and Data Systems, Inc.
Management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. TDS’ internal
control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of America (‘‘GAAP’’).
TDS’ internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the issuer; (ii) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts
and expenditures of the issuer are being made only in accordance with authorizations of management
and, where required, the Board of Directors of the issuer; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the issuer’s
assets that could have a material effect on the interim or annual consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of TDS’ management, including its Chief Executive
Officer and Chief Financial Officer, TDS conducted an evaluation of the effectiveness of its internal control
over financial reporting as of December 31, 2012, based on the criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Management has concluded that TDS maintained effective internal control over
financial reporting as of December 31, 2012 based on criteria established in Internal Control—Integrated
Framework issued by the COSO.
The effectiveness of TDS’ internal control over financial reporting as of December 31, 2012 has been
audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in
the firm’s report included herein.
/s/ LeRoy T. Carlson, Jr.
/s/ Kenneth R. Meyers
/s/ Douglas D. Shuma
LeRoy T. Carlson, Jr.
President and
Chief Executive Officer
(principal executive officer)
Kenneth R. Meyers
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Douglas D. Shuma
Senior Vice President and
Corporate Controller
(principal accounting officer)
110
Telephone and Data Systems, Inc. and Subsidiaries
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Telephone and Data Systems, Inc.:
In our opinion, based on our audits and the report of other auditors, the accompanying consolidated
balance sheets and the related consolidated statements of operations, comprehensive income, changes in
equity, and cash flows present fairly, in all material respects, the financial position of Telephone and Data
Systems, Inc. and its subsidiaries at December 31, 2012 and 2011, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2012 in conformity with
accounting principles generally accepted in the United States of America. Also in our opinion, based on
our audit, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for these financial statements, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s
internal control over financial reporting based on our integrated audits. We did not audit the financial
statements of Los Angeles SMSA Limited Partnership; a 5.5% owned entity accounted for by the equity
method of accounting. The consolidated financial statements of Telephone and Data Systems, Inc. reflect
an investment in this partnership of $105,300,000 and $104,100,000 as of December 31, 2012 and 2011,
respectively, and equity earnings of $67,200,000, $55,300,000 and $64,800,000 for each of the three years
in the period ended December 31, 2012. The financial statements of Los Angeles SMSA Limited
Partnership were audited by other auditors whose report thereon has been furnished to us, and our
opinion on the financial statements expressed herein, insofar as it relates to the amounts included for
Los Angeles SMSA Limited Partnership, is based solely on the report of the other auditors. We conducted
our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such
other procedures as we considered necessary in the circumstances. We believe that our audits and the
report of other auditors provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 26, 2013
111
Telephone and Data Systems, Inc. and Subsidiaries
SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended or at December 31,
2012
2011
2010
2009
2008
(Dollars and shares in thousands, except
per share amounts)
Statement of Operations data
Operating revenues . . . . . . . . . . . . .
Loss on impairment of assets(1) . . . .
(Gain) loss on sale of business and
other exit costs, net . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . .
Gain (loss) on investment . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . .
Net income attributable to
$5,345,277
515
$5,180,471
—
$4,986,829
—
$5,019,943
14,000
$5,091,388
414,376
21,061
183,863
(3,718)
122,653
—
362,502
24,103
250,242
—
296,091
—
190,586
—
407,844
—
249,949
—
132,919
31,595
120,483
noncontrolling interests, net of tax .
40,792
49,676
45,737
58,602
29,817
Net income attributable to TDS
shareholders . . . . . . . . . . . . . . . . .
Net income available to common . . .
Basic weighted average shares
81,861
81,811
200,566
$ 200,516
144,849
$ 144,799
191,347
$ 191,296
$
90,666
90,614
$
outstanding(2)
. . . . . . . . . . . . . . .
108,671
108,562
110,016
114,354
120,992
Basic earnings per share attributable
to TDS shareholders(2) . . . . . . . . .
$
0.75
$
1.85
$
1.32
$
1.67
$
0.75
Diluted weighted average shares
outstanding(2)
. . . . . . . . . . . . . . .
108,937
109,098
110,488
114,572
121,348
Diluted earnings per share
attributable to TDS shareholders(2)
Dividends per Common, Special
Common and Series A Common
Share(3) . . . . . . . . . . . . . . . . . . . .
$
$
0.75
$
1.83
$
1.31
$
1.67
$
0.75
0.49
$
0.47
$
0.45
$
0.43
$
0.41
Balance Sheet data
Cash and cash equivalents . . . . . . . .
Property, plant and equipment, net
. .
Total assets . . . . . . . . . . . . . . . . . . .
Long-term debt, excluding current
portion . . . . . . . . . . . . . . . . . . . . .
Total TDS shareholders’ equity . . . . .
Capital expenditures . . . . . . . . . . . . .
$ 740,481
3,997,266
8,623,900
$ 563,275
3,784,535
8,201,005
$ 341,683
3,517,784
7,696,117
$ 674,469
3,467,367
7,575,312
$ 772,678
3,535,653
7,628,100
1,721,571
4,011,536
$1,004,621
1,529,857
3,962,161
$ 987,218
1,499,862
3,817,895
$ 755,032
1,492,908
3,767,278
$ 671,165
1,621,422
3,763,435
$ 734,923
(1)
Includes Loss on Impairment of intangible assets related to licenses in 2009 and 2008.
(2) On January 13, 2012, TDS shareholders approved a Share Consolidation Amendment to the
Restated Certificate of Incorporation of TDS. Shares outstanding at December 31, 2012, as well as
average basic and diluted shares outstanding used to calculate earnings per share as of the
beginning of 2011 and all prior periods presented, have been retroactively restated to reflect the
impact of the increased shares outstanding as a result of the Share Consolidation Amendment. See
Note15—Common Shareholders’ Equity for additional information.
(3) Dividends per share reflects the amount paid per share outstanding at the date the dividend was
declared and has not been retroactively adjusted to reflect the impact of the Share Consolidation
Amendment approved by TDS shareholders on January 13, 2012.
112
Telephone and Data Systems, Inc. and Subsidiaries
CONSOLIDATED QUARTERLY INFORMATION (UNAUDITED)
(Amounts in thousands, except per share amounts)
2012
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) loss on sale of business and other exit costs, net(2)
. . . . . . .
Loss on impairment of intangible assets . . . . . . . . . . . . . . . . . . .
Operating income (loss)(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on investments(2) . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss)(1)(2)(3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to TDS shareholders . . . . . . . . . . . .
Basic weighted average shares outstanding(4) . . . . . . . . . . . . . . .
Basic earnings per share attributable to TDS shareholders(4) . . . . . .
. . . . . . . . . . . . . .
Diluted weighted average shares outstanding(4)
Diluted earnings per share attributable to TDS shareholders(5) . . . . .
Stock price
TDS Common Shares(5)
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Close . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid(6)
(Amounts in thousands, except per share amounts)
2011
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income(1)(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to TDS shareholders . . . . . . . . . . . . . . . .
Basic weighted average shares outstanding(4) . . . . . . . . . . . . . . .
Basic earnings per share from continuing operations . . . . . . . . . . .
. . . . . . . . . . . . . .
Diluted weighted average shares outstanding(4)
Diluted earnings per share attributable to TDS shareholders(5) . . . . .
Stock price
TDS Common Shares(5)
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Close . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TDS Special Common Shares(5)
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Close . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid(6)
March 31
June 30
September 30
December 31
Quarter Ended
$1,305,791
(4,174)
—
93,642
—
67,566
52,254
108,653
$
$1,323,169
—
515
91,076
(3,728)
55,939
42,337
108,732
$
$
$
$
$
0.48
109,098
0.48
29.14
22.79
23.15
0.1225
$
$
$
$
0.39
109,022
0.39
24.77
19.20
21.29
0.1225
$1,370,108
65
—
55,506
—
40,158
29,117
108,819
$
$
$
$
$
0.27
109,246
0.27
26.25
21.30
25.61
0.1225
$1,346,209
25,170
—
(56,361)
10
(41,010)
$ (41,847)
108,481
$
$
$
$
(0.39)
108,481
(0.39)
26.99
21.67
22.14
0.1225
March 31
June 30
September 30
December 31
Quarter Ended
$1,258,681
88,873
—
54,297
43,504
108,936
$
$1,279,640
127,355
13,373
109,740
91,954
108,423
$
$
$
$
$
0.40
109,715
0.39
37.42
31.05
33.70
32.10
26.61
29.52
0.1175
$
$
$
$
0.85
109,133
0.84
35.84
29.79
31.08
30.63
25.70
26.93
0.1175
$1,325,423
126,924
12,730
88,218
71,294
108,404
$
$
$
$
$
0.66
108,732
0.65
32.00
20.30
21.25
27.61
19.72
19.77
0.1175
$1,316,727
19,350
(2,000)
(2,013)
(6,186)
108,492
$
$
$
$
$
(0.06)
108,492
(0.06)
27.33
19.33
25.89
27.38
18.24
23.81
0.1175
(1) Management believes there exists a seasonality in operating expenses, which tend to be higher in the fourth quarter than in
the other quarters due to increased marketing activities, which may cause operating income to vary from quarter to quarter.
(2) See Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information related
to the Divestiture Transaction.
(3) During the quarter ended December 31, 2012, TDS revised its method of amortizing capitalized debt issuance costs and
original issue debt discounts from straight-line to the effective interest method. This change decreased interest expense for
the quarter, and resulted in corresponding increase to Net income (loss) attributable to TDS shareholders for the quarter of
$2.6 million.
(4) On January 13, 2012, TDS shareholders approved a Share Consolidation Amendment to the Restated Certificate of
Incorporation of TDS. Shares outstanding at December 31, 2012, as well as average basic and diluted shares outstanding
used to calculate earnings per share as of the beginning of all periods presented, have been retroactively restated to reflect
the impact of the increased shares outstanding as a result of the Share Consolidation Amendment. See Note 15—Common
Shareholders’ Equity for additional information.
113
Telephone and Data Systems, Inc. and Subsidiaries
CONSOLIDATED QUARTERLY INFORMATION (UNAUDITED)
(5)
The high, low and closing sales prices as reported by the New York Stock Exchange (‘‘NYSE’’).
(6) Dividends paid reflects the amount paid per share outstanding at the date the dividend was declared and has not been
retroactively adjusted to reflect the impact of the Share Consolidation Amendment approved by TDS shareholders on
January 13, 2012.
(7) During the quarter ended December 31, 2011, TDS recorded an immaterial adjustment to correct its liabilities and prepaid
expense related to property taxes for errors occurring primarily prior to 2009. This adjustment reduced Selling, general and
administrative expenses by $5.4 million in the quarter. TDS also recorded an immaterial adjustment to correct its deferred tax
balances related to a difference in the tax basis in certain partnerships for errors occurring prior to 2009. This adjustment
increased Income tax expense by $6.0 million in the quarter. TDS also recorded other immaterial adjustments to correct errors
in prior periods which, together with the foregoing adjustments, reduced Net income (loss) attributable to TDS shareholders
by a net of $5.4 million. The correction of such errors in the fourth quarter of 2011 did not have a material effect on any prior
periods, the full year ended December 31, 2011, or the trend in earnings.
114
Telephone and Data Systems, Inc. and Subsidiaries
SHAREHOLDER INFORMATION
Stock and dividend information
TDS’ Common Shares are listed on the New York Stock Exchange (‘‘NYSE’’) under the symbol ‘‘TDS.’’
As of January 31, 2013, the last trading day of the month, TDS Common Shares were held by
approximately 1,600 record owners, and the Series A Common Shares were held by approximately
100 record owners.
TDS has paid cash dividends on its common stock since 1974, and paid dividends of $0.49 per
Common and Series A Common Share during 2012. During 2011, TDS paid dividends of $0.47 per
Common, Special Common and Series A Common Share.
The Common Shares of United States Cellular Corporation, an 84%-owned subsidiary of TDS, are listed
on the NYSE under the symbol ‘‘USM.’’
See ‘‘Consolidated Quarterly Information (Unaudited)’’ for information on the high and low trading prices
of the TDS Common Shares and TDS Special Common Shares for 2012 and 2011.
Stock performance graph
The following chart provides a comparison of TDS’ cumulative total return to shareholders (stock price
appreciation plus dividends) during the previous five years to the returns of the Standard & Poor’s 500
Composite Stock Price Index and the Dow Jones U.S. Telecommunications Index. As of December 31,
2012, the Dow Jones U.S. Telecommunications Index was composed of the following companies:
AT&T Inc., CenturyLink Inc., Cincinnati Bell Inc., Crown Castle International Corp., Frontier
Communications Corp., Leucadia National Corp., Level 3 Communications Inc., MetroPCS
Communications Inc., NII Holdings Inc., SBA Communications Corp., Sprint Nextel Corp., Telephone and
Data Systems, Inc. (TDS), TW Telecom, Inc., Verizon Communications Inc., and Windstream Corp.
COMPARISON OF CUMULATIVE TOTAL RETURN*
Telephone & Data Systems Inc.
S&P 500 Index
Dow Jones U.S. Telecommunications Index
$140
$120
$100
$80
$60
$40
$20
$0
2007
2008
2009
2010
2011
2012
20FEB201302243647
*
Cumulative total return assumes reinvestment of dividends.
115
Telephone and Data Systems, Inc. and Subsidiaries
SHAREHOLDER INFORMATION
2007
2008
2009
2010
2011
2012
Telephone and Data Systems Common Shares
(NYSE: TDS) . . . . . . . . . . . . . . . . . . . . . . . . . .
S&P 500 Index . . . . . . . . . . . . . . . . . . . . . . . . . .
Dow Jones U.S. Telecommunications Index . . . . .
$100
100
100
$51.28
63.00
67.07
$55.58
79.67
73.68
$60.70
91.68
86.75
$43.75
93.61
90.19
$ 41.52
108.59
107.14
Assumes $100.00 invested at the close of trading on the last trading day preceding the first day of 2007,
in TDS Common Shares, S&P 500 Index and the Dow Jones U.S. Telecommunications Index.
Dividend reinvestment plan
TDS’ dividend reinvestment plans provide its common and preferred shareholders with a convenient and
economical way to participate in the future growth of TDS. Holders of record of ten (10) or more
Common Shares or Preferred Shares may purchase Common Shares with their reinvested dividends at a
five percent discount from market price. Common Shares may also be purchased, at market price, on a
monthly basis through optional cash payments by participants in this plan. The initial ten (10) shares
cannot be purchased directly from TDS. An authorization card and prospectus will be mailed
automatically by the transfer agent to all registered record holders with ten (10) or more shares. Once
enrolled in the plan, there are no brokerage commissions or service charges for purchases made under
the plan.
116
Telephone and Data Systems, Inc. and Subsidiaries
SHAREHOLDER INFORMATION
Investor relations
TDS’ annual report, SEC filings and news releases are available to investors, securities analysts and
other members of the investment community. These reports are provided, without charge, upon request
to our Corporate Office. Investors may also access these and other reports through the Investor
Relations portion of the TDS website (www.teldta.com).
Questions regarding lost, stolen or destroyed certificates, consolidation of accounts, transferring of
shares and name or address changes should be directed to:
Julie Mathews, Manager—Investor Relations
Telephone and Data Systems, Inc.
30 North LaSalle Street, Suite 4000
Chicago, IL 60602
312.592.5341
312.630.9299 (fax)
julie.mathews@teldta.com
General inquiries by investors, securities analysts and other members of the investment community
should be directed to:
Jane W. McCahon, Vice President—Corporate Relations and Corporate Secretary
Telephone and Data Systems, Inc.
30 North LaSalle Street, Suite 4000
Chicago, IL 60602
312.592.5379
312.630.9299 (fax)
jane.mccahon@teldta.com
Directors and executive officers
See ‘‘Election of Directors’’ and ‘‘Executive Officers’’ sections of the Proxy Statement issued in 2013 for
the 2013 Annual Meeting.
Principal counsel
Sidley Austin LLP, Chicago, Illinois
Transfer agent
Computershare Trust Company, N.A.
250 Royall St.
Canton, MA 02021
877.337.1575
Independent registered public accounting firm
PricewaterhouseCoopers LLP
Visit TDS’ web site at www.teldta.com
117
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We provide outstanding communications services
to our customers and meet the needs of our
shareholders, our people and our communities.
• Fortune 500® company
• Focus on long-term value creation
• Annual dividend increases for 39 consecutive years
• Strong balance sheet
• Investment-grade debt ratings
Telephone and Data Systems headquarters,
Chicago, I ll.
U.S. Cellular current operations
TDS Telecom operations
HMS Facilities
Telephone and Data Systems headquarters, Chicago, IL
U.S. Cellular operations
TDS Telecom operations
TDS Hosted and Managed Services facilities and data centers
Providing the best customer experience in wireless
• Reward Points for things like faster phone upgrades,
accessories and ringtones
• Plans to fit every lifestyle—from single lines, to Family Plans,
to Prepaid Plans
• Top-notch, award-winning customer service—just call,
click or come into a store
• The highest call quality and network satisfaction of any
national carrier
• The latest in wireless devices, from feature-packed
smartphones and tablets to full-keyboard messaging phones
and compact flip phones
• National plans, devices and data options designed
specifically for business needs, and dedicated support from
Business Customer Service Associates
Trusted provider of video, broadband and voice
services, and hosted and managed services
• Building loyalty with superior customer service and
high network quality
• Offering innovative video, high-speed broadband
and voice services
• Providing value with bundled services for
residential customers
• Supporting businesses with robust voice and data
communication solutions
• Comprehensive hosted and managed solutions for
businesses, including colocation, cloud services,
and IT services
Officers
Board of Directors
LeRoy T. Carlson, Jr.
President and
Chief Executive Officer
Kenneth R. Meyers
Executive Vice President and
Chief Financial Officer
Joseph R. Hanley
Senior Vice President -
Technology, Services
and Strategy
Peter L. Sereda
Senior Vice President - Finance
and Treasurer
Douglas D. Shuma
Senior Vice President
and Controller
Kurt B. Thaus
Senior Vice President and
Chief Information Officer
Scott H. Williamson
Senior Vice President -
Acquisitions and Corporate
Development
LeRoy T. Carlson
Chairman Emeritus
Douglas W. Chambers
Assistant Controller
David D. Gillman
Assistant Controller - Tax
C. Theodore Herbert
Vice President -
Human Resources
Frieda E. Ireland
Vice President -
Internal Audit
Kenneth M. Kotylo
Vice President -
Acquisitions and
Corporate Development
Jane W. McCahon
Vice President -
Corporate Relations
and Corporate Secretary
Laurie A. Ruchti
Vice President -
IT Strategy, Architecture
and Quality
John M. Toomey
Assistant Treasurer
Byron A. Wertz
Vice President -
Corporate Development
Theodore E. Wiessing
Vice President and
Chief Information
Security Officer
Christopher D. O´Leary
Executive Vice President and
Chief Operating Officer -
International, General Mills, Inc.
Member, Compensation
Committee
Mitchell Saranow
Chairman, The Saranow
Group, LLC
Member, Audit Committee
Member, Corporate
Governance and
Nominating Committee
Gary L. Sugarman
Executive Chairman,
FXecosystem, Inc., and
Managing Member,
Richfield Capital Partners
Member, Compensation
Committee
Herbert S. Wander
Partner, Katten Muchin
Rosenman LLP
Chairman, Compensation
Committee
Member, Audit Committee
Walter C.D. Carlson
Chairman of the Board
(non-executive), TDS
Partner, Sidley Austin LLP
Chairman, Corporate
Governance and
Nominating Committee
LeRoy T. Carlson, Jr.
President and
Chief Executive Officer, TDS
Member, Corporate Governance
and Nominating Committee
Kenneth R. Meyers
Executive Vice President and
Chief Financial Officer, TDS
Letitia G. Carlson, MD
Physician and Associate
Clinical Professor,
George Washington University
Medical Center
Prudence E. Carlson
Private Investor
Clarence A. Davis
Consultant
Member, Audit Committee
Donald C. Nebergall
Consultant
Member, Audit Committee
George W. Off
Private Investor
Chairman, Audit Committee
Member, Compensation
Committee
Telephone and Data Systems, Inc.
30 N. LaSalle Street, Suite 4000
Chicago, IL 60602
Tel: 312.630.1900
www.teldta.com