2013 Annual Report www.teldta.com 2013 Annual Report www.teldta.com 0251_Cover.indd 13/20/14 12:47 PM Ensuring a strong financial foundation TDS U.S. CellularShares Repurchased (in millions of shares) 8 7 6 5 4 3 2 1 0 07 08 09 10 11 12 13Capital Allocation Strategy $0.60 $0.50 $0.40 $0.30 $0.20 $0.10 $0.00 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13TDS Annual Dividend Per Share At TDS, we take a balanced approach to capital allocation, investing to build our businesses for the long term, and returning value to our shareholders. Investing for our futureOver the next several years, we expect to allocate approximately 75 percent of our available resources to build and strengthen our cable and hosted and managed services businesses through attractive acquisition opportunities.Returning value to our shareholdersAt the same time, we plan to return approximately 25 percent of our available resources to our shareholders, through cash dividends and share repurchases. We are proud to have increased our annual dividend for 40 consecutive years—an achievement accomplished by only a handful of companies. Over the past seven years, TDS has repurchased $930 million of TDS and U.S. Cellular shares. 40 years of consecutive dividend increasesNew $250 million TDS share repurchase program authorized in 2013Investing for our future Returning value to shareholders 0251_Cover.indd 23/15/14 2:19 PM 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.
Total Company Performance
For TDS, 2013 was a year of signifi cant strategic action.
We divested underperforming wireless markets to
focus on stronger markets. We identifi ed cable as an
attractive growth area and made our fi rst acquisition,
Baja Broadband, to build the business. We united our
hosted and managed services businesses under one
brand to focus more effectively on attracting mid-
market commercial customers. We also took action to
return value to TDS and U.S. Cellular shareholders, and
to strengthen our fi nancial foundation by monetizing
non-strategic assets.
While our fi nancial and operating results continue to
refl ect the competitive environment and the impact of
necessary investments, we believe the actions we’ve
taken to better position our businesses will enable us
to improve our performance over time. In addition to
the initiatives above, we made progress in a number of
important areas:
(cid:115)(cid:0)U.S. Cellular continued to increase smartphone
penetration and data use through its expanded 4G
LTE network, shared data plans, and a competitive
portfolio of Android, Apple, and Windows devices.
(cid:115)(cid:0)U.S. Cellular further expanded retail distribution
through agreements with Sam’s Club and Amazon, and
launched a new billing and operational system that
provides an important platform for future growth.
Although implementation challenges impacted
customer service more than anticipated, we believe
the long-term benefi ts will be substantial.
(cid:115) TDS Telecom increased wireline residential average
revenue per connection and maintained strong growth
in commercial managedIP customers.
TDS has invested in substantial
initiatives over the past few years to
position our businesses to operate
more efficiently and compete more
effectively. We are confident that the
short-term impact to performance is
worth the long-term benefits for our
businesses and our customers.
(cid:115)(cid:0)TDS Telecom began integrating the Baja Broadband
acquisition and implementing strategies to increase
residential and commercial penetration in Baja
markets.
(cid:115)(cid:0)We strengthened our hosted and managed services
business with the acquisition of solutions provider
MSN Communications, and then united all fi ve
HMS businesses under a single brand—OneNeck IT
Solutions.
Thank you to the leadership teams
at TDS and each of our businesses for
leading us through challenges and
opportunities with the highest ethical
and professional standards. We appreciate
your vision and dedication.
TELEPHONE AND DATA SYSTEMS 1
J.D. Power
Customer Champion, 2014
Our strategy is to provide the best customer experiences in the wireless industry, centered around
a best-in-class network. A fast and reliable 4G LTE network is the backbone for our competitive data
products and services and strong portfolio of Android, Apple, and Windows devices. Our Rewards
Program—unique in the wireless industry—creates a membership experience for our customers.
Attracting Customers and Building Loyalty
U.S. Cellular Value Proposition
Competitive
devices, plans, and
pricing
u
d
o
r
P
a
t
a
D
v
r
e
i c e s Mem
b
e
r
s
h
i
p
cts & S
Best-in-Class
Network
E
x
p
e
r
i
e
n
c
e
L
o
cal Mark e t F o
u s
c
Understanding
customer needs
in each of our markets
Outstanding
customer service and
Rewards Program
More than ever, we believe network
quality is the most important
element of customer satisfaction.
Attracting new customers and reducing churn are our
highest priorities. We enhanced our value proposition in
2013 by expanding 4G LTE access to nearly 90 percent of
our customers, launching Apple devices to strengthen
our portfolio, offering shared data plans, and working to
provide a seamless and consistently high-quality
experience across our sales and service channels. We
introduced customizable plans for small and medium
businesses, and expanded our distribution to Sam’s Club
and Amazon.
We also converted to a new billing and operational
support system—an essential platform for delivering
services and products more effi ciently. During and
following the conversion, many of our customers
experienced extended reductions in service levels as we
worked through implementation issues, and this led to
an increase in postpaid churn. These experiences were
below our standards, and we provided additional rewards
points to postpaid customers in appreciation for their
patience and commitment.
We launched Apple devices for the fi rst time in November
of 2013, and reinstituted contracts for postpaid
customers, to help reduce postpaid churn over time.
2 TELEPHONE AND DATA SYSTEMS
“Highest Network Quality Performance
Among Wireless Cell Phone Users in
North Central Region”
- J.D. Power
Increasing Smartphone Penetration and
Monetizing Data Use
A best-in-class 4G LTE network is the foundation for
competitive data offerings and devices that enable us
to maximize and monetize the dramatic growth in
data use.
By the end of 2013, we offered our strongest-ever
portfolio of Android, Apple, and Windows devices,
along with attractive shared data plans. Fifty-one
percent of postpaid customers were smartphone
customers in the fourth quarter, and 80 percent of
total devices sold in the quarter were smartphones.
We expanded 4G LTE coverage to nearly 90 percent
of customers by year end, and 4G LTE devices were
69 percent of devices sold in the fourth quarter.
Comprehensive 4G LTE coverage provides signifi cant
capacity to promote and monetize smartphone
adoption and data use in all of our markets.
The recent Federal Communications Commission
decision to mandate device interoperability supports
our strategy by ensuring that we can continue to
offer a greater choice of devices to our customers,
and offer nationwide 4G LTE roaming coverage in
the future.
Growth in data use is a critical
driver of U.S. Cellular’s future success.
Total data traffic increased 97 percent
from 2012 to 2013.
Smartphone Customers
as a Percentage of Postpaid
Customers
46%
47%
42%
43%
51%
42%
33%
29%
21%
15%
Q4 12 Q1 13 Q2 13 Q3 13 Q4 13
55%
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0
Smartphones as a Percentage
of Total Devices Sold
80%
69%
63%
62%
66%
65%
58%
55%
46%
46%
Q4 12 Q1 13 Q2 13 Q3 13 Q4 13
90%
80%
70%
60%
50%
40%
30%
20%
10%
0
3G
4G
3G
4G
TELEPHONE AND DATA SYSTEMS 3
TDS TELECOM
Our strategy is to attract customers by providing high-quality, reliable communications services
and products. We expanded our business strategically in 2013 by entering the cable sector through
the acquisition of Baja Broadband, opening substantial opportunities to leverage our existing
products, services, and infrastructure in new markets. We also positioned our hosted and managed
services business to offer comprehensive IT solutions through a unified brand and sales force.
Wireline
Residential
TDS Telecom is increasing average revenue per residential
connection as customers chose faster broadband speeds
and higher-tier packages of our IPTV service, TDS TV®.
We continued to increase broadband speeds and expand
TDS TV availability in our markets, and we marketed
high-speed fiber and TDS TV services in new
neighborhoods to build momentum prior to buildouts.
By the fourth quarter, TDS TV was available in 11
markets, and 13 percent of residential households were
passed by facilities that enable TDS TV.
Broadband and video service bundles are key to our
retention strategy, and by the end of 2013, 73 percent of
residential customers had double- or triple-play bundles.
The average monthly churn rate
for customers with three services
is very low, at approximately
one-half of one percent.
We also neared completion of stimulus projects
nationwide that will bring broadband access to
approximately 27,000 previously underserved households
when complete.
Commercial
Our commercial strategy is to be a trusted partner to our
business customers, and our reputation for service
quality and reliability enabled us to achieve a 35 percent
increase in connections for managedIP, a hosted VoIP
voice and data solution. This offset a decline in
traditional voice services, which resulted in a slight
increase in commercial revenues in 2013.
4 TELEPHONE AND DATA SYSTEMS
Twenty-five percent of customers had
access to 25Mbps or faster broadband
service at the end of 2013.
managedIP Connections
(in thousands)
128
95
54
30
15
09
10
11
12
13
130
120
110
100
90
80
70
60
50
40
30
20
10
0
Cable
We identifi ed cable broadband as an attractive growth
area and entered the sector in 2013 with the acquisition
of Baja Broadband, which provides a high-capacity data
pipeline to homes and businesses in the southwest U.S.
After the acquisition closed in August, we began
leveraging our marketing experience and network
capabilities to increase residential and commercial
penetration in Baja’s markets. As we execute on our
integration and growth strategies, we’re identifying
operational and infrastructure synergies to
increase effi ciency.
We plan to continue to build our cable portfolio with
acquisitions that offer signifi cant growth potential in
complementary markets.
Hosted and Managed Services
Our strategy is to sell comprehensive IT solutions to
mid-market commercial customers. We strengthened our
value proposition in 2013 with the acquisition of
solutions provider MSN Communications, and then
unifi ed our fi ve hosted and managed services businesses
under one brand—OneNeck IT Solutions.
With a comprehensive, unifi ed service portfolio that
includes colocation, cloud and hosting solutions,
managed services, professional services, ERP application
management, and IT hardware, OneNeck is well
positioned to be a single, trusted source of end-to-end
IT solutions for commercial customers.
OTHER TDS SUBSIDIARIES
The high-capacity cable
pipeline offers significant
growth potential for our
residential and commercial
data products and services.
Recurring hosted and managed
services revenues increased
10 percent in 2013.
Suttle-Straus
Airadigm Communications
Suttle-Straus, a marketing and graphic communications
solutions provider, continued to improve its
performance in 2013, expanding 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 productivity through continuous
improvement initiatives.
Airadigm Communications, Inc. offers mobile
services to customers in Wisconsin. Airadigm
operates independently of U.S. Cellular.
TELEPHONE AND DATA SYSTEMS 5
LOOKING FORWARD
Our strategic imperative is to increase customer and revenue growth in
our businesses by leveraging our improved competitive positioning and
allocating our resources effectively to support growth initiatives.
U.S. Cellular
TDS Telecom
(cid:115)(cid:0)We plan to attract new customers and build customer
loyalty with customer experiences grounded in
network quality, competitive data products and
services and devices, an innovative Rewards Program
that makes customers feel like members, and
localized attention to customer needs.
(cid:115) We’re focused on driving revenues through
smartphone penetration and monetized data use, as
we continue to expand and enhance 4G LTE access.
(cid:115) We will continue to increase operational effi ciency.
(cid:115) We’re working to attract residential and commercial
customers through superior experiences and high-
quality, reliable services.
(cid:115) We plan to bring faster broadband, high-quality
video service, and competitive bundles to more
residential customers, and increase fi ber network
coverage for both residential and commercial
customers.
(cid:115)(cid:0)We’ll continue to optimize our investment in Baja
Broadband and seek additional opportunities to build
our cable business through acquisitions.
(cid:115) We’re focused on developing comprehensive
hosted and managed solutions through OneNeck IT
Solutions, and increasing recurring revenues from
mid-market customers.
Thank you to the employees and associates of the TDS companies for their dedication and
innovation in 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, 2013
Pursuant to SEC Rule 14a-3
The following audited financial statements and certain other financial information for the year ended
December 31, 2013, represent Telephone and Data Systems’ annual report to shareholders as required
by the rules and regulations of the Security and Exchange Commission (‘‘SEC’’).
The following information was filed with the SEC on February 28, 2014 as Exhibit 13 to Telephone and
Data Systems’ Annual Report on Form 10-K for the year ended December 31, 2013. 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.
Exhibit 13
Financial Reports Contents
Management’s Discussion and Analysis of Results of Operations and Financial Condition . . . . . . .
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Results of Operations—Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Results of Operations—U.S. Cellular . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Results of Operations—TDS Telecom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recently Issued 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
16
22
22
22
26
30
38
39
42
43
44
45
46
47
48
51
106
108
109
110
111
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 4.8 million wireless customers and 1.1 million
wireline and cable connections at December 31, 2013. TDS conducts substantially all of its wireless
operations through its 84%-owned subsidiary, United States Cellular Corporation (‘‘U.S. Cellular’’). TDS
provides wireline services, cable services and hosted and managed services (‘‘HMS’’), through 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 wholly-owned subsidiary, Airadigm
Communications, Inc. (‘‘Airadigm’’), a Wisconsin-based service provider. At this time, Airadigm operates
independently from U.S. Cellular. Suttle-Straus and Airadigm’s financial results were not significant to
TDS’ operations for the year ended December 31, 2013 and collectively represent the ‘‘Non-Reportable
Segment.’’
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, 2013. 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.
Previously, TDS had reported the following reportable segments: U.S. Cellular, TDS Telecom’s incumbent
local exchange carrier (‘‘ILEC’’), its competitive local exchange carrier (‘‘CLEC’’), its HMS operations and
the Non-Reportable Segment. As a result of recent acquisitions and changes in TDS’ strategy, operations
and internal reporting, TDS has reevaluated and changed its operating segments during the year ended
December 31, 2013, which resulted in the following reportable segments: U.S. Cellular, TDS Telecom’s
Wireline, Cable and HMS operations, and the Non-Reportable Segment. The Wireline segment consists
of the former ILEC and CLEC segments. The Cable segment consists of Baja Broadband, LLC (‘‘Baja’’),
which was acquired in August 2013. The HMS segment remains unchanged. Periods presented for
comparative purposes have been re-presented to conform to this revised presentation.
U.S. Cellular
In its consolidated operating markets, U.S. Cellular serves approximately 4.8 million customers in 23
states. As of December 31, 2013, U.S. Cellular’s average penetration rate in its consolidated operating
markets was 15.0%. 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 its current operating markets and in areas that are
adjacent to or in close proximity to its other wireless licenses, thereby building contiguous operating
market areas with strong spectrum positions. U.S. Cellular believes that the acquisition of additional
licenses within its current operating markets will enhance its network capacity to meet its customers’
increased demand for data services. 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 2013 included the following:
(cid:129) On April 3, 2013, U.S. Cellular entered into an agreement relating to St. Lawrence Seaway RSA
Cellular Partnership (‘‘NY1’’) and New York RSA 2 Cellular Partnership (‘‘NY2’’ and, together with NY1,
1
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
the ‘‘Partnerships’’) with Cellco Partnership d/b/a Verizon Wireless, which required U.S. Cellular to
deconsolidate the Partnerships and thereafter account for them as equity method investments (the
‘‘NY1 & NY2 Deconsolidation’’). In connection with the deconsolidation, U.S. Cellular recognized a
non-cash pre-tax gain of $18.5 million which was recorded in Gain on investments in the Consolidated
Statement of Operations. See Note 7—Investments in Unconsolidated Entities in the Notes to
Consolidated Financial Statements for additional information regarding this transaction.
(cid:129) On May 16, 2013, U.S. Cellular completed the sale of customers and certain PCS license spectrum in
U.S. Cellular’s Chicago, central Illinois, St. Louis and certain Indiana/Michigan/Ohio markets
(‘‘Divestiture Markets’’), to Sprint Corp., fka Sprint Nextel Corporation, for $480 million in cash (the
‘‘Divestiture Transaction’’). In connection with the sale, U.S. Cellular recognized a pre-tax gain of
$266.4 million which was recorded in (Gain) loss on sale of business and other exit costs, net in the
Consolidated Statement of Operations. See Note 5—Acquisitions, Divestitures and Exchanges in the
Notes to Consolidated Financial Statements for additional information regarding this transaction.
(cid:129) On June 25, 2013, U.S. Cellular paid a special cash dividend of $5.75 per share, for an aggregate
amount of $482.3 million, to all holders of U.S. Cellular Common Shares and Series A Common
Shares as of June 11, 2013. Of the $482.3 million paid, TDS received $407.1 million while
noncontrolling public shareholders received $75.2 million.
(cid:129) On October 4, 2013, U.S. Cellular sold the majority of its Mississippi Valley non-operating market
license (‘‘unbuilt license’’) for $308.0 million. A pre-tax gain of $250.6 million was recorded in (Gain)
loss on license sales and exchanges in the Consolidated Statement of Operations.
(cid:129) In the fourth quarter of 2013, U.S. Cellular issued loyalty reward points with a value of $43.5 million as
a loyalty bonus in recognition of the inconvenience experienced by customers during U.S. Cellular’s
recent billing system conversion. The loyalty bonus reduced Operating revenues in the Consolidated
Statement of Operations and increased Customer deposits and deferred revenues in the Consolidated
Balance Sheet.
(cid:129) Total consolidated customers were 4,774,000 at December 31, 2013, including 4,610,000 retail
customers (97% of total).
The following operating information is presented for Core Markets. As used here, Core Markets is defined
as all consolidated markets in which U.S. Cellular currently conducts business and, therefore, excludes
the Divestiture Markets and the NY1 & NY2 Deconsolidated Markets. Core Markets as defined also
includes any other income or expenses due to U.S. Cellular’s direct or indirect ownership interests in
other spectrum in the Divestiture Markets which was not included in the Divestiture Transaction and other
retained assets from the Divestiture Markets.
(cid:129) Retail customer net losses were 215,000 in 2013 compared to net additions of 32,000 in 2012. In the
postpaid category, there were net losses of 217,000 in 2013, compared to net losses of 92,000 in
2012. Prepaid net additions were 2,000 in 2013 compared to net additions of 124,000 in 2012.
(cid:129) Postpaid customers comprised approximately 93% of U.S. Cellular’s retail customers as of
December 31, 2013 and December 31, 2012. The postpaid churn rate was 1.7% in 2013 and 1.5% in
2012. The prepaid churn rate was 6.7% in 2013 and 5.2% in 2012.
(cid:129) Billed average revenue per user (‘‘ARPU’’) increased to $50.82 in 2013 from $50.54 in 2012 reflecting
an increase in postpaid ARPU due to increases in smartphone adoption and corresponding revenues
from data products and services, offset by a decrease in prepaid ARPU. Service revenue ARPU
decreased to $57.66 in 2013 from $58.49 in 2012 due primarily to decreases in inbound roaming and
eligible telecommunications carriers (‘‘ETC’’) revenues. The special issuance of loyalty rewards points
in the fourth quarter of 2013 negatively impacted both billed ARPU and service revenue ARPU by
$0.73 in 2013.
2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
(cid:129) Postpaid customers on smartphone service plans increased to 51% as of December 31, 2013
compared to 41% as of December 31, 2012. In addition, smartphones represented 69% of all devices
sold in 2013 compared to 56% in 2012.
The following financial information is presented for U.S. Cellular consolidated results:
(cid:129) Retail service revenues of $3,165.5 million decreased $382.5 million year-over-year, due to a decrease
of 619,000 in the average number of customers (including approximately 550,000 due to the
reductions caused by the Divestiture Transaction and NY1 & NY2 Deconsolidation).
(cid:129) Total additions to Property, plant and equipment were $737.5 million, including expenditures to deploy
fourth generation Long-Term Evolution (‘‘4G LTE’’) equipment, construct cell sites, increase capacity in
existing cell sites and switches, 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 decreased 13% year-over-year to 6,975 primarily as a result of the NY1 &
NY2 Deconsolidation and the deactivation of certain cell sites in the Divestiture Markets.
(cid:129) Operating income decreased $9.8 million, or 6%, to $146.9 million in 2013 from $156.7 million in 2012,
reflecting lower service revenues as discussed above as well as lower inbound roaming revenues,
higher equipment subsidies and accelerated depreciation related to the Divestiture Transaction. The
impacts of these items were offset by lower operating expenses in other categories and gains related
to sales of the Divestiture Markets and spectrum licenses. See additional discussion below in ‘‘Results
of Operations—U.S. Cellular’’.
U.S. Cellular anticipates that future results will be affected by the following factors:
(cid:129) Impacts of selling Apple iPhone products;
(cid:129) Relative ability to attract and retain customers in a competitive marketplace in a cost effective manner;
(cid:129) Effects of industry competition on service and equipment pricing as well as the impacts associated
with the expanding presence of carriers and other retailers offering low-priced, unlimited prepaid
service;
(cid:129) Expanded distribution of products and services in third-party national retailers;
(cid:129) Potential increases in prepaid customers, who generally generate lower ARPU and higher churn, as a
percentage of U.S. Cellular’s customer base in response to changes in customer preferences and
industry dynamics;
(cid:129) 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 the use of data products and services
and attracting wireless customers switching from other wireless carriers;
(cid:129) Continued growth in revenues and costs related to data products and services and declines in
revenues from voice services;
(cid:129) 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 and enhancements;
(cid:129) Further consolidation among carriers in the wireless industry, which could result in increased
competition for customers and/or cause roaming revenues to decline;
(cid:129) Uncertainty related to various rulemaking proceedings under way at the Federal Communications
Commission (‘‘FCC’’);
(cid:129) The ability to negotiate satisfactory 4G LTE data roaming agreements with other wireless operators;
3
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
(cid:129) U.S. Cellular completed the migration of its customers to a new Billing and Operational Support
System (‘‘B/OSS’’) in the third quarter of 2013. This conversion caused billing delays, which were
largely resolved in the fourth quarter of 2013. In addition, intermittent system outages and delayed
system response times negatively impacted customer service and sales operations at certain times.
Continuing operational problems associated with the conversion to the new billing system could have
adverse effects on U.S. Cellular’s business (in areas such as overall customer satisfaction, customer
attrition, uncollectible accounts receivable, gross customer additions, or operating expenses). All of
these factors could have a material adverse effect on U.S. Cellular’s results of operations or cash
flows; and
(cid:129) On August 14, 2013 U.S. Cellular entered into a definitive agreement to sell the majority of its St. Louis
area unbuilt license for $92.3 million. The sale will result in an estimated pre-tax gain of $76.2 million.
This transaction is subject to regulatory approval and is expected to close in the first quarter of 2014 at
which time, the gain on sale will be recorded. In accordance with GAAP, the book value of the license
has been accounted for and disclosed as ‘‘held for sale’’ in the Consolidated Balance Sheet at
December 31, 2013.
See ‘‘Results of Operations—U.S. Cellular.’’
TDS Telecom
The Wireline and Cable segments seek to be the preferred telecommunications solutions providers in
their chosen markets serving 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 broadband, voice, 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. The HMS segment
provides colocation, dedicated hosting, hosted application management, cloud computing services and
planning, engineering, procurement, installation, sales and management of Information Technology (‘‘IT’’)
infrastructure hardware solutions.
On October 4, 2013, TDS acquired 100% of the outstanding shares of MSN Communications, Inc.
(‘‘MSN’’) for $43.6 million in cash. The operations of MSN are included in the HMS segment since the
date of acquisition.
On August 1, 2013, TDS Telecom acquired substantially all of the assets of Baja Broadband, LLC
(‘‘Baja’’) for $264.1 million in cash. Baja operates in markets primarily in Colorado, New Mexico, Texas,
and Utah. The operations of Baja are included in the Cable segment since the date of acquisition.
TDS Telecom acquired Vital Support Systems, LLC (‘‘Vital’’) in June 2012 and OneNeck IT Services
Corporation (‘‘OneNeck IT Services’’) in July 2011. The operations of Vital and OneNeck IT Services are
included in the HMS segment since their respective dates of acquisition.
All of these acquisitions impact the comparability of TDS Telecom operating results.
Financial and operating highlights in 2013 included the following:
(cid:129) Operating revenues increased $92.5 million or 11% to $947.0 million in 2013. The increase was due
primarily to $100.1 million from acquisitions of Vital in June 2012, Baja in August 2013 and MSN in
October 2013, partially offset by a decrease in revenues due to declines in Wireline connections and a
decline in Wireline wholesale revenues.
(cid:129) Operating expenses increased $88.4 million or 11% to $902.2 million in 2013 due primarily to
$101.2 million from the acquisitions noted above, partially offset by a decrease in Wireline expenses.
(cid:129) Additions to Property, plant and equipment totaled $164.9 million in 2013 including strategic
investment in increased network capabilities for broadband services, HMS expansion, IPTV expansion,
4
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
and software tools that improve management of the network and support sales and customer service
processes.
TDS anticipates that TDS Telecom’s future results will be affected by the following factors:
(cid:129) Continued increases in competition from wireless and other wireline providers, cable providers, and
technologies such as VoIP, DOCSIS 3.0 and fourth generation (‘‘4G’’) mobile technology;
(cid:129) Continued increases in consumer data usage and demand for high-speed data services;
(cid:129) Continued declines in Wireline voice connections;
(cid:129) Continued focus on customer retention programs, including discounting for ‘‘triple-play’’ bundles
including voice, broadband and video or satellite video;
(cid:129) The expansion of IPTV into additional market areas;
(cid:129) Continued growth in hosted and managed services which may result in the need for additional
investment in data centers;
(cid:129) Continued focus on cost-reduction initiatives through product and service cost improvements and
process efficiencies;
(cid:129) The Federal government’s disbursement of Broadband Stimulus Funds to bring broadband to rural
customers;
(cid:129) The National Broadband Plan and other rulemaking by the FCC, including uncertainty related to future
funding from the Universal Service Fund (‘‘USF’’), broadband requirements, intercarrier compensation
and changes in access reform;
(cid:129) Impacts of the Baja and MSN transactions, including, but not limited to, the ability to successfully
integrate and operate these businesses and the financial impacts of such transactions; and
(cid:129) Potential acquisitions or divestitures by TDS and/or TDS Telecom of wireline, cable, HMS, or other
businesses.
See ‘‘Results of Operations—TDS Telecom.’’
Pro Forma Financial Information
Refer to TDS’ Form 8-K filed on February 26, 2014 for pro forma financial information related to the
Divestiture Transaction and the NY1 & NY2 Deconsolidation for the three and twelve months ended
December 31, 2013, as if the transactions had occurred at the beginning of the respective periods. Also
refer to TDS’ Form 8-K filed on May 3, 2013 for pro forma financial information related to the Divestiture
Transaction and the NY1 & NY2 Deconsolidation for the twelve months ended December 31, 2012.
REGULATORY DEVELOPMENTS
FCC Reform Order
In 2011, the FCC released an order (‘‘Reform Order’’) to: reform its universal service and intercarrier
compensation mechanisms; establish a new, broadband-focused support mechanism; and propose
further rules to advance reform. Appeals of the Reform Order were consolidated and argued in the U.S.
Court of Appeals for the 10th Circuit on November 19, 2013, with a decision anticipated in 2014.
There have been no significant changes to the Reform Order since December 31, 2012 that are expected
to adversely affect U.S. Cellular or TDS Telecom. U.S. Cellular and TDS Telecom cannot predict the
outcome of the consolidated appeals referred to above or any future rulemaking, reconsideration or legal
challenges and, as a consequence, the impacts that such potential developments may have on U.S.
Cellular’s or TDS Telecom’s business, financial condition or results of operations.
5
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
FCC Interoperability Order
On October 25, 2013, the FCC adopted a Report and Order and Order of Proposed Modification
confirming a voluntary industry agreement on interoperability in the Lower 700 MHz spectrum band. The
FCC’s Report and Order lays out a roadmap for the voluntary commitments of AT&T and DISH Network
Corporation (‘‘DISH’’) to become fully binding under a regulatory framework which will require the FCC
to take additional actions proposed to be completed by the first quarter of 2014. Pursuant to this
voluntary agreement, AT&T will begin incorporating changes in its network and devices that will foster
interoperability across all paired spectrum blocks in the Lower 700 MHz Band, collectively comprising
‘‘Band 12’’ under the standards of the 3rd Generation Partnership Project (‘‘3GPP’’). AT&T also agreed to
support LTE roaming on its networks for carriers with compatible Band 12 devices, consistent with the
FCC’s rules on roaming. As outlined in its voluntary commitment, AT&T will be implementing the
foregoing changes in phases starting with network software enhancement taking place possibly through
the third quarter of 2015 with its Band 12 device roll-out to follow. In addition the FCC has adopted
changes in its technical rules for certain unpaired spectrum licensed to AT&T and DISH in the Lower 700
MHz band to enhance prospects for Lower 700 MHz interoperability. AT&T’s network and devices
currently only interoperate across two of the three paired blocks in the Lower 700 MHz band. U.S.
Cellular’s LTE deployment, carried out in conjunction with its partner, King Street Wireless, utilizes
spectrum in all three of these blocks and consequently was not interoperable with the AT&T
configuration. U.S. Cellular believes that the FCC action will broaden the ecosystem of devices available
to U.S. Cellular’s customers over time.
6
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,
2013
Increase/ Percentage
(Decrease)
Change
2012
Increase/ Percentage
(Decrease)
Change
2011
(Dollars in thousands, except per share amounts)
Operating revenues
U.S. Cellular . . . . . . . . . . . . . . $3,918,836
947,003
TDS Telecom . . . . . . . . . . . . .
35,397
All other(1) . . . . . . . . . . . . . . .
$(533,248)
92,497
(3,290)
(12)% $4,452,084
854,506
11%
38,687
(9)%
$ 108,738
39,118
16,950
3% $4,343,346
815,388
5%
21,737
78%
Total operating revenues . . . . .
4,901,236
(444,041)
(8)% 5,345,277
164,806
3%
5,180,471
Operating expenses
U.S. Cellular . . . . . . . . . . . . . .
TDS Telecom . . . . . . . . . . . . .
All other(1) . . . . . . . . . . . . . . .
3,771,971
902,171
(8,265)
(523,457)
88,407
(60,487)
(12)% 4,295,428
813,764
11%
52,222
>(100)%
232,862
97,027
13,556
6%
14%
35%
4,062,566
716,737
38,666
Total operating expenses . . . . .
4,665,877
(495,537)
(10)% 5,161,414
343,445
7%
4,817,969
Operating income (loss)
U.S. Cellular . . . . . . . . . . . . . .
TDS Telecom . . . . . . . . . . . . .
All other(1) . . . . . . . . . . . . . . .
146,865
44,832
43,662
(9,791)
4,090
57,197
(6)%
10%
>100%
156,656
40,742
(13,535)
(124,124)
(57,909)
3,394
Total operating income . . . . . .
235,359
51,496
28%
183,863
(178,639)
(44)%
(59)%
20%
(49)%
280,780
98,651
(16,929)
362,502
Other income (expenses)
Equity in earnings of
unconsolidated entities . . . . . .
Interest and dividend income . . .
Gain (loss) on investments . . . . .
Interest expense . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . .
132,714
9,092
14,547
(98,811)
(37)
Total other income (expenses)
.
57,505
Income before income taxes . . . . . . .
Income tax expense . . . . . . . . .
292,864
126,043
Net income . . . . . . . . . . . . . . . . . .
166,821
39,847
(156)
18,265
12,066
(757)
45,133
96,629
52,461
44,168
43%
(2)%
>100%
14%
>(100)%
92,867
9,248
(3,718)
(86,745)
720
10,329
103
(27,821)
(31,456)
(2,938)
13%
1%
>(100)%
(27)%
(80)%
>100%
12,372
11,129
>100%
49%
71%
36%
196,235
73,582
(167,510)
(39,921)
122,653
(127,589)
(46)%
(35)%
(51)%
82,538
9,145
24,103
(118,201)
3,658
1,243
363,745
113,503
250,242
Less: Net income attributable to
noncontrolling interests, net of
tax . . . . . . . . . . . . . . . . . . .
Net income attributable to TDS
24,894
(15,898)
(39)%
40,792
(8,884)
(18)%
49,676
shareholders . . . . . . . . . . . . . . . .
. .
Preferred dividend requirement
141,927
(49)
60,066
(1)
73%
(2)%
81,861
(50)
(118,705)
—
(59)%
—
200,566
(50)
Net income available to common
shareholders . . . . . . . . . . . . . . . . $ 141,878
$ 60,067
73% $
81,811
$(118,705)
(59)% $ 200,516
Basic earnings per share attributable
to TDS shareholders . . . . . . . . . . . $
1.31
Diluted earnings per share attributable
to TDS shareholders . . . . . . . . . . . $
1.29
$
$
0.56
0.54
75% $
0.75
72% $
0.75
$
$
(1.10)
(59)% $
1.85
(1.08)
(59)% $
1.83
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. TDS recognized an incremental gain of $53.5 million
compared to U.S. Cellular upon closing of the Divestiture Transaction as a result of lower asset basis in the assets disposed.
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.
7
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 in which
it has a noncontrolling interest and that are accounted for by the equity method. TDS generally follows
the equity method of accounting for unconsolidated entities in which its ownership interest is less than or
equal to 50% but equals or exceeds 20% for corporations and 3% for partnerships and limited liability
companies, or for unconsolidated entities in which its ownership is greater than 50% but TDS does not
have a controlling financial interest.
TDS’ investment in the Los Angeles SMSA Limited Partnership (‘‘LA Partnership’’) contributed
$78.4 million, $67.2 million and $55.3 million to Equity in earnings of unconsolidated entities in 2013,
2012 and 2011, respectively. TDS received cash distributions from the LA Partnership of $71.5 million in
2013 and $66.0 million in 2012 and 2011.
On April 3, 2013, TDS deconsolidated the NY1 & NY2 Partnerships and began reporting them as equity
method investments in its consolidated financial statements as of that date. In 2013, TDS’ investment in
the NY1 & NY2 Partnerships contributed $24.7 million to Equity in earnings of unconsolidated entities
subsequent to their deconsolidation. No amounts were included in 2012 or 2011 because the NY1 &
NY2 Partnerships were consolidated in those years. Distributions from the NY1 & NY2 Partnerships of
$29.4 million in 2013, after the deconsolidation on April 1, 2013, are included in Distributions from
unconsolidated entities on the Consolidated Statement of Cash Flows.
Gain (loss) on investments
In connection with the deconsolidation of the NY1 & NY2 Partnerships, TDS recognized a non-cash
pre-tax gain of $14.5 million which was recorded in Gain (loss) on investments in 2013. See Note 7—
Investments in Unconsolidated Entities for additional information.
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 5—Acquisitions, Divestitures and Exchanges in the Notes to Consolidated
Financial Statements.
Interest expense
Interest expense increased $12.1 million due primarily to the issuance of TDS’ 5.875% Senior Notes in
November 2012 for $195.0 million. This amount was partially offset by an increase in capitalized interest
during 2013. 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.
Income tax expense
The effective tax rates on Income before income taxes and extraordinary items (‘‘pre-tax income’’) for
2013, 2012 and 2011 were 43.0%, 37.5% and 31.2%, respectively. The following significant discrete and
other items impacted income tax expense for these years:
2013—Includes tax expense of $14.9 million related to the NY1 & NY2 Deconsolidation and the
Divestiture Transaction, and a tax benefit of $5.5 million resulting from statute of limitation expirations.
8
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
2012—Includes tax benefits of $11.3 million resulting from 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 a tax benefit of $26.9 million resulting from state tax law changes, a tax benefit of
$9.0 million resulting from statute of limitation expirations and tax expense of $6.0 million resulting from
correction of partnership tax basis relating to a prior period.
See Note 3—Income Taxes in the Notes to Consolidated Financial Statements for further information on
the effective tax rate.
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,
2013
2012
2011
(Dollars in thousands)
Net income attributable to noncontrolling interest, net of tax U.S. Cellular
Noncontrolling public shareholders’ . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling shareholders’ or partners’(1) . . . . . . . . . . . . . . . . . . .
$21,775
3,119
$18,431
22,361
$28,934
20,742
$24,894
$40,792
$49,676
(1) The large decrease in 2013 is primarily due to the elimination of the noncontrolling interest as a
result of the NY1 & NY2 Deconsolidation on April 3, 2013.
9
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
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.
Summary Operating Data for U.S. Cellular Consolidated Markets
Following is a table of summarized operating data for U.S. Cellular’s Consolidated Markets. Consolidated
Markets herein refers to markets which U.S. Cellular currently consolidates, or previously consolidated in
the periods presented, and is not adjusted in prior periods presented for subsequent divestitures or
deconsolidations. Unless otherwise noted, figures reported in Results of Operations are representative of
consolidated results.
As of or for the Year Ended December 31,
2013
2012
2011
Retail Customers
Postpaid
Total at end of period . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net additions (losses) . . . . . . . . . . . . . . . . . . . . . . . . . .
ARPU(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Churn rate(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Smartphone penetration(3)(4) . . . . . . . . . . . . . . . . . . . .
Prepaid
Total at end of period . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net additions (losses) . . . . . . . . . . . . . . . . . . . . . . . . . .
ARPU(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Churn rate(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total customers at end of period . . . . . . . . . . . . . . . . . . . .
Billed ARPU(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service revenue ARPU(1) . . . . . . . . . . . . . . . . . . . . . . . . .
Smartphones sold as a percent of total devices sold . . . .
Total Population
4,267,000
697,000
(325,000)
54.31
1.8%
50.8%
343,000
309,000
(21,000)
31.44
7.0%
4,774,000
50.73
57.61
$
$
$
$
5,134,000
880,000
(165,000)
54.32
1.7%
41.8%
423,000
368,000
118,000
33.26
6.0%
5,798,000
50.81
58.70
$
$
$
$
5,302,000
836,000
(117,000)
52.20
1.5%
30.5%
306,000
228,000
(8,000)
33.42
6.6%
5,891,000
48.63
56.54
68.4%
55.8%
44.0%
$
$
$
$
Consolidated markets(5) . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated operating markets(5) . . . . . . . . . . . . . . . . . .
58,013,000
31,759,000
93,244,000
46,966,000
91,965,000
46,888,000
Market penetration at end of period
Consolidated markets(6) . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated operating markets(6) . . . . . . . . . . . . . . . . . .
Capital expenditures (000s) . . . . . . . . . . . . . . . . . . . . . .
Total cell sites in service . . . . . . . . . . . . . . . . . . . . . . . . . .
Owned towers in service . . . . . . . . . . . . . . . . . . . . . . . . . .
8.2%
15.0%
6.2%
12.3%
6.4%
12.6%
$
$
737,501
6,975
4,448
$
836,748
8,028
4,408
782,526
7,882
4,311
10
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
Summary Operating Data for U.S. Cellular Core Markets
Following is a table of summarized operating data for U.S. Cellular’s Core Markets (which excludes the
Divestiture Markets and NY1 and NY2 markets) as of or for the year ended December 31, 2013 or 2012.
As of or for the Year Ended December 31,
2013
2012
Retail Customers
Postpaid
Total at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net additions (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ARPU(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Churn rate(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Smartphone penetration(3)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid
Total at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net additions (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ARPU(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Churn rate(2)
Total customers at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Billed ARPU(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service revenue ARPU(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Smartphones sold as a percent of total devices sold . . . . . . . . . . . . . . .
Total Population
Consolidated markets(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated operating markets(5)
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market penetration at end of period
Consolidated markets(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated operating markets(6)
Capital expenditures (000s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cell sites in service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Owned towers in service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,267,000
682,000
(217,000)
54.23
1.7%
50.8%
343,000
295,000
2,000
31.45
6.7%
4,774,000
50.82
57.66
$
$
$
$
4,496,000
746,000
(92,000)
53.65
1.5%
41.1%
342,000
288,000
124,000
32.98
5.2%
5,022,000
50.54
58.49
68.6%
56.1%
$
$
$
$
58,013,000
31,759,000
83,384,000
31,445,000
8.2%
15.0%
6.0%
16.0%
$
$
735,082
6,161
3,913
768,884
6,130
3,847
(1) ARPU metrics are calculated by dividing a revenue base by an average number of customers by the
number of months in the period. These revenue bases and customer populations are shown below:
a. Postpaid ARPU consists of total postpaid service revenues and postpaid customers.
b. Prepaid ARPU consists of total prepaid service revenues and prepaid customers.
c. Billed ARPU consists of total postpaid, prepaid and reseller service revenues and postpaid,
prepaid and reseller customers.
d. Service revenue ARPU consists of total retail service revenues, inbound roaming and other
service revenues and postpaid, prepaid and reseller customers.
(2) Churn metrics represent the percentage of the postpaid or prepaid customers that disconnects
service each month. These metrics represent the average monthly postpaid or prepaid churn rate for
each respective period.
(3) Smartphones represent wireless devices which run on an Android, Apple, BlackBerry or Windows
Mobile operating system, excluding tablets.
11
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
(4) Smartphone penetration is calculated by dividing postpaid smartphone customers by total postpaid
customers.
(5) Used only to calculate market penetration of consolidated and core markets and consolidated and
core operating markets, respectively. See footnote (6) below.
(6) Market penetration is calculated by dividing the number of wireless customers at the end of the
period by the total population of consolidated and core markets and consolidated and core
operating markets, respectively, estimated by Claritas.
Increase/
(Decrease)
Percentage
Change
2012
Increase/
(Decrease)
Percentage
Change
2011
Components of Operating Income
Year Ended December 31,
2013
(Dollars in thousands)
Retail service . . . . . . . . . . . . . . $3,165,496
263,186
Inbound roaming . . . . . . . . . . .
166,091
Other . . . . . . . . . . . . . . . . . . .
Service revenues . . . . . . . . . . 3,594,773
324,063
Equipment sales . . . . . . . . . . .
$(382,483)
(85,531)
(36,069)
(504,083)
(29,165)
Total operating revenues . . . . . 3,918,836
(533,248)
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, net
(Gain) loss on sale of business
763,435
999,000
1,677,395
(183,370)
63,053
(87,538)
803,781
30,606
195,148
(12,518)
(Gain) loss on license sales and
exchanges . . . . . . . . . . . . . .
(255,479)
255,479
Total operating expenses . . . . . 3,771,971
(523,457)
Operating income . . . . . . . . . . . $ 146,865
$
(9,791)
N/M
(12)%
(6)%
N/M—Percentage change not meaningful
Operating Revenues
Service revenues
(11)%
(25)%
(18)%
(12)%
(8)%
(12)%
(19)%
7%
(5)%
32%
(69)%
$3,547,979
348,717
202,160
4,098,856
353,228
4,452,084
$ 61,457
408
(16,806)
45,059
63,679
108,738
946,805
935,947
1,764,933
608,633
18,088
17,426
144,145
(4,768)
35,076
(8,199)
2%
N/M
(8)%
1%
22%
3%
2%
18%
N/M
6%
(83)%
N/M
N/M
6%
$3,486,522
348,309
218,966
4,053,797
289,549
4,343,346
929,379
791,802
1,769,701
573,557
9,889
—
(11,762)
4,062,566
—
(11,762)
4,295,428
232,862
$ 156,656
$(124,124)
(44)%
$ 280,780
and other exit costs, net
. . . . .
(246,767)
267,789
>100%
21,022
(21,022)
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 decreased by $382.5 million, or 11%, to $3,165.5 million due primarily to a
decrease in U.S. Cellular’s average customer base (including the reductions caused by the Divestiture
Transaction and NY1 & NY2 Deconsolidation) and a slight decrease in billed ARPU. In 2012, retail service
revenues increased by $61.5 million, or 2%, to $3,548.0 million due primarily to the impact of an increase
in billed ARPU, partially offset by a decrease in U.S. Cellular’s average customer base.
In the fourth quarter of 2013, U.S. Cellular issued loyalty reward points with a value of $43.5 million as a
loyalty bonus in recognition of the inconvenience experienced by customers during U.S. Cellular’s recent
billing system conversion. The value of the loyalty bonus reduced Operating revenues in the
Consolidated Statement of Operations and increased Customer deposits and deferred revenues in the
Consolidated Balance Sheet.
12
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
Billed ARPU of $50.73 in 2013 was relatively flat compared to $50.81 in 2012. The special issuance of
loyalty rewards points in the fourth quarter of 2013 negatively impacted billed ARPU by $0.70 in 2013,
which was partially offset by an increase in smartphone adoption and corresponding revenues from data
products and services. The increase in billed ARPU in 2012 from $48.63 in 2011 also reflects the impact
of a larger portion of the customer base using smartphones which drives incremental data access
revenue.
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.
Inbound roaming revenues
Inbound roaming revenues decreased by $85.5 million, or 25% in 2013 to $263.2 million. The decrease
was due primarily to lower rates ($47.9 million) and the impacts of the Divestiture Transaction and NY1 &
NY2 Deconsolidation ($37.6 million). Data volume increased year-over year but the impact of this
increase was offset by the combined impacts of lower volume for voice and lower rates for both data
and voice. The decline in roaming revenues was offset by a decline in roaming expense also due to
lower rates. U.S. Cellular expects continued growth in data volume but also expects that the revenue
impact of this growth will be offset by the impacts of decreases in data rates and voice volume.
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.
Other revenues
Other revenues decreased by $36.1 million, or 18%, in 2013 compared to 2012. In 2012, Other revenues
decreased by $16.8 million, or 8%. The decreases in both years are due primarily to decreases in ETC
support.
Pursuant to the FCC’s Reform Order (See ‘‘Overview—FCC Reform Order’’), U.S. Cellular’s current ETC
support is being phased down at the rate of 20% per year beginning July 1, 2012. 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 continue
to receive 60% of its baseline support until the Phase II Mobility Fund is operational.
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. 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 portfolio 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.
13
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
The decrease in 2013 equipment sales revenues of $29.2 million, or 8%, to $324.1 million was driven
primarily by selling fewer devices, partially due to the Divestiture Transaction. Declines in volume were
offset by an increase of 12.0% in average revenue per device. 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 in both years due to a continued shift in customer preference
to higher priced smartphones.
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 decreased $183.4 million, or 19%, to $763.4 million in 2013 and increased
$17.4 million, or 2%, to $946.8 million in 2012. Key components of the net changes in System operations
expenses were as follows:
(cid:129) Expenses incurred when U.S. Cellular’s customers used other carriers’ networks while roaming
decreased $64.1 million, or 27%, in 2013 and $11.1 million, or 4%, in 2012, due primarily to lower
rates and the impacts of the Divestiture Transaction and NY1 & NY2 Deconsolidation. For both years,
data roaming usage increased; however, the impact of the increase was more than offset by lower
rates for both data and voice and lower voice volume.
(cid:129) Maintenance, utility and cell site expenses decreased $61.6 million, or 15%, in 2013 and increased
$24.4 million, or 6%, in 2012. The decrease in 2013 is driven primarily by impacts of the Divestiture
Transaction and reductions in expenses related to 3G equipment support and network costs, offset by
increases in charges related to 4G LTE equipment and network costs. The increase in 2012 is driven
primarily by an increase in the number of cell sites within U.S. Cellular’s network and costs related to
the deployment and operation of LTE networks.
(cid:129) Customer usage expenses decreased by $57.7 million, or 19%, in 2013, and increased by $4.1 million,
or 1%, in 2012. The decrease in 2013 is driven by impacts of the Divestiture Transaction and
decreases in intercarrier charges as a result of the FCC’s Reform Order and certain data costs,
partially offset by increases due to network costs for 4G LTE. The increase in 2012 is due primarily to
an increase in data capacity and usage, offset by a decline in voice usage as well as reduced
intercarrier compensation expenses as a result of the FCC’s Reform Order.
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.
Cost of equipment sold
Cost of equipment sold increased $63.1 million, or 7%, in 2013 and $144.1 million, or 18% in 2012. In
both years, the increase was driven primarily by an increase in the average cost per wireless device sold
(33% in 2013 and 18% in 2012). Average cost per device sold increased due to general customer
preference for higher priced 4G LTE smartphones, including the introduction of Apple products in the
fourth quarter of 2013. In 2013, total devices sold decreased by 18% partially due to the Divestiture
Transaction; in 2012, total devices sold increased by 1%.
14
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
U.S. Cellular’s loss on equipment, defined as equipment sales revenues less cost of equipment sold,
was $674.9 million, $582.7 million and $502.3 million for 2013, 2012 and 2011, 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 pricing as a means of competitive differentiation. In addition, U.S. Cellular
expects increasing sales of data centric wireless devices 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 under the standard contract/subsidy model the
industry has operated with for many years. However, U.S. Cellular is beginning to offer new equipment
pricing constructs such as device financing to offset a higher proportion of increasing equipment costs.
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.
Selling, general and administrative expenses decreased by $87.5 million to $1,677.4 million in 2013 and
by $4.8 million to $1,764.9 in 2012. Key components of the net changes in Selling, general and
administrative expenses were as follows:
2013—
(cid:129) Selling and marketing expenses decreased by $75.7 million, or 9%, primarily from lower commission
expenses, more cost-effective advertising spending and reduced employee and facilities costs as a
result of the Divestiture Transaction.
(cid:129) General and administrative expenses decreased by $11.8 million, or 1%, driven by corporate cost
containment and reduction initiatives and reduced spending as a result of the Divestiture Transaction,
offset by costs associated with launching the new billing system of $55.8 million and higher bad debts
expense of $31.5 million due to higher customer accounts receivable balances resulting from billing
issues experienced after the system conversion.
2012—
(cid:129) Selling and marketing expenses decreased by $24.8 million, or 3%, primarily from more cost-effective
advertising spending.
(cid:129) General and administrative expenses increased by $20.1 million, or 2%, driven by increases in bad
debts expense, Federal Universal Service Charge (‘‘FUSC’’) expense and non-income tax expense.
FUSC charges are assessed to customers and also included in Service revenues.
Depreciation, amortization and accretion
Depreciation, amortization and accretion expense increased $195.1 million, or 32%, in 2013, and
$35.1 million, or 6%, in 2012 due primarily to the acceleration of depreciation, amortization and accretion
in the Divestiture Markets. The impact of the acceleration year over year was $158.5 million in 2013. The
accelerated depreciation, amortization and accretion in the Divestiture Markets is expected to conclude in
the first quarter of 2014.
(Gain) loss on asset disposals, net
(Gain) loss on asset disposals, net was a loss of $30.6 million in 2013 and $18.1 million in 2012 due
primarily to losses resulting from the write-off and disposals of certain network assets.
15
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
(Gain) loss on sale of business and other exit costs, net
(Gain) loss on sale of business and other exit costs, net was a gain of $246.8 million in 2013, primarily
related to the closing of the Divestiture Transaction. The loss of $21.0 million in 2012 was due primarily
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.
(Gain) loss on license sales and exchanges
(Gain) loss on license sales and exchanges resulted from the sale of the Mississippi Valley non-operating
market license for $308.0 million, which resulted in a pre-tax gain of $250.6 million.
RESULTS OF OPERATIONS—TDS TELECOM
TDS conducts its Wireline, Cable and HMS operations through TDS Telecom, a wholly-owned subsidiary.
The following table summarizes operating data for Wireline and Cable operations:
As of December 31,
Wireline
Residential connections
2013
2012
2011
Voice(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Broadband(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IPTV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
352,100
227,000
13,800
374,700
229,900
7,900
399,300
230,600
4,600
Wireline residential connections . . . . . . . . . . . . . . . . . . . . . . .
592,900
612,500
634,500
Commercial connections
Voice(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Broadband(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
managedIP(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
218,400
27,100
127,600
243,100
29,700
94,600
271,700
32,800
53,500
Wireline commercial connections . . . . . . . . . . . . . . . . . . . . . .
373,100
367,400
358,000
Total Wireline connections . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
966,000
979,900
992,500
Total residential revenue per connection(4) . . . . . . . . . . . . . . . . . . .
Residential broadband penetration(5) . . . . . . . . . . . . . . . . . . . . . . .
$ 40.53
$ 39.65
$ 38.86
66%
63%
60%
Cable
Cable connections
Video(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Broadband(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Voice(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
69,200
61,000
17,200
Cable connections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
147,400
Total residential revenue per connection(4) . . . . . . . . . . . . . . . . . . .
$ 55.43
(1) 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.
(4) Total residential revenue divided by the average number of total residential connections.
(5) Total number of broadband connections divided by total primary residential connections.
16
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
(6) Generally, a home or business receiving video programming counts as one video connection. In
counting bulk residential or commercial connections, such as an apartment building or a hotel,
connections are counted based on the number of units/rooms within the building receiving service.
(7) Broadband and voice connections reflect billable number of lines into a building for high speed data
and voice services, respectively.
TDS Telecom Total (Wireline, Cable and HMS Operations)
Components of Operating Income
Year Ended December 31,
(Dollars in thousands)
Operating revenues
2013
Increase/ Percentage
(Decrease)
Change
2012
Increase/ Percentage
(Decrease)
Change
2011
Wireline . . . . . . . . . . . . . . . . $726,567 $(15,181)
35,883
Cable . . . . . . . . . . . . . . . . .
HMS . . . . . . . . . . . . . . . . . .
72,606
Intra-company elimination . . .
35,883
185,616
(1,063)
(2)% $741,748 $(26,460)
—
N/M
—
65,830
64% 113,010
(252)
(252)
(3)% $768,208
—
N/M
47,180
>100%
—
N/M
(811) >(100)%
TDS Telecom operating
revenues . . . . . . . . . . . .
947,003
92,497
11% 854,506
39,118
5% 815,388
Operating expenses
Wireline . . . . . . . . . . . . . . . .
Cable . . . . . . . . . . . . . . . . .
HMS . . . . . . . . . . . . . . . . . .
Intra-company elimination . . .
661,561
35,927
205,746
(1,063)
TDS Telecom operating
(21,805)
35,927
75,096
(3)% 683,366
N/M
—
57% 130,650
(252)
18,760
—
78,519
(252)
3% 664,606
—
N/M
52,131
>100%
—
N/M
(811) >(100)%
expenses . . . . . . . . . . .
902,171
88,407
11% 813,764
97,027
14% 716,737
TDS Telecom operating income $ 44,832 $ 4,090
10% $ 40,742 $(57,909)
(59)% $ 98,651
N/M—Not meaningful
17
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
Wireline Operations
Components of Operating Income
Year Ended December 31,
(Dollars in thousands)
Operating revenues
2013
Increase/ Percentage
(Decrease)
Change
2012
Increase/ Percentage
(Decrease)
Change
2011
Residential . . . . . . . . . . . . . . $293,217 $ (3,375)
2,436
Commercial . . . . . . . . . . . . .
(14,242)
Wholesale . . . . . . . . . . . . . .
232,910
200,440
(1)% $296,592 $ (5,272)
(951)
(20,237)
1% 230,474
(7)% 214,682
(2)% $301,864
N/M 231,425
(9)% 234,919
Total operating revenues . .
726,567
(15,181)
(2)% 741,748
(26,460)
(3)% 768,208
Operating expenses
Cost of services and
products (excluding
depreciation, amortization
and accretion reported
below) . . . . . . . . . . . . . . .
Selling, general and
270,466
(3,599)
(1)% 274,065
(636)
N/M 274,701
administrative expenses . .
220,097
(15,619)
(7)% 235,716
14,602
7% 221,114
Depreciation, amortization
and accretion . . . . . . . . . .
Loss on asset disposals, net .
Loss on sale of business and
. . . . .
other exit costs, net
170,868
130
(1,658)
(890)
(1)% 172,526
1,020
(87)%
4,863
(108)
3% 167,663
1,128
(10)%
—
(39)
N/M
39
39
N/M
—
Total operating expenses . .
661,561
(21,805)
(3)% 683,366
18,760
3% 664,606
Total operating income . . . . . . $ 65,006 $ 6,624
11% $ 58,382 $(45,220)
(44)% $103,602
N/M—Not meaningful
Operating Revenues
Residential revenues consist of voice, data and video services to Wireline’s residential customer base.
Residential revenues decreased $3.4 million or 1% to $293.2 million in 2013. A 3% reduction in the
number of average residential connections reduced revenues by $7.9 million partially offset by a
$5.2 million increase due to growth in average revenue per residential connection of 2%. The growth in
average revenue was mainly driven by broadband price increases, growth in customers opting for faster
broadband speeds and the growth of customers selecting higher tier IPTV packages.
Residential revenues decreased $5.3 million or 2% to $296.6 million in 2012. Reductions in the number
of residential connections of 4% negatively impacted residential revenues by $9.8 million. Customers
choosing higher speed data plans primarily drove a 2% increase in average revenue per residential
connection in 2012, which increased residential revenues $6.6 million.
Commercial revenues consist of data and voice services and sales and installation of IP-based
telecommunications systems to Wireline’s commercial customer base.
Commercial revenues increased $2.4 million or 1% to $232.9 million in 2013. A 2% increase in average
commercial connections, which was driven by the 49% growth in managedIP as customers converted
from traditional voice and data connections, increased revenues by $4.4 million. This increase was
partially offset by a 1% decline in average revenue per commercial connection, primarily driven by lower
managedIP rates, which decreased revenues $2.7 million.
18
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
Commercial revenues decreased $1.0 million to $230.5 million in 2012 due primarily to a $2.5 million
decline in business systems sales and charges for directory assistance. A $4.8 million increase in
revenue resulting from an increase in commercial connections was partially offset by a $3.2 million
decrease in the average revenue per commercial connection primarily driven by lower managedIP rates.
Wholesale revenues consist of compensation from other carriers for utilizing TDS Telecom’s network
infrastructure and regulatory recoveries.
Wholesale revenues decreased $14.2 million or 7% to $200.4 million in 2013. Network access revenues
decreased $6.8 million in 2013 as a result of changes in support mechanisms and in intercarrier
compensation resulting from the Reform Order released by the FCC in November 2011. Wholesale
revenues also declined $5.3 million due to a 15% reduction in intra-state minutes-of-use.
Wholesale revenues decreased $20.2 million or 9% to $214.7 million in 2012. Wholesale revenues
decreased $10.0 million in 2012 as a result of changes in support mechanisms and in intercarrier
compensation resulting from the Reform Order. 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
$5.1 million due to a 11% decline in intrastate minutes of use.
Operating Expenses
Cost of services and products (excluding Depreciation, amortization and accretion)
Cost of services and products decreased $3.6 million or 1% to $270.5 million in 2013 due primarily to a
$5.4 million decrease in cost of goods sold related to long distance services and promotional giveaways.
In addition, carrier interconnection charges decreased $2.3 million as a result of lower access charges
that became effective related to the Reform Order. Employee expense decreased $1.1 million due to a
reduction in employees. Offsetting the decreases were increases in charges related to IPTV expansion.
Cost of services and products of $274.1 million in 2012 were flat compared to 2011. Increases in
employee related costs, charges related to IPTV expansion and network maintenance costs were mostly
offset by decreased long-distance costs, lower circuit charges, lower purchased network services, and a
decrease in reciprocal compensation expense related to the FCC Reform Order which mandated rate
reductions that became effective in July of 2012.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased $15.6 million or 7% to $220.1 million in 2013 due
primarily to decreases in employee expenses, Federal USF contributions due to lower revenues, bad
debts, and property taxes.
Selling, general and administrative expenses increased $14.6 million or 7% to $235.7 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, which decreased 2011 Selling,
general and administrative expenses by $7.7 million. These discrete benefits in 2011 were the primary
cause of the overall expense increase from 2011 to 2012. Additionally, higher employee related and
contractor costs and Federal USF contributions added to the increase in 2012.
19
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
Cable Operations
Components of Operating Income
Year Ended December 31,
(Dollars in thousands)
Operating revenues
2013(1)
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$29,016
6,867
Total operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35,883
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,274
11,054
7,571
28
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35,927
Total operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(44)
(1) Represents the operations of Baja from August 1, 2013 (date of acquisition) to December 31, 2013.
Operating Revenues
Residential revenues consist of video, broadband and voices services to Cable’s residential customer
base.
Baja had 104,900 residential connections which generated revenues of $29.0 million since the acquisition
of Baja on August 1, 2013.
Commercial revenues consist of video, broadband and voice services to Cable’s commercial customer
base.
Baja had 42,500 commercial connections which generated revenues of $6.9 million since the acquisition
of Baja.
Operating Expenses
Cost of services and products (excluding Depreciation, amortization and accretion)
Cost of services and products (excluding Depreciation, amortization and accretion) of $17.3 million were
incurred for programming costs and expenses related to the delivery and support of services since the
acquisition of Baja.
Selling, general and administrative expenses
Selling, general and administrative expenses of $11.1 million include legal and consulting costs of
$2.0 million related to the acquisition.
Depreciation, amortization and accretion expense
Depreciation, amortization and accretion expense of $7.6 million was incurred since the acquisition of
Baja. Amortization of the acquired customer list and trade name contributed $3.0 million of expense.
20
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
HMS Operations
Components of Operating Income
Year Ended December 31,
2013
Increase/ Percentage
(Decrease)
Change
2012
Increase/ Percentage
(Decrease)
Change
2011
(Dollars in thousands)
Operating revenues . . . . . . . . . . $185,616 $72,606
64% $113,010 $ 65,830
>100% $47,180
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 . .
136,414
60,633
80%
75,781
52,279
>100% 23,502
44,945
10,752
31%
34,193
18,546
>100% 15,647
Total operating expenses . . .
205,746
75,096
24,262
125
3,694
17
18%
16%
57%
20,568
108
7,701
(7)
60% 12,867
115
(6)%
130,650
78,519
>100% 52,131
Total operating income (loss) . . . $ (20,130) $ (2,490)
(14)% $ (17,640) $(12,689) >(100)% $ (4,951)
Operating Revenues
HMS operating revenues consist primarily of colocation, cloud computing and hosted managed services,
application management, and sales, installation and management of IT infrastructure hardware solutions.
Operating revenues increased $72.6 million to $185.6 million in 2013. The acquisitions of Vital in June of
2012 and MSN in October of 2013 contributed $64.3 million of incremental revenues. The remaining
increase was due to 10% growth in recurring services primarily consisting of colocation, cloud and
hosted managed services, and application management.
Operating revenues increased $65.8 million to $113.0 million in 2012. The acquisitions of OneNeck IT
Services in June of 2011 and Vital in June of 2012 contributed $64.1 million of incremental revenues.
Operating Expenses
Cost of services and products (excluding Depreciation, amortization and accretion)
Cost of services and products increased $60.6 million to $136.4 million in 2013 and increased
$52.3 million to $75.8 million in 2012. Acquisitions increased Cost of services and products $52.8 million
and $47.7 million in 2013 and 2012, respectively. Employee related expense also increased in 2013 by
$5.7 million in addition to increased data center costs to support revenue growth.
Selling, general and administrative expense
Selling, general and administrative expense increased $10.8 million to $44.9 million in 2013 and
increased $18.5 million to $34.2 million in 2012. Acquisitions increased Selling, general and
administrative expense $10.6 million and $15.1 million in 2013 and 2012, respectively. Additional
expenses were incurred in both 2013 and 2012 as TDS Telecom developed the infrastructure and
products and services to support growth of the HMS operations.
21
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 $3.7 million to $24.3 million in 2013 and
increased $7.7 million to $20.6 million in 2012 due primarily to acquisitions. Customer list and trade
name amortization contributed $2.2 million and $4.4 million of the increase in 2013 and 2012,
respectively.
INFLATION
Management believes that inflation affects TDS’ business to no greater or lesser extent than the general
economy.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In general, recently issued 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 recently issued accounting
pronouncements.
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 2013, 2012 and 2011.
2013
2012
2011
(Dollars in thousands)
Cash flows from (used in)
Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 494,610
(260,653)
(144,424)
$1,105,172
(998,069)
70,103
$1,255,711
(866,089)
(168,030)
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . .
$ 89,533
$ 177,206
$ 221,592
Cash Flows from Operating Activities
Cash flows from operating activities were $494.6 million in 2013 and $1,105.2 million in 2012. Significant
items to note are as follows:
(cid:129) Net income increased by $44.2 million. This increase resulted primarily from the gains recognized as a
result of the closing of the Divestiture Transaction, the NY1& NY2 Deconsolidation and the Mississippi
Valley license sale. These gains were partially offset by a decrease in Operating revenues, higher cost
of equipment sold, and an increase in non-cash expenses, including depreciation expense.
(cid:129) Net income tax payments of $175.6 million were recorded in 2013 compared to net income tax refunds
of $62.0 million in 2012. The 2013 tax payments were due primarily to the gain recognized as a result
of the closing of the Divestiture Transaction and the Mississippi Valley license sale. Federal tax refunds
of $71.5 million were received in 2012 primarily related to a federal net operating loss in 2011 largely
attributable to 100% bonus depreciation applicable to qualified capital expenditures.
22
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
TDS carried back this federal net operating loss to prior tax years and received these refunds in 2012
for carrybacks to 2009 and 2010 tax years.
(cid:129) Changes in Accounts receivable combined with the impact of Bad debts expense required
$188.7 million and $6.4 million in 2013 and 2012, respectively. Changes in Accounts receivable were
driven primarily by billing delays encountered as a result of the conversion to a new U.S. Cellular
billing system in the third quarter of 2013, which caused Accounts receivable to increase at
December 31, 2013. Given these billing delays and the corresponding increase in Accounts receivable,
U.S. Cellular believes it has made an adequate provision for allowance for doubtful accounts at
December 31, 2013. However, such provision is an estimate, and U.S. Cellular’s actual experience with
uncollectible accounts in future periods could materially differ from the amounts provided in the
allowance for doubtful accounts at December 31, 2013. Any such difference could have a material
adverse impact on future results of operations and cash flow.
(cid:129) Changes in Inventory required $83.5 million in 2013 and required $29.9 million in 2012. This change
was due primarily to higher costs per unit related to 4G LTE smartphones.
(cid:129) Changes in Accounts payable provided $86.0 million in 2013 and required $12.3 million in 2012.
Changes in Accounts payable were driven primarily by payment timing differences related to operating
expenses, capital expenditures and device purchases.
Cash flows from operating activities were $1,105.2 million in 2012 and $1,255.7 million in 2011.
Significant items to note are as follows:
(cid:129) Net income decreased by $127.6 million. This decrease resulted primarily from increases in Cost of
services and products and non-cash expenses, including depreciation expense.
(cid:129) Net income tax refunds of $62.0 million were recorded in 2012 compared to net income tax refunds of
$67.0 million in 2011. Tax refunds received in 2012 were primarily for federal net operating loss
carrybacks from the 2011 tax year to the 2009 and 2010 tax years. Tax refunds received in 2011
primarily represented federal refunds related to overpayment of 2010 taxes.
(cid:129) 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. Accounts receivable balances fluctuate based on the
timing of customer payments, promotions and other factors.
(cid:129) Changes in Inventory required $29.9 million in 2012 and $13.4 million in 2011. This change was due
primarily to higher inventory levels and a change in inventory mix, resulting in a higher cost per unit.
(cid:129) Changes in Accounts payable required $12.3 million in 2012 and provided $29.3 million in 2011.
Changes in Accounts payable were primarily driven by payment timing differences related to network
equipment and device purchases.
(cid:129) Changes in Other assets and liabilities required $30.5 million and $4.4 million in 2012 and 2011,
respectively. This change was due primarily to an increase in LTE-related deferred charges.
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 $909.7 million in 2013, $1,004.6 million in 2012 and $987.2 million in 2011. Cash
used for additions to property, plant and equipment is reported in the Consolidated Statement of Cash
Flows, and excludes amounts accrued in Accounts receivable and Accounts payable for capital
expenditures at December 31 of the current year and includes amounts received and/or paid in the
23
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
current period that were accrued at December 31 of the prior year. Cash used for additions to property,
plant and equipment totaled $883.8 million, $995.5 million and $971.8 million in 2013, 2012 and 2011,
respectively. These expenditures were made to provide for customer and usage growth (in recent
periods, particularly with respect to data usage growth), to upgrade service and to take advantage of
service-enhancing and cost-reducing technological developments in order to maintain competitive
services.
(cid:129) U.S. Cellular’s capital expenditures totaled $737.5 million in 2013, $836.7 million in 2012 and
$782.5 million in 2011 representing expenditures made 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:129) TDS Telecom’s capital expenditures totaled $164.9 million, $173.9 million, and $191.2 million in 2013,
2012, and 2011, respectively. Capital expenditures for Wireline operations totaled $140.0 million in
2013, $158.6 million in 2012 and $164.2 million in 2011 primarily representing expenditures to upgrade
plant and equipment to provide enhanced services. Capital expenditures for Cable operations totaled
$8.4 million in 2013. Capital expenditures for HMS operations totaled $16.5 million in 2013,
$15.3 million in 2012 and $27.0 million in 2011 representing expenditures to expand data center
facilities and the purchase of IT-related equipment to deliver products and services.
Cash payments for acquisitions in 2013, 2012 and 2011 were as follows:
Cash Payments for Acquisitions
2013
2012
2011
(Dollars in thousands)
U.S. Cellular licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Cellular business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TDS Telecom HMS businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TDS Telecom cable business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Reportable Segment(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 16,540
—
33,961
264,069
—
$ 4,406
$122,690
19,367
—
95,865
40,692
—
—
— (14,130)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$314,570
$163,382
$105,508
(1) Cash held by Airadigm at acquisition. TDS acquired 63% of Airadigm on September 23, 2011.
Cash amounts paid for the 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.
Cash Received from Divestitures
2013
2012
2011
(Dollars in thousands)
U.S. Cellular licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Cellular businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TDS Telecom wireline business . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$311,989
499,131
—
$
— $
49,932
250
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$811,120
$50,182
$
—
—
—
—
U.S. Cellular received $480.0 million in cash at the close of the Divestiture Transaction in May 2013. In
addition, U.S. Cellular received $10.6 million in reimbursements for certain network decommissioning
costs, network site lease rent and termination costs, network access termination costs, and employee
termination benefits for specified engineering employees (the ‘‘Sprint Cost Reimbursement’’) in 2013.
On October 4, 2013, U.S. Cellular sold the majority of its Mississippi Valley unbuilt license for
$308.0 million. This sale resulted in a $250.6 million gain which was recorded in the fourth quarter of
2013.
24
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
On August 14, 2013 U.S. Cellular entered into a definitive agreement to sell the majority of its St. Louis
area unbuilt license for $92.3 million. The sale will result in an estimated pre-tax gain of $76.2 million.
This transaction is subject to regulatory approval and is expected to close in the first quarter of 2014.
TDS invested $120.0 million and $180.9 million in 2012 and 2011, respectively, in U.S. Treasury Notes
and corporate notes with maturities greater than three months from the acquisition date. TDS realized
cash proceeds of $115.0 million, $243.4 million and $393.2 million in 2013, 2012 and 2011, respectively,
related to the maturities of its investments in U.S. Treasury Notes, corporate notes and certificates of
deposit.
Cash Flows from Financing Activities
Cash flows from financing activities include repayments of and proceeds from short-term and long-term
debt, 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 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 September 2011, Airadigm paid $32.7 million to the FCC in satisfaction of amounts due pursuant to
Airadigm’s plan of reorganization. See Note 5—Acquisitions, Divestitures and Exchanges in the Notes to
Consolidated Financial Statements for additional information related to this acquisition.
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.
On June 25, 2013, U.S. Cellular paid a special cash dividend of $5.75 per share, for an aggregate
amount of $482.3 million, to all holders of U.S. Cellular Common Shares and Series A Common Shares
as of June 11, 2013. Of the $482.3 million paid, TDS received $407.1 million while noncontrolling public
shareholders received $75.2 million. The cash paid to noncontrolling public shareholders is presented as
U.S. Cellular dividends paid to noncontrolling public shareholders on the Consolidated Statement of
Cash Flows.
TDS repurchased Common Shares for $9.7 million and $20.0 million in 2013 and 2012, respectively, and
Special Common Shares for $21.5 million in 2011. U.S. Cellular repurchased Common Shares for
$18.5 million, $20.0 million and $62.3 million in 2013, 2012 and 2011, respectively. See Note 15—
Common Shareholders’ Equity in the Notes to Consolidated Financial Statements for additional
information related to these transactions.
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 which TDS believes may be useful to investors and other users of its financial
25
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
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 . . . . . .
2013
2012
2011
$ 494,610
(883,797)
$1,105,172
(995,517)
$1,255,711
(971,759)
Free cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(389,187) $ 109,655
$ 283,952
See Cash flows from Operating Activities and Cash flows from Investing Activities for details on the
changes to the components of Free cash flow.
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 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
marketing and promotional activity 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 capital expenditure, acquisition or share repurchase programs.
Such reductions could have a material adverse effect on TDS’ business, financial condition or results of
operations.
The following table summarizes TDS’ and U.S. Cellular’s cash and investments as of December 31, 2013.
(Dollars in thousands)
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TDS
U.S. Cellular(1)
$830,014
$ 50,104
$342,065
$ 50,104
(1) Also included as a component of the TDS column.
Cash and Cash Equivalents
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, 2013, the majority of TDS’ Cash and cash equivalents was held in
bank deposit accounts and in money market funds that invest exclusively in U.S. Treasury Notes or in
repurchase agreements fully collateralized by such obligations. TDS monitors the financial viability of the
money market funds and direct investments in which it invests and believes that the credit risk
associated with these investments is low.
Short-term and Long-term Investments
Short-term investments consist of U.S. Treasury Notes 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
26
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
Note 2—Fair Value Measurements in the Notes to Consolidated Financial Statements for additional
information on Short-term investments. As of December 31, 2013, TDS does not hold 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, 2013, 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.
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, 2013, TDS’ and U.S. Cellular’s senior debt credit ratings from nationally recognized
credit rating agencies remained at investment grade.
In June 2013, U.S. Cellular provided $17.4 million in letters of credit to the FCC in connection with U.S.
Cellular’s winning bids in Auction 901. See Note 19—Supplemental Cash Flow Disclosures in the Notes
to Consolidated Financial Statements for additional information on Auction 901.
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 that they were in
compliance as of December 31, 2013 with all of the financial covenants and requirements set forth in
their revolving credit facilities. TDS also has certain other non-material credit facilities from time to time.
See Note 10—Debt in the Notes to Consolidated Financial Statements for additional information
regarding the revolving credit facilities.
Long-Term Financing
TDS and its subsidiaries’ 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. TDS believes that it and its subsidiaries were in compliance as of December 31, 2013 with all
financial covenants and other requirements set forth in its 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 four years represent less than 1% of the total
long-term debt obligation at December 31, 2013. 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 and U.S. Cellular, at their discretion, may from time to time seek to retire or purchase their
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.
27
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
TDS and U.S. Cellular each have an effective shelf registration statement on Form S-3 to issue senior or
subordinated debt securities. The proceeds from any such issuances may be used for general corporate
purposes, including the possible reduction of other long-term debt; in connection with acquisition,
construction and development programs; the reduction of short-term debt; for working capital; to provide
additional investments in subsidiaries; or the repurchase of shares. The TDS shelf registration permits
TDS to issue at any time and from time to time senior or subordinated 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 or subordinated 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.
See Note 10—Debt in the Notes to Consolidated Financial Statements for additional information on
Long-term financing.
Capital Expenditures
U.S. Cellular’s capital expenditures for 2014 are expected to be approximately $640 million. These
expenditures are expected to be for the following general purposes:
(cid:129) Expand and enhance network coverage in its service areas, including providing additional capacity to
accommodate increased network usage, principally data usage, by current customers;
(cid:129) Continue to deploy 4G LTE technology in certain markets;
(cid:129) Expand and enhance the retail store network; and
(cid:129) Develop and enhance office systems.
TDS Telecom’s capital expenditures for 2014 are expected to be approximately $200 million. These
expenditures are expected to be for the following general purposes:
(cid:129) Fiber expansion in Wireline markets to support IPTV and super high speed data;
(cid:129) Success-based spending to sustain managedIP, IPTV and HMS growth;
(cid:129) Expansion of HMS data center facilities;
(cid:129) Plant upgrades and success-based spending at Baja; and
(cid:129) Process and productivity initiatives.
TDS plans to finance its capital expenditures program for 2014 using primarily Cash flows from operating
activities, and as necessary, existing cash balances and short-term investments.
Acquisitions, Divestitures and Exchanges
TDS assesses its business interests on an ongoing basis with a goal of improving the competitiveness of
its operations and maximizing its long-term return on investment. As part of this strategy, TDS reviews
attractive opportunities to acquire additional wireless operating markets and wireless spectrum; and
telecommunications, cable, HMS or other possible businesses. 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, properties, wireless spectrum and other possible businesses. In general, TDS
may not disclose such transactions until there is a definitive agreement. See Note 5—Acquisitions,
Divestitures and Exchanges and Note 7—Investments in Unconsolidated Entities in the Notes to
Consolidated Financial Statements for additional information related to significant transactions.
28
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
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 13—Variable Interest Entities in
the Notes to Consolidated Financial Statements for additional information related to these variable
interest entities. TDS may elect to make additional capital contributions and/or advances to these
variable interest entities in future periods in order to fund their operations.
Common Share Repurchase Programs
In the past year, TDS and U.S. Cellular have repurchased and expect to continue to repurchase their
Common Shares, in each case subject to any available repurchase program. For additional information
related to the current TDS and U.S. Cellular repurchase authorizations and repurchases made during
2013, 2012 and 2011, see Note 15—Common Shareholders’ Equity in the Notes to Consolidated
Financial Statements and Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Contractual and Other Obligations
At December 31, 2013, 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
$1,728.7
4,336.2
1,510.2
8.4
1,959.6
Less Than
1 Year
$
1.5
116.1
175.2
0.6
675.3
1 - 3 Years
3 - 5 Years
More Than
5 Years
$
3.9
232.1
285.0
1.2
1,058.7
$ — $1,723.3
3,756.2
849.0
5.4
84.3
231.8
201.0
1.2
141.3
$9,543.1
$968.7
$1,580.9
$575.3
$6,418.2
(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
$11.6 million unamortized discount related to U.S. Cellular’s 6.7% Senior Notes. See Note 10—Debt
in the Notes to Consolidated Financial Statements for additional information.
Includes future lease costs related to telecommunications plant facilities, office space, retail sites, cell
sites, data centers and equipment. See Note 12—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, long-term marketing programs, and an agreement with
Apple to purchase Apple iPhone products. As described more fully in Note 5—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, 2013.
(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,
2013, TDS Telecom has expended $24.8 million of the $30.9 million on these projects. Under the
terms of the grants, the projects must be completed by June of 2015.
29
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
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
$30.4 million at December 31, 2013. See Note 3—Income Taxes in the Notes to Consolidated Financial
Statements for additional information on unrecognized tax benefits.
Agreements
As previously disclosed, on August 17, 2010, TDS 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’’). In July 2013, TDS implemented B/OSS, pursuant to an updated Statement of Work dated
June 29, 2012. Total payments to Amdocs related to this implementation are estimated to be
approximately $183.9 million (subject to certain potential adjustments) over the period from
commencement of the SLMA through the first half of 2014. As of December 31, 2013, $136.8 million had
been paid to Amdocs.
Apple iPhone Products Purchase Commitment
In March 2013, U.S. Cellular entered into an agreement with Apple to purchase certain minimum
quantities of iPhone products over a three-year period beginning in November 2013. The minimum
quantity of iPhone products to be purchased during the first contract year is fixed and is subject to
adjustment for the second and third contract years based on the percentage growth in smartphone sales
in the United States for the immediately preceding calendar year. Based on current forecasts, TDS
estimates that the remaining contractual purchase commitment as of December 31, 2013 is
approximately $950 million. At this time, TDS expects to meet its contractual commitment with Apple.
Off-Balance Sheet Arrangements
TDS had no transactions, agreements or other contractual arrangements with unconsolidated entities
involving ‘‘off-balance sheet arrangements,’’ as defined by SEC rules, that had or are reasonably likely to
have a material current or future effect on its financial condition, changes in financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital resources.
Dividends
TDS paid quarterly dividends per outstanding share of $0.1275 in 2013, $0.1225 in 2012 and $0.1175 in
2011. TDS increased the dividend per share to $0.1340 in the first quarter of 2014. The dividends per
share amount for 2011 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.
On June 25, 2013, U.S. Cellular paid a special cash dividend of $5.75 per share, for an aggregate
amount of $482.3 million, to all holders of U.S. Cellular Common Shares and Series A Common Shares
as of June 11, 2013. Of the $482.3 million paid, TDS received $407.1 million while noncontrolling public
shareholders received $75.2 million.
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.
30
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
Goodwill, Licenses and Franchise rights
See the Goodwill, Licenses and Franchise rights 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, Licenses and Franchise rights impairment testing
policies and methods. TDS performs annual impairment testing of Goodwill, Licenses and Franchise
rights, as required by GAAP, in the fourth quarter of its fiscal year, based on fair values and net carrying
values determined as of November 1.
See Note 6—Intangible Assets in the Notes to Consolidated Financial Statements for additional
information related to Goodwill, Licenses and Franchise rights activity in 2013 and 2012.
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 2013, U.S. Cellular identified four reporting units based on
geographic service areas (all of which are included in TDS’ wireless reportable operating segment). For
purposes of the impairment testing of Goodwill in 2012, U.S. Cellular identified five reporting units based
on geographic service areas. The change in reporting units resulted from the NY1 & NY2
Deconsolidation more fully described in Note 7—Investments in Unconsolidated Entities in the Notes to
Consolidated Financial Statements. There were no changes to U.S. Cellular’s overall Goodwill impairment
testing methodology between November 1, 2013 and November 1, 2012.
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 (shown as a ten year compound annual growth rate in the table below), the terminal revenue
growth rate, the discount rate and capital expenditures as a percentage of revenue (shown as a simple
average in the table below). The averages below are based on ten year projection periods. These
assumptions were as follows for November 1, 2013 and 2012:
Key Assumptions
November 1,
2013
November 1,
2012
Revenue growth rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Terminal revenue growth rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures as a percentage of revenue . . . . . . . . . . . . . . . . . . . . . .
2.2%
2.0%
10.0%
16.0%
2.2%
2.0%
11.0%
15.2%
The carrying value of each U.S. Cellular reporting unit at TDS as of November 1, 2013 was as follows:
Reporting Unit
Carrying Value
at TDS(1)
(Dollars in millions)
Central Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mid-Atlantic Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New England Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Northwest Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,753
836
269
328
$4,186
(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
$4,287 million at November 1, 2013.
31
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
As of November 1, 2013, the fair values of the reporting units exceeded their respective carrying values
by amounts ranging from 18.4% to 33.4%. 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 11.4% to 12.7%
to yield estimated fair values of reporting units that equal their respective carrying values at November 1,
2013. Further, assuming all other assumptions remained the same, the terminal growth rate assumptions
would need to decrease to amounts ranging from negative 5.3% to negative 1.3% to yield estimates of
fair value equal to the carrying values of the respective reporting units at November 1, 2013.
Goodwill—TDS Telecom
TDS Telecom has recorded Goodwill as a result of the acquisition of ILEC, HMS and cable companies.
For purposes of Goodwill impairment testing, TDS Telecom has three reporting units: ILEC, HMS and
Cable.
During the third quarter of 2013, due to continued competitive pressures and negative secular and
regulatory trends in the ILEC industry, TDS determined that an interim impairment test of TDS Telecom’s
ILEC Goodwill was required. TDS performed the Step 1 Goodwill impairment test, as defined by GAAP,
as of August 1, 2013, and determined that the fair value of the ILEC reporting unit exceeded its carrying
value, and accordingly no Goodwill impairment resulted.
Prior to the third quarter of 2013, HMS was comprised of three reporting units: OneNeck IT Services,
TEAM Technologies, LLC/VISI Incorporated (‘‘TEAM/VISI’’) and Vital. Due to changes in the management
of the HMS operations and related changes in internal financial reporting that culminated in the third
quarter of 2013, the three separate HMS reporting units were combined into one HMS reporting unit.
This change in reporting units required TDS to perform an interim impairment test of the Goodwill in the
HMS reporting unit(s) in the third quarter of 2013. TDS performed the Step 1 Goodwill impairment test as
of August 1, 2013 for the three historical HMS reporting units of OneNeck IT Services, TEAM/VISI, and
Vital and the newly combined HMS reporting unit. In all four of these HMS-related Step 1 Goodwill
impairment tests, TDS determined that the fair value of each of the reporting units exceeded its
respective carrying value, and accordingly, no Goodwill impairment resulted.
In October 2013, TDS acquired MSN. MSN is included in the HMS reporting unit for purposes of
Goodwill impairment testing. However, as MSN was acquired in the fourth quarter, the assumptions
discussed below relate solely to the legacy HMS reporting unit. Consistent with fair value principles, as
MSN was recently purchased from a third party in an arms-length transaction, management believes that
MSN’s purchase price of $44 million reflects fair value and carrying value at November 1, 2013. This
amount was included in the overall HMS reporting unit fair value and carrying value.
The Cable reporting unit consists of Baja, which was acquired in August 2013. A qualitative assessment,
as defined by GAAP, of the reporting unit was completed as of November 1, 2013. The qualitative
assessment, which analyzed company, industry and economic trends, concluded that it was more likely
than not that the fair value of this reporting unit was at least equal to its carrying value, and accordingly
no Goodwill impairment resulted.
The discounted cash flow approach and publicly-traded guideline company method were used to value
the ILEC and 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 (shown as a compound annual growth rate in the table below), the terminal revenue growth
rate, the discount rate and capital expenditures as a percentage of revenue (shown as a simple average
in the table below).
32
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
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.
The following tables represent key assumptions used in estimating the fair value of the ILEC and HMS
(excluding MSN, as previously discussed) reporting units as of November 1, 2013 and 2012, the annual
impairment testing dates. The ILEC and HMS averages below are based on five and ten year projection
periods, respectively. There are uncertainties associated with these key assumptions, and potential
events and/or circumstances that could have a negative effect on the key assumptions, which are
described below.
The assumptions were as follows for November 1, 2013:
Key Assumptions
Revenue growth rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Terminal revenue growth rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures as a percentage of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . .
The assumptions were as follows for November 1, 2012:
Key Assumptions
ILEC
(0.5)%
0.0%
7.5%
15.0%
HMS
10.8%
2.5%
12.5%
11.2%
ILEC
HMS
Revenue growth rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Terminal revenue growth rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures as a percentage of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.3)% 6.3-16.3%
0.0% 1.5-3.0%
7.0% 11.0-13.0%
15.3% 0.4-21.9%
Revenue growth rates
The negative average expected growth rate for the ILEC reporting unit is due primarily to declines in
voice and data market share and declines in regulatory and wholesale revenues.
The mix of products and services in the HMS reporting unit is diverse and offers the following services:
colocation, dedicated hosting, hosted application management, cloud computing services and planning,
engineering, procurement, installation, and sales and management of IT infrastructure hardware
solutions. The following sources were used to generate projected revenues:
(cid:129) Market participant growth rates
(cid:129) Internally generated forecasts, which in addition to market participant growth rates, also considered:
(cid:129) Current and projected staffing of the sales teams and their reasonable potential for sales quota
attainment
(cid:129) Observed customer demand
(cid:129) Market and competitive knowledge
There are risks that could negatively impact the projected revenue growth rates, including, but not limited
to:
(cid:129) Sales process execution—including the ability to attract and retain qualified sales professionals.
33
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
(cid:129) Competition—competitors may gain advantages over the HMS business, and may have the ability to
offer product and service offerings which TDS Telecom is not able to offer, or offer competitively.
(cid:129) Operations—TDS Telecom could experience operational difficulties including service disruptions,
security breaches, or other negative events that could harm the reputation of its HMS business and its
future revenue prospects.
Discount rates
The discount rate of each reporting unit was computed by calculating the weighted average cost of
capital (‘‘WACC’’) of market participants with businesses reasonably comparable to each respective
reporting unit. The following is a summary of the key components of the calculation:
(cid:129) Each reporting unit used a separate set of market participants based upon the primary products
offered by each respective reporting unit.
(cid:129) The percentage of debt and equity in each market participant’s capital structure was then computed.
TDS then selected a capital allocation between debt and equity reflective of the corresponding market
participant set. These relative debt and equity capital allocation percentages were then applied to the
estimated after-tax cost of debt and estimated cost of equity of the market participants in each
reporting unit to arrive at an estimated WACC of market participants, which was then used as the
discount rate for each respective reporting unit.
The discount rate is dependent upon the cost of capital of other industry market participants. To the
extent that the weighted average cost of capital of industry participants increases, this would decrease
the estimated fair value of the reporting units. The weighted average cost of capital may increase if
borrowing costs rise, market participants weight more of their capital structure towards equity (vs. debt),
or other elements affecting the estimated cost of equity increase.
The WACC calculated for the ILEC reporting unit was lower than the WACC calculated for the HMS
reporting unit as a result of the ILEC market participants having capital structures that are more heavily
weighted toward debt (vs. higher cost equity) relative to the HMS market participants. ILEC market
participants are more mature, capital intensive businesses than the HMS market participants. As a result,
ILEC market participants generally have a higher ratio of debt relative to equity in their capital structures
as compared to HMS market participants.
Capital expenditures as a percentage of revenue
Capital expenditures for the ILEC reporting unit primarily consist of upgrades to plant and equipment in
the IPTV markets, general network support, IT infrastructure and the completion of broadband stimulus
projects. To the extent costs associated with these capital expenditures increase at a rate higher than
expected and disproportionate to forecasted future revenues, this could negatively impact future cash
flows.
Capital expenditures for the HMS reporting unit primarily consist of buildings and improvements related
to data center construction and information technology hardware. To the extent building capacity needs
increase at a rate higher than expected and disproportionate to forecasted future revenues, this could
negatively impact future cash flows. Further, should the cost of IT hardware increase at levels higher than
expected, this could also cause future capital expenditures to exceed the amounts forecasted.
34
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
Results
The following represents the carrying values of the reporting units tested for impairment as of
November 1, 2013, and the results of the Step 1 Goodwill impairment tests.
Reporting unit
Carrying value
(in millions)
Percentage by which the estimated fair value of the reporting
unit exceeded its carrying value
ILEC . . . . . . . . . . . . . . . . . . . . . . .
HMS . . . . . . . . . . . . . . . . . . . . . . .
$1,297
$ 223
25.5%
16.7%
As of November 1, 2013, the fair value of the ILEC reporting unit exceeded its carrying value; therefore,
no impairment of Goodwill existed. Given that the fair value of the reporting unit exceeded its respective
carrying value, provided all other assumptions remained the same, the discount rate would have to
increase to 9.7% 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, 2013. Further, provided all other assumptions
remained the same, the terminal revenue growth rate assumption would need to decrease to negative
3.0%, 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, 2013.
As of November 1, 2013 the fair value of the HMS reporting unit exceeded its carrying value; therefore,
no impairment of Goodwill existed. Given that the fair value of the reporting unit exceeded its respective
carrying value, provided all other assumptions remained the same, the discount rate would have to
increase to 13.6% for the discounted cash flow approach to yield estimated fair value of the HMS
reporting unit (excluding MSN, as previously discussed) that equals its carrying value at November 1,
2013. Further, provided all other assumptions remained the same, the terminal revenue growth rate
assumption would need to decrease to negative 0.2%, for the discounted cash flow approach to yield an
estimate of fair value equal to the carrying value of the HMS reporting unit (excluding MSN, as previously
discussed) at November 1, 2013.
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, 2013, U.S. Cellular separated its FCC
licenses into eleven units of accounting based on geographic service areas. As of November 1, 2012,
U.S. Cellular separated its FCC licenses into thirteen units of accounting based on geographic service
areas. The change in units of accounting resulted from (i) the Divestiture Transaction and the Mississippi
Valley non-operating market license sale, both of which are more fully described in Note 5—Acquisitions,
Divestitures and Exchanges in the Notes to Consolidated Financial Statements and (ii) the NY1 &
NY2 Deconsolidation more fully described in Note 7—Investments in Unconsolidated Entities in the Notes
to Consolidated Financial Statements. In both 2013 and 2012, 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.
35
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
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, 2013 and 2012 licenses impairment
assessments were as follows:
Key Assumptions
November 1,
2013
November 1,
2012
Build-out period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Terminal revenue growth rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Terminal capital expenditures as a percentage of revenue . . . . . . . . . . . . . . . .
Customer penetration rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 years
7 years
8.5%
2.0%
13.6%
8.5%
2.0%
13.2%
12.5-16.7% 13.3-17.3%
The shorter build-out period in 2013 reflects a change in management’s expectations of the time required
to build out the U.S. Cellular network and is based on recent company-specific experience and industry
observation.
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. 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.
As of November 1, 2013, the fair values of the built licenses units of accounting exceeded their
respective carrying values by amounts ranging from 28.0% to 75.9%. Therefore, no impairment of
Licenses existed. Given that the fair values of the licenses exceed their respective carrying values, the
discount rate would have to increase to a range of 8.9% to 9.5% to yield estimated fair values of licenses
in the respective units of accounting that equal their respective carrying values at November 1, 2013. An
increase of 50 basis points to the assumed discount rate would cause an impairment of approximately
$11 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, 2013 licenses impairment test.
36
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
Carrying Value of Licenses
The carrying value of licenses at November 1, 2013 was as follows:
Unit of Accounting(1)
Carrying Value
(Dollars in millions)
U.S. Cellular—Developed Operating markets
Central Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mid-Atlantic Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New England Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Northwest Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Cellular—Non-operating markets
New England . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
North Northwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South Northwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
North Central . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South Central . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
East Central . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mid-Atlantic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 749
235
107
68
1
3
2
59
22
107
50
Total(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,403
TDS Telecom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Airadigm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
15
Total(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,421
(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 New England, include licenses awarded to the limited partnerships.
(2) 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 $1,398 million at November 1, 2013.
(3) Between November 1, 2013 and December 31, 2013, TDS capitalized interest on certain licenses
pursuant to current network build-outs in the amount of $3 million.
Franchise rights
TDS Telecom has recorded Franchise rights as a result of the acquisition of a cable business in August
2013. The carrying value of Franchise rights as of December 31, 2013 was $123.7 million. TDS Telecom
tests Franchise rights for impairment at a level of reporting referred to as a unit of accounting. For
purposes of its impairment testing of Franchise rights in 2013, TDS Telecom identified one unit of
accounting: Cable. A qualitative assessment, as defined by GAAP, of the Cable unit of accounting was
completed as of November 1, 2013. The qualitative assessment, which analyzed company, industry and
economic trends, concluded that it was more likely than not that the fair value of the Franchise rights
was at least equal to their carrying value, and accordingly, no Franchise rights impairment resulted.
37
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
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 3—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.
TDS follows the deferred revenue method of accounting for its loyalty reward program. Under this
method, revenue allocated to loyalty reward points is deferred. Revenue is recognized at the time of
customer redemption or when such points have been depleted via an account maintenance charge. TDS
periodically reviews and revises the redemption and depletion rates as appropriate based on history and
related future expectations. As of December 31, 2013, TDS estimated loyalty reward points breakage
based on actuarial estimates and recorded a $7.4 million change in estimate, which reduced Customer
deposits and deferred revenues in the Consolidated Balance Sheet and increased Operating revenues in
the Consolidated Statement of Operations.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Note 20—Certain Relationships and Related Transactions in the Notes to Consolidated Financial
Statements.
38
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
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 and
represent ‘‘forward-looking statements’’ as this term is defined in the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other
factors that may cause actual results, events or developments to be significantly different from any future
results, events or developments expressed or implied by such forward-looking statements. Such risks,
uncertainties and other factors include, but are not limited to, the following risks:
(cid:129) Intense competition in the markets in which TDS operates could adversely affect TDS’ revenues or
increase its costs to compete.
(cid:129) 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:129) 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:129) 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:129) Changes in roaming practices or other factors could cause TDS’ roaming revenues to decline from
current levels and/or impact TDS’ ability to service its customers in geographic areas where TDS does
not have its own network, which would have an adverse effect on TDS’ business, financial condition or
results of operations.
(cid:129) 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:129) 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:129) 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:129) 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.
(cid:129) 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:129) 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:129) TDS’ lower scale relative to larger competitors could adversely affect its business, financial condition or
results of operations.
(cid:129) Changes in various business factors could have an adverse effect on TDS’ business, financial
condition or results of operations.
39
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
(cid:129) 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:129) Complexities associated with deploying new technologies present substantial risk.
(cid:129) 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:129) Performance under device purchase agreements could have a material adverse impact on TDS’
business, financial condition or results of operations.
(cid:129) Changes in TDS’ enterprise value, changes in the market supply or demand for wireless licenses,
wireline or cable markets or IT service providers, adverse developments in the businesses or the
industries in which TDS is involved and/or other factors could require TDS to recognize impairments in
the carrying value of its licenses, goodwill, franchise rights and/or physical assets.
(cid:129) Costs, integration problems or other factors associated with acquisitions, divestitures or exchanges of
properties or licenses and/or expansion of TDS’ businesses could have an adverse effect on TDS’
business, financial condition or results of operations.
(cid:129) 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 and third-party national
retailers. If TDS’ relationships with these agents or third-party national retailers are seriously harmed, its
business, financial condition or results of operations could be adversely affected.
(cid:129) TDS’ investments in unproven technologies may not produce the benefits that TDS expects.
(cid:129) 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 networks and support
systems could have an adverse effect on its operations.
(cid:129) 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:129) 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:129) 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:129) 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:129) The market price of TDS’ Common Shares is subject to fluctuations due to a variety of factors.
(cid:129) 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
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.
40
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Telephone and Data Systems, Inc.
(cid:129) 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:129) 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:129) 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:129) 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:129) 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:129) 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:129) 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:129) 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:129) 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, 2013 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.
41
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, 2013, the majority of TDS’ long-term debt was in the form of fixed-rate notes with
maturities ranging up to 48 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, 2013:
Principal Payments Due by Period
Long-Term
Debt Obligations(1)
Weighted-Avg.
Interest Rates
on Long-Term
Debt Obligations(2)
(Dollars in millions)
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1.6
1.3
3.1
0.2
0.2
1,726.9
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,733.3
4.8%
2.7%
4.8%
9.1%
9.2%
6.7%
6.7%
(1) The total long-term debt obligation differs from Long-term debt in Consolidated Balance Sheet due
to the $11.6 million unamortized discount related to U.S. Cellular’s 6.7% Senior Notes. See
Note 10—Debt in the Notes to Consolidated Financial Statements for additional information.
(2) Represents the weighted average interest rates at December 31, 2013 for debt maturing in the
respective periods.
Fair Value of Long-Term Debt
At December 31, 2013 and 2012, the estimated fair value of long-term debt obligations, excluding capital
lease obligations and the current portion of such long-term debt, was $1,560.6 million and
$1,827.6 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, 2013 and 2012 and discounted cash flow analysis for U.S. Cellular’s 6.7% Senior
Notes and the remaining debt at December 31, 2013 and 2012.
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.
42
Telephone and Data Systems, Inc.
Consolidated Statement of Operations
Year Ended December 31,
2013
2012
2011
(Dollars and shares in thousands, except per share amounts)
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,901,236
$5,345,277
$5,180,471
Operating expenses
Cost of services and products (excluding Depreciation,
amortization and accretion expense reported below) . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . .
Depreciation, amortization and accretion . . . . . . . . . . . . . . . .
Loss on impairment of assets . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) loss on asset disposals, net
. . . . . . . . . . . . . . . . . . . .
(Gain) loss on sale of business and other exit costs, net . . . . .
(Gain) loss on license sales and exchanges . . . . . . . . . . . . . .
2,225,316
1,947,778
1,018,077
—
30,841
(300,656)
(255,479)
2,272,570
2,033,901
813,626
515
19,741
21,061
—
2,050,644
2,002,359
765,776
—
10,952
—
(11,762)
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . .
4,665,877
5,161,414
4,817,969
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
235,359
183,863
362,502
Investment and other income (expense)
Equity in earnings of unconsolidated entities . . . . . . . . . . . . .
Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . . .
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
132,714
9,092
14,547
(98,811)
(37)
57,505
292,864
126,043
166,821
of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,894
Net income attributable to TDS shareholders . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
TDS Preferred dividend requirement
141,927
(49)
Net income available to common shareholders . . . . . . . . . . .
$ 141,878
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 to TDS shareholders . . . . . . . . . . . . . . .
108,490
1.31
109,132
1.29
0.51
$
$
$
92,867
9,248
(3,718)
(86,745)
720
12,372
196,235
73,582
122,653
40,792
81,861
(50)
82,538
9,145
24,103
(118,201)
3,658
1,243
363,745
113,503
250,242
49,676
200,566
(50)
$
$
$
$
81,811
$ 200,516
108,671
0.75
108,937
0.75
0.49
108,562
1.85
109,098
1.83
0.47
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
43
Telephone and Data Systems, Inc.
Consolidated Statement of Comprehensive Income
Year Ended December 31,
2013
2012
2011
(Dollars in thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in accumulated other comprehensive income
Change in net unrealized gain 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 . . . . . . . .
$166,821
$122,653
$250,242
51
(34)
49
4
138
—
13,345
(3,605)
2,452
12,192
(4,646)
7,546
7,563
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)
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Comprehensive income attributable to noncontrolling interest .
174,384
24,894
123,375
40,792
244,596
49,676
Comprehensive income attributable to TDS shareholders . . . . . . .
$149,490
$ 82,583
$194,920
The accompanying notes are an integral part of these consolidated financial statements.
44
Telephone and Data Systems, Inc.
Consolidated Statement of Cash Flows
2013
2012
2011
Year Ended December 31,
(Dollars in thousands)
Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add (deduct) adjustments to reconcile net income to net cash flows from
$ 166,821
$ 122,653
$ 250,242
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, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) loss on sale of business and other exit costs, net . . . . . . . . . . . . . . . . .
(Gain) loss on license sales and exchanges . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) loss on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,018,077
105,629
30,338
(67,150)
(132,714)
127,929
—
30,841
(300,656)
(255,479)
(14,547)
2,463
612
(294,320)
(83,536)
86,028
66,460
17,388
380
(9,954)
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
—
10,952
—
(11,762)
(24,103)
18,849
1,067
(95,426)
(13,382)
29,291
35,457
(27,871)
3,351
(4,418)
Cash flows from investing activities
Cash used for additions to property, plant and equipment . . . . . . . . . . . . . . . . . . .
Cash paid for acquisitions and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash received from divestitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash received for investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 plans, net of
tax payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 to TDS shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Cellular dividends paid to noncontrolling public shareholders . . . . . . . . . . . . . .
Payment of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions to noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments to acquire additional interest in subsidiaries . . . . . . . . . . . . . . . . . . . . .
Other financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
494,610
1,105,172
1,255,711
(883,797)
(314,570)
811,120
—
115,000
11,594
(995,517)
(163,382)
50,182
(120,000)
243,444
(12,796)
(971,759)
(105,508)
—
(180,920)
393,246
(1,148)
(260,653)
(998,069)
(866,089)
—
(1,581)
37
9,654
5,784
(9,692)
(18,544)
(55,293)
(75,235)
(23)
(3,766)
(4,505)
8,740
—
(2,566)
195,358
(32,671)
(614,639)
643,700
(1,119)
(2,205)
(20,026)
(20,045)
(53,165)
—
(8,242)
(20,856)
(3,167)
6,136
32
1,935
(21,500)
(62,294)
(48,670)
—
(21,657)
(16,236)
—
3,970
(144,424)
70,103
(168,030)
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . .
89,533
177,206
221,592
Cash and cash equivalents
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
740,481
563,275
341,683
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 830,014
$ 740,481
$ 563,275
The accompanying notes are an integral part of these consolidated financial statements.
45
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 and agents, less allowances of $63,690 and
$28,152, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, less allowances of $1,914 and $5,263, respectively . . . . . . . . . .
Inventory, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred income tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
2012
$
830,014
50,104
$
740,481
115,700
551,611
179,503
244,560
106,077
87,920
2,397
35,151
409,720
164,608
160,692
43,411
86,385
9,625
32,815
2,087,337
1,763,437
Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,027
163,242
Investments
Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Franchise rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets, net of accumulated amortization of $112,752 and
$143,613, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in unconsolidated entities . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,423,779
836,843
123,668
1,480,039
797,194
—
71,454
301,772
—
641
58,522
179,921
50,305
824
2,758,157
2,566,805
Property, plant and equipment
In service and under construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,239,804
7,361,660
10,808,499
6,811,233
Other assets and deferred charges . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,878,144
164,482
3,997,266
133,150
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,904,147
$ 8,623,900
The accompanying notes are an integral part of these consolidated financial statements.
46
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
2012
$
1,646
496,069
289,445
6,673
70,518
115,031
212,374
1,191,756
$
1,233
377,291
222,345
6,565
48,237
134,932
134,005
924,608
Liabilities held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
19,594
Deferred liabilities and credits
Net deferred income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other deferred liabilities and credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
862,975
458,709
862,580
438,727
Long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,720,074
1,721,571
Commitments and contingencies
Noncontrolling interests with redemption features . . . . . . . . . . . . . . . . . . .
536
493
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 132,711 shares (7,166 Series A Common and 125,545 Common
Shares) and 132,672 shares (7,160 Series A Common, and 125,512
Common Shares), respectively
Outstanding 108,757 shares (7,166 Series A Common and 101,591
Common Shares) and 108,031 shares (7,160 Series A Common, and
100,871 Common Shares), respectively
Par Value ($.01 per share) of $1,327 ($72 Series A Common and
$1,255 Common Shares)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury shares at cost:
23,954 and 24,641 Common Shares, respectively . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total TDS shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,327
2,308,807
1,327
2,304,122
(721,354)
(569)
2,529,626
4,117,837
824
551,436
(750,099)
(8,132)
2,464,318
4,011,536
825
643,966
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,670,097
4,656,327
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8,904,147
$8,623,900
The accompanying notes are an integral part of these consolidated financial statements.
47
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T
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 4.8 million wireless customers and 1.1 million
wireline and cable connections at December 31, 2013. TDS conducts substantially all of its wireless
operations through its 84%-owned subsidiary, United States Cellular Corporation (‘‘U.S. Cellular’’). TDS
provides wireline services, cable services and hosted and managed services (‘‘HMS’’) through 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 wholly-owned subsidiary, Airadigm
Communications, Inc. (‘‘Airadigm’’), a Wisconsin-based service provider (collectively, the
‘‘Non-Reportable Segment’’). At this time, Airadigm operates independently from U.S. Cellular. Suttle-
Straus and Airadigm’s financial results were not significant to TDS’ operations in 2013.
Previously, TDS had reported the following reportable segments: U.S. Cellular, TDS Telecom’s incumbent
local exchange carrier (‘‘ILEC’’), its competitive local exchange carrier (‘‘CLEC’’), its HMS operations and
the Non-Reportable Segment. As a result of recent acquisitions and changes in TDS’ strategy, operations
and internal reporting, TDS has reevaluated and changed its operating segments during the year ended
December 31, 2013, which resulted in the following reportable segments: U.S. Cellular, TDS Telecom’s
Wireline, Cable and HMS operations, and the Non-Reportable Segment. The Wireline segment consists
of the former ILEC and CLEC segments. The Cable segment consists of Baja Broadband, LLC (‘‘Baja’’),
which was acquired in August 2013. The HMS segment remains unchanged, except that it now uses a
unified brand name, OneNeck IT Solutions (‘‘OneNeck’’), as a result of the consolidation of the HMS
operations. Periods presented for comparative purposes have been re-presented to conform to the
revised presentation described above. All of TDS’ segments operate only in the United States, except for
HMS, which includes an insignificant foreign operation. See Note 18—Business Segment Information for
summary financial information on each business segment.
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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 2013 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
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Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)
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,
income taxes, stock based compensation and asset retirement obligations.
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, 2013 and 2012, TDS had $50.1 million and $115.7 million, respectively, in Short-term
investments. At December 31, 2012, TDS had $50.3 million in Long-term investments. Short-term and
Long-term investments consist primarily of U.S. Treasury Notes 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 2—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 for wireless services
and 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, 2013, 2012
and 2011 were as follows:
(Dollars in thousands)
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . .
Additions, net of recoveries . . . . . . . . . . . . . . . . . .
Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 33,415
105,629
(73,440)
$ 31,071
74,695
(72,351)
$ 35,007
68,611
(72,547)
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 65,604
$ 33,415
$ 31,071
2013
2012
2011
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.
Goodwill
TDS has Goodwill as a result of its acquisitions of wireless businesses, the acquisitions of ILEC, cable,
and 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.
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:129) Radio spectrum is not a depleting asset.
(cid:129) The ability to use radio spectrum is not limited to any one technology.
(cid:129) 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.
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Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)
(cid:129) 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.
Franchise rights
TDS has Franchise rights as a result of its acquisition of a cable business. Franchise rights are intangible
assets that provide their holder with the right to operate a business in a certain geographical location as
sanctioned by the franchiser, usually a government agency. TDS has determined that Franchise rights
are indefinite-lived intangible assets and, therefore, not subject to amortization because TDS expects
both the renewal by the granting authorities and the cash flows generated from the Franchise rights to
continue indefinitely. Cable Franchise rights are generally granted for ten year periods and may be
renewed for additional terms upon approval by the granting authority. TDS anticipates that future
renewals of its Franchise rights will be granted.
Goodwill, Licenses and Franchise rights Impairment Assessment
Goodwill, Licenses and Franchise rights 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, Licenses and Franchise rights as of November 1 of each
year.
TDS may first assess qualitative factors, such as company, industry and economic trends to determine
whether it is necessary to perform the two-step Goodwill impairment test. If determined to be necessary,
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 may consist of first
assessing qualitative factors, such as company, industry and economic trends. If determined to be
necessary, the next step compares 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
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Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)
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
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 2013, U.S. Cellular identified four reporting units. The
four reporting units represent four geographic groupings of operating markets, representing four
geographic service areas. For purposes of its impairment testing of Goodwill in 2012, U.S. Cellular
identified five reporting units. The change in reporting units resulted from the NY1 &
NY2 Deconsolidation more fully described in Note 7—Investments in Unconsolidated Entities.
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.
U.S. Cellular tests Licenses for impairment at the level of reporting referred to as a unit of accounting.
For purposes of its 2013 impairment testing of Licenses, U.S. Cellular separated its FCC licenses into
eleven units of accounting based on geographic service areas. 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. The change in units of accounting resulted from (i) the Divestiture Transaction
and the Mississippi Valley non-operating market license sale, both of which are more fully described in
Note 5—Acquisitions, Divestitures and Exchanges and (ii) the NY1 & NY2 Deconsolidation more fully
described in Note 7—Investments in Unconsolidated Entities. In both 2013 and 2012, 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 U.S. Cellular’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
TDS Telecom has recorded Goodwill as a result of the acquisition of ILEC, HMS and cable businesses.
For purposes of the annual impairment testing, TDS Telecom has three reporting units: one ILEC
reporting unit within its Wireline reportable operating segment, one reporting unit within its HMS
reportable operating segment and one reporting unit within its Cable reportable operating segment. For
purposes of its annual impairment testing of Goodwill, as of November 1, 2012, TDS Telecom identified
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Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)
four reporting units: one reporting unit within its ILEC reportable operating segment and three reporting
units within its HMS reportable operating segment. TDS Telecom’s change in reporting units resulted
from additional acquisitions and TDS’ reevaluation of its operating segments, more fully described above.
For purposes of its impairment testing of Goodwill in 2013, TDS Telecom performed a qualitative
assessment of the Cable reporting unit, which analyzed company, industry and economic trends and
determined the two-step Goodwill impairment test was not necessary since it was more likely than not
that the fair value was at least equal to the carrying value of the reporting unit.
The discounted cash flow approach and publicly-traded guideline company method were used to value
the ILEC and 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’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 developed multiples are 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.
TDS Telecom has recorded Franchise rights as a result of the acquisition of a cable business in August
2013. TDS Telecom tests Franchise rights for impairment at a level of reporting referred to as a unit of
accounting. For purposes of its impairment testing of Franchise rights in 2013, TDS Telecom identified
one Cable unit of accounting. TDS Telecom performed a qualitative assessment of the Cable unit of
accounting, which analyzed company, industry and economic trends and determined no further testing
was necessary since it was more likely than not that the fair value of the Franchise rights was at least
equal to their carrying value.
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 is less than or equal to 50% but equals or exceeds 20% for
corporations and 3% for partnerships and limited liability companies, or for unconsolidated entities in
which its ownership is greater than 50% but TDS does not have a controlling financial interest. 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.
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Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)
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 net removal
costs (removal costs less any applicable accrued asset retirement obligations and salvage value
realized), to (Gain) loss on asset disposals, 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 certain Wireline segment assets, which use 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 5—Acquisitions, Divestitures and Exchanges, U.S.
Cellular changed the useful lives of certain assets in 2013 and 2012. Other than the Divestiture
Transaction, there were no other material changes to useful lives of property, plant and equipment in
2013, 2012 or 2011. TDS Telecom did not materially change the useful lives of its property, plant and
equipment in 2013, 2012 or 2011.
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. If necessary, 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 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.
U.S. Cellular has one asset group for purposes of assessing property, plant and equipment for
impairment based on the fact that the individual operating markets are reliant on centrally operated data
centers, mobile telephone switching offices, network operations center and wide-area network. As a
result, U.S. Cellular operates a single integrated national wireless network, and the lowest level for which
identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities
represent cash flows generated by this single interdependent network.
TDS Telecom has five asset groups for purposes of assessing property, plant and equipment for
impairment based on their integrated network, assets and operations. The cash flows generated by each
of these groups is the lowest level for which identifiable cash flows are largely independent of the cash
flows of other groups of assets and liabilities.
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Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)
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, 2013 and 2012, U.S. Cellular had accrued $121.3 million and
$88.2 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 underwriters’ and legal fees and other charges related to
issuing various borrowing instruments and other long-term agreements, and are amortized over the
respective term of each instrument. The amounts for deferred charges included in the Consolidated
Balance Sheet at December 31, 2013 and 2012, are shown net of accumulated amortization of
$41.4 million and $30.0 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.
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.
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Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)
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.
Revenue Recognition
U.S. Cellular
Revenues from wireless operations consist primarily of:
(cid:129) 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:129) Charges to carriers whose customers use U.S. Cellular’s systems when roaming;
(cid:129) Sales of equipment and accessories;
(cid:129) Amounts received from the Universal Service Fund (‘‘USF’’) in states where U.S. Cellular has been
designated an Eligible Telecommunications Carrier (‘‘ETC’’); and
(cid:129) 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:129) U.S. Cellular-specific objective evidence of stand-alone selling price, if available; otherwise
(cid:129) Third-party evidence of selling price, if it is determinable; otherwise
(cid:129) A best estimate of stand-alone selling price.
U.S. Cellular estimates stand-alone selling prices of the elements of its service offerings as follows:
(cid:129) 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:129) Wireless devices—Based on the selling price of the respective wireless device when it is sold on a
stand-alone basis.
(cid:129) 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.
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Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)
(cid:129) 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 deferred. Revenue is recognized at the time of
customer redemption or when such points have been depleted via an account maintenance charge. U.S.
Cellular periodically reviews and revises the redemption and depletion rates as appropriate based on
history and related future expectations. As of December 31, 2013, U.S. Cellular estimated loyalty reward
points breakage based on actuarial estimates and recorded a $7.4 million change in estimate, which
reduced Customer deposits and deferred revenues in the Consolidated Balance Sheet and increased
Operating revenues in the Consolidated Statement of Operations.
In the fourth quarter of 2013, U.S. Cellular issued loyalty reward points with a value of $43.5 million as a
loyalty bonus in recognition of the inconvenience experienced by customers during U.S. Cellular’s recent
billing system conversion. The value of the loyalty bonus reduced Operating revenues in the
Consolidated Statement of Operations and increased Customer deposits and deferred revenues in the
Consolidated Balance Sheet.
As of December 31, 2013 and 2012, U.S. Cellular had deferred revenue related to loyalty reward points
outstanding of $116.2 million and $56.6 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.
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. 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.
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.
60
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)
TDS Telecom
Revenue from Wireline operations consists primarily of charges for:
(cid:129) Providing telephone voice services;
(cid:129) Compensation for carrying long-distance voice and data traffic on TDS Telecom’s local telephone
networks, including compensation from inter-state and intra-state regulatory recovery mechanisms;
(cid:129) Leasing, selling, installing and maintaining customer premise equipment;
(cid:129) Providing broadband services;
(cid:129) Providing hosted Voice over Internet Protocol (‘‘VoIP’’) solutions and other hosted services to business;
(cid:129) Reselling long-distance services; and
(cid:129) Selling Internet Protocol Television (‘‘IPTV’’) and satellite video service.
Cable operating revenues consist of charges for:
(cid:129) Providing basic and pay-per-view video services;
(cid:129) Providing broadband services; and
(cid:129) Providing Internet Protocol (‘‘IP’’) telephone voice services.
HMS operating revenues consist of charges for:
(cid:129) Providing colocation;
(cid:129) Providing dedicated hosting;
(cid:129) Providing hosted application management and cloud computing services; and
(cid:129) Planning, engineering, procurement, installation, sales and management of IT infrastructure hardware
solutions.
Revenues related to services are recognized as services are rendered. Activation fees charged are
deferred and recognized over the average customer’s service period. Revenues related to products are
recognized when title and risk of loss transfer from TDS Telecom to the customer.
TDS Telecom offers some products and services that are provided by third-party vendors, primarily
satellite video service through its Wireline 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 earns Wholesale revenues in its Wireline segment as a result of its 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
61
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)
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 $131.0 million, $152.4 million and
$141.3 million for 2013, 2012 and 2011, respectively.
Advertising Costs
TDS expenses advertising costs as incurred. Advertising costs totaled $212.8 million, $240.9 million and
$267.7 million in 2013, 2012 and 2011, 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
62
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)
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.
Beginning with grants in 2013, newly granted TDS stock option awards cliff vest in three years. TDS
stock option awards granted prior to 2013 and U.S. Cellular stock option awards vest on an annual basis
in three separate tranches. Compensation cost is recognized on a straight-line basis over the requisite
service period, which was generally the vesting period, 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, certain
telecommunication and data center facilities 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.
Recently Issued Accounting Pronouncements
On July 18, 2013, the FASB issued Accounting Standards Update 2013-11, Income Taxes (Topic 740):
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryfoward, a Similar Tax Loss,
or a Tax Credit Carryforward Exists (‘‘ASU 2013-11’’). ASU 2013-11 addresses the presentation of an
unrecognized tax benefit when a net operating loss carryforward or tax credit carryforward exists. In such
event, an unrecognized tax benefit, or portion of an unrecognized tax benefit, would be presented in the
Consolidated Balance Sheet as a reduction to deferred tax assets unless the net operating loss
carryforward or tax credit carryforward at the reporting date is not available under the tax law of the
applicable jurisdiction. TDS is required to adopt the provisions of ASU 2013-11 effective January 1, 2014.
The adoption of ASU 2013-11 is not expected to have a significant impact on TDS’ financial position or
results of operations.
NOTE 2 FAIR VALUE MEASUREMENTS
As of December 31, 2013 and 2012, 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.
63
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 2 FAIR VALUE MEASUREMENTS (Continued)
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, 2013
December 31, 2012
Book Value
Fair Value
Book Value
Fair Value
(Dollars in thousands)
Cash and cash equivalents . .
Short-term investments
U.S. Treasury Notes . . . . . .
Long-term investments
U.S. Treasury Notes . . . . . .
Long-term debt
Retail
Institutional and other
. . . . . . . . . . . . . . . .
. . . .
1
1
1
1
2
$ 830,014
$ 830,014
$ 740,481
$ 740,481
50,104
50,104
115,700
115,700
—
—
50,305
50,339
1,178,250
537,454
1,048,010
512,635
1,178,250
538,657
1,238,204
589,435
Short-term investments are designated as held-to-maturity investments and recorded at amortized cost in
the Consolidated Balance Sheet. Long-term debt excludes capital lease obligations and the 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 ‘‘Retail’’ Long-term
debt was estimated using market prices for TDS’ 7.0% Senior Notes, 6.875% Senior Notes, 6.625%
Senior Notes and 5.875% Senior Notes, and U.S. Cellular’s 6.95% Senior Notes. TDS’ institutional debt
includes U.S. Cellular’s 6.7% Senior Notes which are traded over the counter. TDS estimated the fair
value of its institutional and other debt through a discounted cash flow analysis using the interest rates
or estimated yield to maturity for each borrowing, which ranged from 0.00% to 7.35% at December 31,
2013 and 0.00% to 6.09% at December 31, 2012.
As of December 31, 2013 and 2012, TDS did not have nonfinancial assets or liabilities that required the
application of fair value accounting for purposes of reporting such amounts in the Consolidated Balance
Sheet.
NOTE 3 INCOME TAXES
TDS’ income taxes balances at December 31, 2013 and 2012 were as follows:
December 31,
2013
2012
(Dollars in thousands)
Federal income taxes (payable) . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(20,288) $(5,455)
9,625
2,397
64
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 3 INCOME TAXES (Continued)
Income tax expense (benefit) is summarized as follows:
Year Ended December 31,
(Dollars in thousands)
Current
2013
2012
2011
Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$181,579
11,614
$ 9,705
5,092
$ (94,627)
5,583
Deferred
Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(65,970)
(1,180)
61,113
(2,328)
214,722
(12,175)
$126,043
$73,582
$113,503
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,
2013
2012
2011
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 . . . . . . . . . . . . . . . . . .
Gains (losses) on investments and sale of assets(2) . . . .
Correction of deferred taxes(3) . . . . . . . . . . . . . . . . . . .
Other differences, net . . . . . . . . . . . . . . . . . . . . . . . . . .
$102.5
10.5
(1.0)
14.9
—
(0.9)
35.0% $68.7
8.4
—
—
(6.1)
2.6
3.6
(0.4)
5.1
—
(0.3)
35.0% $127.3
(20.9)
(3.0)
—
6.0
4.1
4.2
—
—
(3.1)
1.4
35.0%
(5.7)
(0.8)
—
1.6
1.1
Total income tax expense and rate . . . . . . . . . . . . . . . . .
$126.0
43.0% $73.6
37.5% $113.5
31.2%
(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 2013, 2012 and 2011.
(2) Represents 2013 tax expense related to the NY1 & NY2 Deconsolidation and the Divestiture
Transaction.
(3) TDS recorded immaterial adjustments to correct deferred tax balances in 2012 and 2011 related to
tax basis and law changes that related to periods prior to 2012 and 2011, respectively.
TDS’ current Net deferred income tax asset totaled $106.1 million and $43.4 million at December 31,
2013 and 2012, respectively, and primarily represents the deferred tax effects of the deferred revenue for
the loyalty reward points, the allowance for doubtful accounts on customer receivables, and accrued
liabilities.
65
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 3 INCOME TAXES (Continued)
TDS’ noncurrent deferred income tax assets and liabilities at December 31, 2013 and 2012 and the
temporary differences that gave rise to them were as follows:
December 31,
(Dollars in thousands)
Noncurrent deferred tax assets
2013
2012
Net operating loss (‘‘NOL’’) carryforwards . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation and benefits—other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
$ 121,651
50,563
12,681
20,500
32,444
$ 121,111
53,330
32,484
16,862
32,654
Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
237,839
(70,609)
256,441
(69,108)
Total noncurrent deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
167,230
187,333
Noncurrent deferred tax liabilities
Property, plant and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Licenses/intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Partnership investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
637,090
251,578
136,581
4,956
666,201
250,860
127,331
5,521
Total noncurrent deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,030,205
1,049,913
Net noncurrent deferred income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 862,975
$ 862,580
At December 31, 2013, TDS and certain subsidiaries had $1,951.4 million of state NOL carryforwards
(generating a $100.7 million deferred tax asset) available to offset future taxable income. The state NOL
carryforwards expire between 2014 and 2033. Certain subsidiaries had federal NOL carryforwards
(generating a $21.0 million deferred tax asset) available to offset their future taxable income. The federal
NOL carryforwards expire between 2018 and 2033. 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 used.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$70,502
1,954
6,608
$49,686
5,268
15,548
$ 71,014
(28,511)
7,183
Balance at December 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$79,064
$70,502
$ 49,686
2013
2012
2011
As of December 31, 2013, the valuation allowance reduced current deferred tax assets by $8.5 million
and noncurrent deferred tax assets by $70.6 million.
66
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 3 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 . . . . . . . . . . . . . . . . . . .
2013
2012
2011
$28,420
6,388
1,858
(467)
(1,337)
(4,472)
$28,841
7,027
1,673
(7)
(21)
(9,093)
$34,002
4,369
171
(1,973)
(976)
(6,752)
Unrecognized tax benefits balance at December 31, . . . . . . . . . . . . . . . .
$30,390
$28,420
$28,841
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 2013, 2012 and 2011 by $19.8 million, $18.6 million and $18.2 million, respectively, net of the
federal benefit from state income taxes. As of December 31, 2013, TDS does not expect unrecognized
tax benefits to change significantly in the next twelve months.
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 an
expense of $0.7 million in 2013, and a benefit of $1.5 million and $2.5 million in 2012 and 2011,
respectively. Net accrued interest and penalties were $12.4 million and $13.2 million at December 31,
2013 and 2012, 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 2011. With only a few exceptions, TDS is no longer subject to state
income tax audits for years prior to 2009.
NOTE 4 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
outstanding during the period adjusted to include the effects of potentially dilutive securities. Potentially
dilutive securities primarily include incremental shares issuable upon exercise of outstanding stock
options and the vesting of restricted stock units.
67
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 4 EARNINGS PER SHARE (Continued)
The amounts used in computing earnings per common share and the effects of potentially dilutive
securities on the weighted average number of common shares were as follows:
Year Ended December 31,
2013
2012
2011
(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$141,878
$ 81,811
$200,516
Adjustments to compute diluted earnings:
Noncontrolling interest adjustment . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred dividend adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,058)
49
(640)
—
(989)
49
Net income attributable to common shareholders of TDS used in
diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$140,869
$ 81,171
$199,576
Weighted average number of shares used in basic earnings per share
Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Series A Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
101,339
7,151
101,532
7,139
101,471
7,091
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
108,490
108,671
108,562
Effects of dilutive securities:
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
209
375
58
11
255
—
262
214
60
Weighted average number of shares used in diluted earnings per
share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
109,132
108,937
109,098
Basic earnings per share attributable to TDS shareholders . . . . . . . . .
Diluted earnings per share attributable to TDS shareholders . . . . . . . .
$
$
1.31
1.29
$
$
0.75
0.75
$
$
1.85
1.83
On June 25, 2013, U.S. Cellular paid a special cash dividend of $5.75 per share, for an aggregate
amount of $482.3 million, to all holders of U.S. Cellular Common Shares and Series A Common Shares
as of June 11, 2013. Outstanding U.S. Cellular stock options and restricted stock unit awards were
equitably adjusted for the special cash dividend. The impact of such adjustments on the earnings per
share calculation was fully reflected for all years presented.
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.
Year Ended December 31,
(Shares in thousands)
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
2012
2011
7,120
171
—
8,130
154
57
3,785
141
—
NOTE 5 ACQUISITIONS, DIVESTITURES AND EXCHANGES
TDS assesses its business interests on an ongoing basis with a goal of improving the competitiveness of
its operations and maximizing its long-term return on investment. As part of this strategy, TDS reviews
attractive opportunities to acquire additional wireless operating markets and wireless spectrum; and
68
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 5 ACQUISITIONS, DIVESTITURES AND EXCHANGES (Continued)
telecommunications, cable, HMS or other possible 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.
Acquisitions did not have a material impact on TDS’ consolidated financial statements for the periods
presented and pro forma results, assuming acquisitions had occurred at the beginning of each period
presented, would not be materially different from the results reported.
Divestiture Transaction
On November 6, 2012, U.S. Cellular entered into a Purchase and Sale Agreement with subsidiaries of
Sprint Corp., fka Sprint Nextel Corporation (‘‘Sprint’’). Pursuant to the Purchase and Sale Agreement, on
May 16, 2013, U.S. Cellular transferred 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. The Purchase and Sale Agreement also
contemplated certain other agreements, together with the Purchase and Sale Agreement collectively
referred to as the ‘‘Divestiture Transaction.’’
U.S. Cellular retained other assets and liabilities related to the Divestiture Markets, including network
assets, retail stores and related equipment, and other buildings and facilities. The transaction did not
affect spectrum licenses held by U.S. Cellular or variable interest entities (‘‘VIEs’’) that were not used in
the operations of the Divestiture Markets. Pursuant to the Purchase and Sale Agreement, U.S. Cellular
and Sprint also entered into certain other agreements, including customer and network transition
services agreements, which require U.S. Cellular to provide customer, billing and network services to
Sprint for a period of up to 24 months after the May 16, 2013 closing date. Sprint will reimburse U.S.
Cellular for providing such services at an amount equal to U.S. Cellular’s estimated costs, including
applicable overhead allocations. In addition, these agreements require Sprint to reimburse U.S. Cellular
up to $200 million (the ‘‘Sprint Cost Reimbursement’’) for certain network decommissioning costs,
network site lease rent and termination costs, network access termination costs, and employee
termination benefits for specified engineering employees. It is estimated that up to $175 million of the
Sprint Cost Reimbursement will be recorded in (Gain) loss on sale of business and other exit costs, net
and up to $25 million of the Sprint Cost Reimbursement will be recorded in Cost of services and
products in the Consolidated Statement of Operations. For the year ended December 31, 2013,
$10.6 million of the Sprint Cost Reimbursement had been received and recorded in Cash received from
divestitures in the Consolidated Statement of Cash Flows.
Financial impacts of the Divestiture Transaction are classified in the Consolidated Statement of
Operations within Operating income. The table below describes the amounts TDS has recognized and
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.
69
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 5 ACQUISITIONS, DIVESTITURES AND EXCHANGES (Continued)
Cumulative
Amount
Actual
Amount
Recognized as Recognized Three Months
Year Ended
Ended
of
and Year
Ended
Actual
Amount
Recognized
Recognized Three Months
Actual
Amount
Projected Range
2013
2013
2013
2012
December 31, December 31, December 31, December 31,
Expected
Period of
Recognition
2013
$(480,000) $(480,000)
$(480,000)
$(480,000)
$
—
$
2013-2014
2013
(120,000)
160,073
(175,000)
160,073
(47,641)
160,073
(47,641)
160,073
(43,420)
—
—
—
—
2012-2014
10,000
14,000
10,675
3
(51)
10,672
2012-2014
2012-2014
2012-2014
12,000
110,000
5,000
18,000
160,000
6,000
14,262
59,584
5,565
1,653
59,525
4,428
(809)
40,744
347
12,609
59
1,137
$(302,927) $(296,927)
$(277,482)
$(301,959)
$ (3,189)
$24,477
2012-2014
200,000
225,000
198,571
178,513
44,513
20,058
(Dollars in thousands)
(Gain) loss on sale of
business and other exit
costs, net
Proceeds from Sprint
Purchase price . . . . . . .
Sprint Cost
Reimbursement
. . . . .
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,
retention and
outplacement
. . . . . . . .
Contract termination costs .
Transaction costs . . . . . . .
Total (Gain) loss on sale
of business and other
exit costs, net . . . . . . .
Depreciation, amortization
and accretion expense
Incremental depreciation,
amortization and
accretion, net of salvage
values . . . . . . . . . . . . .
(Increase) decrease in
Operating income . . . . . .
$(102,927) $ (71,927)
$ (78,911)
$(123,446)
$ 41,324
$44,535
Incremental depreciation, amortization and accretion, net of salvage values represents anticipated
amounts to be recorded in the specified time periods as a result of a change in estimate for the
remaining useful life and salvage value of certain assets and a change in estimate which accelerated 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.
70
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 5 ACQUISITIONS, DIVESTITURES AND EXCHANGES (Continued)
As a result of the transaction, TDS recognized the following amounts in the Consolidated Balance Sheet:
(Dollars in thousands)
Accrued compensation
Employee related costs including
Balance
December 31,
2012
Year Ended December 31, 2013
Costs
Incurred
Cash
Settlements(1) Adjustments(2)
Balance
December 31,
2013
severance, retention, outplacement
$12,305
$ 6,853
$(11,905)
$(5,200)
$ 2,053
Other current liabilities
Contract termination costs . . . . . . . .
Other deferred liabilities and credits
Contract termination costs . . . . . . . .
$
$
30
$22,675
$ (8,713)
$ —
$13,992
— $34,283
$ (3,434)
$ —
$30,849
(Dollars in thousands)
Accrued compensation
Employee related costs including
severance, retention, outplacement
Other current liabilities
Contract termination costs . . . . . . . .
Balance
November 6,
2012
Year Ended December 31, 2012
Costs
Incurred
Cash
Settlements(1) Adjustments(2)
Balance
December 31,
2012
$
$
— $12,609
— $
59
$
$
(304)
$ —
$12,305
(29)
$ —
$
30
(1) Cash settlement amounts are included in either the Net income or changes in Other assets and
liabilities line items as part of Cash flows from operating activities on the Consolidated Statement of
Cash Flows.
(2) Adjustment to liability represents changes to previously accrued amounts.
Other Acquisitions, Divestitures and Exchanges
On October 4, 2013, TDS acquired 100% of the outstanding shares of MSN Communications, Inc.
(‘‘MSN’’) for $43.6 million in cash. MSN is an information technology solutions provider whose service
offerings complement the HMS portfolio of products. MSN is included in the HMS segment for reporting
purposes.
On October 4, 2013, U.S. Cellular sold the majority of its Mississippi Valley non-operating market license
(‘‘unbuilt license’’) for $308.0 million. At the time of the sale, a $250.6 million gain was recorded in (Gain)
loss on license sales and exchanges in the Consolidated Statement of Operations.
On August 14, 2013 U.S. Cellular entered into a definitive agreement to sell the majority of its St. Louis
area unbuilt license for $92.3 million. This transaction is subject to regulatory approval and is expected to
close in the first quarter of 2014. In accordance with GAAP, the book value of the license has been
accounted for and disclosed as ‘‘held for sale’’ in the Consolidated Balance Sheet at December 31,
2013.
On August 1, 2013, TDS Telecom acquired substantially all of the assets of Baja for $264.1 million in
cash. Baja is a cable company that operates in markets primarily in Colorado, New Mexico, Texas, and
Utah and offers video, broadband and voice services, which complement the TDS Telecom portfolio of
products. Baja is included in the Cable segment for reporting purposes.
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.
71
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 5 ACQUISITIONS, DIVESTITURES AND EXCHANGES (Continued)
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 $46.1 million in cash 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 HMS portfolio of products. Vital is included in the 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. 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 investments 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 provided 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 license sales and exchanges in the Consolidated Statement of Operations for
the year ended December 31, 2011.
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 investments 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. On March 13, 2013, TDS acquired the remaining 37% ownership interest in Airadigm for
$3.5 million. At this time, Airadigm operates independently from U.S. Cellular. Airadigm’s financial results
are included in ‘‘Non-Reportable segment’’ for reporting purposes.
On July 1, 2011, TDS paid $95.9 million in cash to purchase 100% of the outstanding shares of
OneNeck IT Services Corporation (‘‘OneNeck IT Services’’). OneNeck IT Services is a provider of hosted
application management and managed IT hosting services to middle market businesses, which
complements the HMS portfolio of products. OneNeck IT Services is included in the HMS segment for
reporting purposes.
72
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 5 ACQUISITIONS, DIVESTITURES AND EXCHANGES (Continued)
TDS’ acquisitions in 2013 and 2012 and the allocation of the purchase price for these acquisitions were
as follows:
Allocation of Purchase Price
Purchase
Price(1)
Goodwill(2)
Licenses
Franchise
Rights
Intangible
Assets
Subject to
Amortization(3)
Net
Tangible
Assets/
(Liabilities)
(Dollars in thousands)
2013
U.S. Cellular licenses . . . . . . . . . . .
TDS Telecom cable business . . . . .
TDS Telecom HMS business . . . . . .
$
$ 16,540
264,069
43,557
61,712
15,203
— $ 16,540
$
—
— 123,668
—
—
Total . . . . . . . . . . . . . . . . . . . . .
$324,166
$76,915
$ 16,540
$123,668
2012
U.S. Cellular licenses . . . . . . . . . . .
TDS Telecom HMS business . . . . . .
$122,690
46,126
$
— $122,690
—
20,364
Total . . . . . . . . . . . . . . . . . . . . .
$168,816
$20,364
$122,690
$
$
—
—
—
$
—
11,542
17,183
$28,725
$
—
20,300
$20,300
$
—
67,147
11,171
$78,318
$
—
5,462
$ 5,462
(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) The entire amount of Goodwill acquired in 2013 and 2012 was amortizable for income tax purposes.
(3) At the date of acquisition, the weighted average amortization period for Intangible Assets Subject to
Amortization acquired was as follows: 2013: 2.9 years for TDS Telecom cable business and 10 years for TDS
Telecom HMS business; 2012: 8.1 years for TDS Telecom HMS business.
At December 31, 2013 and 2012, the following assets and liabilities were classified in the Consolidated
Balance Sheet as ‘‘Assets held for sale’’ and ‘‘Liabilities held for sale’’:
(Dollars in thousands)
2013
Divestiture of Spectrum Licenses . . . . . .
2012
Divestiture Transaction . . . . . . . . . . . . .
Bolingbrook Customer Care Center(3) . .
Current
Assets Licenses Goodwill Equipment
Property,
Plant and Assets Held
for Sale(1)
Loss on
Total Assets Liabilities
Held for
Sale(2)
Held for
Sale
$— $ 16,027 $
— $ —
$ —
$ 16,027
$
—
$— $140,599 $19,474
—
—
—
$ —
4,274
$ —
(1,105)
$160,073
3,169
$19,594
—
Total
. . . . . . . . . . . . . . . . . . . . . . .
$— $140,599 $19,474
$4,274
$(1,105)
$163,242
$19,594
(1) Loss on assets held for sale was recorded in (Gain) loss on sale of business and other exit costs, net in the
Consolidated Statement of Operations.
(2) Liabilities held for sale primarily consisted of Customer deposits and deferred revenues.
(3) Effective January 1, 2013, U.S. Cellular transferred its Bolingbrook Customer Care Center operations to an
existing third party vendor.
73
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 6 INTANGIBLE ASSETS
Changes in TDS’ Licenses, Goodwill and Franchise rights are presented below. See
Note 5—Acquisitions, Divestitures and Exchanges for information regarding transactions which affected
Licenses, Goodwill and Franchise rights during the periods. Previously under GAAP, 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. Consequently, U.S. Cellular’s Licenses and Goodwill on a stand-alone
basis do not equal the TDS consolidated Licenses and Goodwill related to U.S. Cellular.
Licenses
U.S. Cellular Wireline
Non-Reportable
Segment
Total
(Dollars in thousands)
Balance December 31, 2012 . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Divestitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transferred to Assets held for sale . . . . . . . . . . . . . . . . .
NY1 & NY2 Deconsolidation . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
$1,462,019
16,540
(59,419)
(16,027)
(592)
3,238
Balance December 31, 2013 . . . . . . . . . . . . . . . . . . . . . .
$1,405,759
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
$2,800
—
—
—
—
—
$2,800
$2,800
—
—
—
$2,800
$15,220
—
—
—
—
—
$15,220
$15,220
—
—
—
$15,220
$1,480,039
16,540
(59,419)
(16,027)
(592)
3,238
$1,423,779
$1,494,014
122,690
(140,599)
3,934
$1,480,039
Goodwill
(Dollars in thousands)
Assigned value at time of acquisition . . . . . .
Accumulated impairment losses in prior
periods . . . . . . . . . . . . . . . . . . . . . .
Transferred to Assets held for sale . . . . . .
Balance December 31, 2012 . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . .
Divestitures . . . . . . . . . . . . . . . . . . . . .
NY1 & NY2 Deconsolidation . . . . . . . . . .
U.S. Cellular Wireline
Cable
HMS
Non-
Reportable
Segment
Total
$ 622,681
$449,898
$
— $103,627
$4,317
$1,180,523
(333,900)
(19,474)
269,307
—
(135)
(37,131)
(29,440)
—
420,458
—
—
—
—
— 61,712
—
—
—
—
— 103,627
15,203
—
—
(515)
—
3,802
—
—
—
(363,855)
(19,474)
797,194
76,915
(135)
(37,131)
Balance December 31, 2013 . . . . . . . . . . .
$ 232,041
$420,458
$61,712
$118,830
$3,802
$ 836,843
Assigned value at time of acquisition . . . . . .
Accumulated impairment losses in prior
$ 622,681
$450,156
$
— $ 83,263
$4,317
$1,160,417
periods . . . . . . . . . . . . . . . . . . . . . .
(333,900)
(29,440)
Balance December 31, 2011 . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Impairment(1)
Transferred to Assets held for sale . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . .
288,781
—
—
(19,474)
—
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
(1) 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.
74
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 6 INTANGIBLE ASSETS (Continued)
During the third quarter of 2013, TDS determined that an interim Goodwill impairment test was required
for TDS Telecom’s ILEC and HMS reporting units. The fair value of each reporting unit exceeded its
respective carrying value, and accordingly no Goodwill impairment resulted.
Franchise rights
(Dollars in thousands)
Balance December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cable
$
—
123,668
Balance December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$123,668
NOTE 7 INVESTMENTS IN UNCONSOLIDATED ENTITIES
Investments in unconsolidated entities consist of amounts invested in wireless and wireline entities in
which TDS holds a noncontrolling interest. These investments are accounted for using either the equity
or cost method as shown in the following table:
December 31,
(Dollars in thousands)
Equity method investments:
2013
2012
Capital contributions, loans, advances and adjustments . .
Cumulative share of income . . . . . . . . . . . . . . . . . . . . . .
Cumulative share of distributions . . . . . . . . . . . . . . . . . .
$
132,629
1,186,900
(1,033,087)
$
21,543
1,050,618
(907,509)
Cost method investments . . . . . . . . . . . . . . . . . . . . . . . . .
286,442
15,330
164,652
15,269
Total investments in unconsolidated entities . . . . . . . . . . . .
$
301,772
$ 179,921
Equity in earnings of unconsolidated entities totaled $132.7 million, $92.9 million and $82.5 million in
2013, 2012 and 2011, respectively; of those amounts, TDS’ investment in the Los Angeles SMSA Limited
Partnership (‘‘LA Partnership’’) contributed $78.4 million, $67.2 million and $55.3 million in 2013, 2012
and 2011, respectively. TDS held a 5.5% ownership interest in the LA Partnership throughout and at the
end of each of these years.
75
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 7 INVESTMENTS IN UNCONSOLIDATED ENTITIES (Continued)
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
2013
2012
Current
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 520,804
408,735
2,080,436
$ 477,673
298,707
1,951,887
Liabilities and Equity
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term capital lease obligations . . . . . . . . . . . . . . . . .
Partners’ capital and shareholders’ equity . . . . . . . . . . . .
Year Ended December 31,
(Dollars in thousands)
Results of Operations
$3,009,975
$2,728,267
$ 355,167
89,198
31,605
707
2,533,298
$ 353,044
84,672
33,856
405
2,256,290
$3,009,975
$2,728,267
2013
2012
2011
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,239,200
4,492,372
$5,825,150
4,381,731
$5,540,220
4,301,758
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income, net
1,746,828
4,019
1,443,419
7,190
1,238,462
960
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,750,847
$1,450,609
$1,239,422
NY1 & NY2 Deconsolidation
U.S. Cellular holds a 60.00% interest in St. Lawrence Seaway RSA Cellular Partnership (‘‘NY1’’) and a
57.14% interest in New York RSA 2 Cellular Partnership (‘‘NY2’’) (together with NY1, the ‘‘Partnerships’’).
The remaining interests in the Partnerships are held by Cellco Partnership d/b/a Verizon Wireless
(‘‘Verizon Wireless’’). The Partnerships are operated by Verizon Wireless under the Verizon Wireless
brand. Prior to April 3, 2013, because U.S. Cellular owned a greater than 50% interest in each of these
Partnerships and based on U.S. Cellular’s rights under the Partnership Agreements, TDS consolidated
the financial results of these Partnerships in accordance with GAAP.
On April 3, 2013, U.S. Cellular entered into an agreement relating to the Partnerships. The agreement
amends the Partnership Agreements in several ways which provide Verizon Wireless with substantive
participating rights that allow Verizon Wireless to make decisions that are in the ordinary course of
business of the Partnerships and which are significant to directing and executing the activities of the
business. Accordingly, as required by GAAP, TDS deconsolidated the Partnerships effective as of April 3,
2013 and thereafter reported them as equity method investments in its consolidated financial statements
(‘‘NY1 & NY2 Deconsolidation’’). After the NY1 & NY2 Deconsolidation, TDS retained the same ownership
percentages in the Partnerships and will continue to report the same percentages of income from the
Partnerships, which will be recorded in Equity in earnings of unconsolidated entities in the Consolidated
76
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 7 INVESTMENTS IN UNCONSOLIDATED ENTITIES (Continued)
Statement of Operations. In addition to the foregoing described arrangements, TDS and U.S. Cellular
have certain other arm’s length, ordinary business relationships with Verizon Wireless and its affiliates.
In accordance with GAAP, as a result of the NY1 & NY2 Deconsolidation, TDS’ interest in the
Partnerships was reflected in Investments in unconsolidated entities at a fair value of $114.8 million as of
April 3, 2013. Recording TDS’ interest in the Partnerships required allocation of the excess of fair value
over book value to customer lists, licenses, a favorable contract and goodwill of the Partnerships.
Amortization expense related to customer lists and the favorable contract will be recognized over their
respective useful lives and is included in Equity in earnings of unconsolidated entities in the
Consolidated Statement of Operations. In addition, TDS recognized a non-cash pre-tax gain of
$14.5 million in the second quarter of 2013. The gain was recorded in Gain (loss) on investments in the
Consolidated Statement of Operations.
The Partnerships were valued using a discounted cash flow approach and a publicly-traded guideline
company method. The discounted cash flow approach uses value drivers and risks specific to the
industry and current economic factors and incorporates assumptions that market participants would use
in their estimates of fair value and may not be indicative of TDS specific assumptions. The most
significant assumptions made in this process were the revenue growth rate (shown as a simple average
in the table below), the terminal revenue growth rate, discount rate and capital expenditures. The
assumptions were as follows:
Key assumptions
Average expected revenue growth rate (next ten years) . . . . . . . . . . . . . . .
Terminal revenue growth rate (after year ten) . . . . . . . . . . . . . . . . . . . . . . .
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures as a percentage of revenue . . . . . . . . . . . . . . . . . . . .
2.0%
2.0%
10.5%
14.9-18.8%
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 and
Earnings before Interest, Taxes, and Depreciation and Amortization (EBITDA). The developed multiples
were applied to applicable financial measures of the Partnerships to determine fair value. The discounted
cash flow approach and publicly-traded guideline company method were weighted to arrive at the total
fair value of the Partnerships.
77
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 8 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, 2013 and 2012 were as follows:
December 31,
Useful Lives (Years)
2013
2012
(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
$
36,266
304,272
1,197,520
3,306,575
1,161,976
539,248
92,456
962,698
116,501
$
33,947
341,852
1,188,720
3,100,916
1,155,114
535,656
128,290
631,184
362,749
7,717,512
7,478,428
(4,860,992)
(4,455,840)
$ 2,856,520
$ 3,022,588
U.S. Cellular’s depreciation and amortization expense totaled $791.1 million, $597.7 million and
$565.1 million in 2013, 2012 and 2011, respectively. As a result of the Divestiture Transaction, U.S.
Cellular recognized incremental depreciation and amortization in 2012 and 2013. See Note 5—
Acquisitions, Divestitures and Exchanges for additional information.
TDS Telecom’s (including Wireline, Cable, and HMS) Property, plant and equipment in service and under
construction, and related accumulated depreciation, as of December 31, 2013 and 2012 were as follows:
December 31,
Useful Lives (Years)
2013
2012
(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
5-40
15-35
3-12
5-10
5-12
3-7
N/A
$
12,794
148,800
1,523,123
1,229,941
74,507
94,438
230,416
88,614
$
9,004
147,177
1,445,270
1,171,461
71,887
85,486
196,185
87,043
3,402,633
3,213,513
(2,417,999)
(2,279,325)
$
984,634
$
934,188
The provision for certain Wireline companies’ depreciation as a percentage of depreciable property was
5.3% in 2013, 5.6% in 2012 and 5.7% in 2011. TDS Telecom’s depreciation and amortization expense
related to Property, plant and equipment totaled $182.6 million, $177.3 million and $168.2 million in 2013,
2012 and 2011, respectively.
78
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 8 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, 2013 and 2012 were as follows:
December 31,
2013
2012
(Dollars in thousands)
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$119,659
(82,669)
$116,558
(76,068)
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 36,990
$ 40,490
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 $10.7 million, $10.3 million and $8.3 million in 2013, 2012 and 2011, respectively.
In 2013, 2012 and 2011, (Gain) loss on asset disposals, net included charges of $30.8 million,
$19.7 million and $11.0 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.
NOTE 9 ASSET RETIREMENT OBLIGATIONS
Asset retirement obligations are included in Other deferred liabilities and credits and Other current
liabilities in the Consolidated Balance Sheet.
In 2013 and 2012, 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 2013 and 2012,
including the Divestiture Transaction, were as follows:
(Dollars in thousands)
Balance December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . .
Additional liabilities accrued . . . . . . . . . . . . . . . . . . . . . .
Revisions in estimated cash outflows . . . . . . . . . . . . . . .
Acquisition of assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposition of assets(1) . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion expense(2) . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S.
Cellular
TDS
Telecom
$179,607
635
6,268
—
(3,534)
12,592
$69,969
257
(2,562)
3,410
(577)
4,898
Other
$4,034
—
—
—
—
241
TDS
Consolidated
$253,610
892
3,706
3,410
(4,111)
17,731
Balance December 31, 2013(3) . . . . . . . . . . . . . . . . . . . . .
$195,568
$75,395
$4,275
$275,238
Balance December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . .
Additional liabilities accrued . . . . . . . . . . . . . . . . . . . . . .
Revisions in estimated cash outflows(4)
. . . . . . . . . . . . .
Disposition of assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion expense(2) . . . . . . . . . . . . . . . . . . . . . . . . . . .
$143,402
5,578
22,588
(2,674)
10,713
$65,209
367
—
(298)
4,691
$3,806
—
—
—
228
$212,417
5,945
22,588
(2,972)
15,632
Balance December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . .
$179,607
$69,969
$4,034
$253,610
(1)
Included $2.0 million of incremental disposition costs related to the Divestiture Transaction in 2013.
(2)
Included $1.1 million and $0.2 million of incremental accretion related to the Divestiture Transaction
in 2013 and 2012, respectively.
79
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 9 ASSET RETIREMENT OBLIGATIONS (Continued)
(3)
In 2013, as a result of the accelerated settlement dates of certain asset retirement obligations related
to the Divestiture Transaction, TDS reclassified $37.7 million of its asset retirement obligations from
Other deferred liabilities and credits to Other current liabilities.
(4)
Included increases of $14.9 million as a result of changes in expected settlement dates related to
the Divestiture Transaction in 2012.
NOTE 10 DEBT
Revolving Credit Facilities
At December 31, 2013, 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 2013, 2012 or 2011 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.
80
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 10 DEBT (Continued)
The following table summarizes the terms of such revolving credit facilities as of December 31, 2013:
$
$
$
$
(Dollars in millions)
Maximum borrowing capacity . . . . . . . . . . . . . . . . . . . . . . . . . . .
Letters of credit outstanding(1) . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount available for use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowing rate: One-month London Interbank Offered Rate
. . . . . . . . . . . . . . . . . . .
(‘‘LIBOR’’) plus contractual spread(2)
LIBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contractual spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Range of commitment fees on amount available for use(3)
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agreement date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturity date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fees incurred attributable to the Revolving Credit Facility are as
follows:
Fees incurred as a percent of Maximum borrowing capacity for
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fees incurred, amount
TDS
U.S. Cellular
$
400.0
$
0.3
— $
$
399.7
1.67%
0.17%
1.50%
0.13%
0.30%
300.0
17.6
—
282.4
1.67%
0.17%
1.50%
0.13%
0.30%
December 2010
December 2017
December 2010
December 2017
0.21%
0.25%
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
0.9
1.3
1.5
$
$
$
0.8
1.1
1.2
(1)
In June 2013, U.S. Cellular provided $17.4 million in letters of credit to the FCC in connection with
U.S. Cellular’s winning bids in Auction 901. See Note 19—Supplemental Cash Flow Disclosures for
additional information on Auction 901.
(2) 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.
(3) The revolving credit facility has commitment fees based on the unsecured senior debt ratings
assigned to TDS and U.S. Cellular by certain ratings agencies.
The 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, 2013 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
81
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 10 DEBT (Continued)
(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,
2013, 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, 2013, TDS had recorded $6.1 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 as of December 31, 2013 and 2012 was as follows:
December 31,
(Dollars in thousands)
TDS:
Unsecured Senior Notes
Issuance date
Maturity date
Call date
2013
2012
6.625% . . . . . . . . . . . . . . March 2005
6.875% . . . . . . . . . . . . . . November 2010 November 2059 November 2015
7.0% . . . . . . . . . . . . . . . March 2011
5.875% . . . . . . . . . . . . . . November 2012 December 2061 December 2017
March 2045
March 2060
March 2010
March 2016
Purchase contract at 6.0% . . . October 2001
October 2021
Total Parent . . . . . . . . . .
Subsidiaries:
U.S. Cellular—
Unsecured Senior Notes
6.7% . . . . . . . . . . . . . . . December 2003
$ 116,250 $ 116,250
225,000
300,000
195,000
1,097
225,000
300,000
195,000
1,097
837,347
837,347
and June 2004 December 2033 December 2003
544,000
544,000
Less: 6.7% Unamortized
discount
. . . . . . . . . . .
6.95% . . . . . . . . . . . . . . . May 2011
May 2060
May 2016
Obligation on capital leases .
TDS Telecom—
Rural Utilities Service
(‘‘RUS’’) and other notes .
Obligation on capital leases . .
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
(11,551)
(11,806)
532,449
342,000
3,749
532,194
342,000
4,756
749
779
844
—
4,612
35
5,663
—
884,373
885,457
$1,721,720 $1,722,804
1,646 $
1,233
$
$1,720,074 $1,721,571
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
82
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 10 DEBT (Continued)
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, 2013, 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 $44.3 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 $1.6 million,
$1.3 million, $3.1 million, $0.2 million and $0.2 million for the years 2014 through 2018, 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.
NOTE 11 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
$16.2 million, $18.4 million and $17.5 million in 2013, 2012 and 2011, 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 $24.8 million, $25.0 million and $22.1 million in 2013, 2012 and
2011, 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 Wireline 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
2012
$ 18,833
(20,713)
$ 22,438
(36,510)
$ (1,880) $(14,072)
83
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 11 EMPLOYEE BENEFIT PLANS (Continued)
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 2014 are
$2.4 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, 2013
Before-Tax
Deferred
Income
Tax Benefit
(Expense)
Net-of-Tax
(Dollars in thousands)
Net actuarial gains (losses) . . . . . . . . . . . . . . . . . . .
Amortization of prior service costs . . . . . . . . . . . . . .
Amortization of actuarial losses . . . . . . . . . . . . . . . .
Total gains (losses) recognized in Comprehensive
$13,345
(3,605)
2,452
$(5,086)
1,374
(934)
$ 8,259
(2,231)
1,518
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,192
$(4,646)
$ 7,546
Year Ended December 31, 2012
Before-Tax
Deferred
Income
Tax Benefit
(Expense)
Net-of-Tax
(Dollars in thousands)
Net actuarial gains (losses) . . . . . . . . . . . . . . . . . . .
Amortization of prior service costs . . . . . . . . . . . . . .
Amortization of actuarial losses . . . . . . . . . . . . . . . .
Total gains (losses) recognized in Comprehensive
$
90
(3,735)
2,517
$ (143)
5,950
(4,010)
$
(53)
2,215
(1,493)
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(1,128)
$ 1,797
$
669
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
2013
2012
Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prescription drug subsidy . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$54,568
1,348
2,137
(9,437)
—
(2,474)
$50,113
1,197
2,297
3,179
542
(2,760)
Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . .
46,142
54,568
Change in plan assets
Fair value of plan assets at beginning of year . . . . . . . . . . . . . .
Actual return (loss) on plan assets . . . . . . . . . . . . . . . . . . . . . .
Employer contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45,047
6,973
197
(2,474)
41,267
6,264
276
(2,760)
Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . .
49,743
45,047
Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,601
$ (9,521)
84
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 11 EMPLOYEE BENEFIT PLANS (Continued)
Employee contributions are included with Benefits paid in the table above. The funded status identified
above is recorded as a component of Other assets and deferred charges in TDS’ Consolidated Balance
Sheet as of December 31, 2013 and Other deferred liabilities and credits in TDS’ Consolidated Balance
Sheet as of December 31, 2012.
The following table sets forth by level within the fair value hierarchy the plans’ assets at fair value, as of
December 31, 2013 and 2012. See Note 1—Summary of Significant Accounting Policies and Recent
Accounting Pronouncements for definitions of the levels in the fair value hierarchy.
December 31, 2013
(Dollars in thousands)
Mutual funds
Level 1
Level 2
Level 3
Total
Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International equity . . . . . . . . . . . . . . . . . . .
Money market
. . . . . . . . . . . . . . . . . . . . . .
US large cap . . . . . . . . . . . . . . . . . . . . . . .
US small cap . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
$12,697
9,876
1,798
20,861
4,500
—
$ — $ — $12,697
9,876
—
—
1,798
— 20,861
4,500
—
11
—
—
—
—
—
11
Total plan assets at fair value . . . . . . . . . . . .
$49,732
$
11
$ — $49,743
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
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.
85
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 11 EMPLOYEE BENEFIT PLANS (Continued)
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.
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,
2013
2012
51.0%
19.9%
29.1%
50.8%
19.7%
29.5%
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 10.59% and 14.19%,
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 2014.
Net periodic benefit cost recorded in the Consolidated Statement of Operations includes the following
components:
Year Ended December 31,
2013
2012
2011
(Dollars in thousands)
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service costs(1) . . . . . . . . . . . . . . . . . . . . . .
Amortization of actuarial losses(2) . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,348
2,137
(3,065)
(3,605)
2,452
$ 1,197
2,297
(2,995)
(3,735)
2,517
$ 1,116
2,368
(3,496)
(3,815)
1,934
Net post-retirement cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (733) $ (719) $(1,893)
(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.
86
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 11 EMPLOYEE BENEFIT PLANS (Continued)
The following assumptions were used to determine benefit obligations and net periodic benefit cost:
December 31,
2013
2012
Benefit obligations
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.00% 4.00%
Net periodic benefit cost
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.00% 4.70%
7.00% 7.50%
The discount rate for 2013 and 2012 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 expected rate of return was determined using the target asset allocation for the TDS plan and rate of
return expectations for each asset class.
The measurement date for actuarial determination was December 31, 2013. For measurement purposes,
the annual rate of increase in the per capita cost of covered health care benefits was assumed for 2013
to be 7.5% for plan participants aged 65 and above, and 7.9% for participants under age 65. For all
participants the 2013 annual rate of increase is expected to decrease to 5.0% by 2021. The 2012
expected rate of increase was 7.3% for plan participants aged 65 and above, and 8.1% 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, 2013:
(Dollars in thousands)
Effect on total service and interest cost components . . . . . . . . . . .
Effect on post-retirement benefit obligation . . . . . . . . . . . . . . . . . .
One Percent
Increase
Decrease
$ 18
$301
$ (17)
$(281)
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)
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019-2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,082
2,059
2,143
2,117
2,138
13,294
87
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 12 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’’). In July 2013, U.S. Cellular implemented B/OSS, pursuant to an
updated Statement of Work dated June 29, 2012. Total payments to Amdocs related to this
implementation are estimated to be approximately $183.9 million (subject to certain potential
adjustments) over the period from commencement of the SLMA through the first half of 2014. As of
December 31, 2013, $136.8 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, 2013, 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)
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 175,140
153,338
131,670
109,733
91,275
849,015
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,510,171
$ 45,911
36,536
25,993
17,083
6,478
227
$132,228
For 2013, 2012 and 2011, rent expense for noncancellable long-term leases was $187.8 million,
$204.1 million and $187.4 million, respectively; and rent expense under cancellable short-term leases
was $15.4 million, $10.4 million and $9.0 million, respectively.
Rent revenue totaled $45.7 million, $41.6 million and $39.2 million in 2013, 2012 and 2011, 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.
88
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 12 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 $0.3 million and $1.7 million with respect to legal proceedings and unasserted claims
as of December 31, 2013 and 2012, 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.
Apple iPhone Products Purchase Commitment
In March 2013, U.S. Cellular entered into an agreement with Apple to purchase certain minimum
quantities of Apple iPhone products over a three-year period beginning in November 2013. Based on
current forecasts, TDS estimates that the remaining contractual purchase commitment as of
December 31, 2013 is approximately $950 million. At this time, TDS expects to meet its contractual
commitment with Apple.
NOTE 13 VARIABLE INTEREST ENTITIES (VIEs)
TDS consolidates variable interest entities in which it has a controlling financial interest and is the
primary beneficiary. A controlling financial interest will have both of the following characteristics: (a) the
power to direct the VIE activities that most significantly impact economic performance and (b) the
obligation to absorb the VIE losses and right to receive benefits that are significant to the VIE. TDS
reviews these criteria initially at the time it enters into agreements and subsequently when
reconsideration events occur.
Consolidated VIEs
As of December 31, 2013, TDS holds a variable interest in and consolidates the following VIEs under
GAAP:
(cid:129) Aquinas Wireless L.P. (‘‘Aquinas Wireless’’); and
(cid:129) King Street Wireless L.P. (‘‘King Street Wireless’’) and King Street Wireless, Inc., the general partner of
King Street Wireless.
The power to direct the activities that most significantly impact the economic performance of Aquinas
Wireless and King Street Wireless (collectively, the ‘‘limited partnerships’’) 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
89
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 13 VARIABLE INTEREST ENTITIES (VIEs) (Continued)
TDS is the primary beneficiary of the VIEs in accordance with GAAP. Accordingly, these VIEs are
consolidated.
On March 13, 2013, TDS acquired the remaining 37% ownership interest in Airadigm
Communications, Inc. (‘‘Airadigm’’) that it did not own for $3.5 million in cash. Prior to this acquisition,
TDS consolidated Airadigm as a VIE. Subsequent to the acquisition date, Airadigm ceased to be a VIE
but continues to be consolidated based on TDS’ controlling financial interest in the entity.
The following table presents the classification of the consolidated VIEs’ assets and liabilities in TDS’
Consolidated Balance Sheet.
December 31,
(Dollars in thousands)
Assets
2013
2012
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Licenses and other intangible assets . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . .
Other assets and deferred charges . . . . . . . . . . . . . . . . . . . .
$ 2,076
1,184
310,475
18,600
511
$ 7,028
3,267
325,707
31,544
3,026
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$332,846
$370,572
Liabilities
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred liabilities and credits . . . . . . . . . . . . . . . . . . . . . . . .
$
46
3,139
$ 9,985
6,213
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,185
$ 16,198
Other Related Matters
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. As such, these entities have risks similar to those described in the ‘‘Risk Factors’’ in TDS’
Annual Report on Form 10-K.
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
licenses granted in various auctions. TDS may finance such amounts with a combination of cash on
hand, borrowings under its revolving credit agreement and/or 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,
90
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 13 VARIABLE INTEREST ENTITIES (VIEs) (Continued)
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, 2013 and 2012, respectively. 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.
TDS’ capital contributions and advances made to Aquinas Wireless and King Street Wireless and/or their
general partners totaled $10.0 million in the year ended December 31, 2012. There were no capital
contributions or advances made to Aquinas Wireless or King Street Wireless or their general partners in
2013.
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 14 NONCONTROLLING INTERESTS
The following schedule discloses the effects of Net income attributable to TDS shareholders and
changes in TDS’ ownership interest in U.S. Cellular on TDS’ equity for 2013, 2012 and 2011:
Year Ended December 31,
2013
2012
2011
(Dollars in thousands)
Net income attributable to TDS shareholders . . . . . . . . . . . . . . . . . . . .
$141,927
$81,861
$200,566
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 . . . . . . . . . . . . . . . . . . . . . . . .
(14,135)
(8,854)
(8,555)
Change in TDS’ Capital in excess of par value from U.S. Cellular’s
repurchase of U.S. Cellular shares . . . . . . . . . . . . . . . . . . . . . .
Purchase of ownership in subsidiaries from noncontrolling interests
3,370
(123)
4,789
4,397
(7,723)
—
Net transfers (to) from noncontrolling interests . . . . . . . . . . . . . . .
(10,888)
332
(16,278)
Change from net income attributable to TDS shareholders and
transfers (to) from noncontrolling interests . . . . . . . . . . . . . . . . . .
$131,039
$82,193
$184,288
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 estimated aggregate amount that would be due and payable to settle all of these noncontrolling
interests, assuming an orderly liquidation of the finite-lived consolidated partnerships and LLCs on
December 31, 2013, net of estimated liquidation costs, is $14.0 million. This amount excludes
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Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 14 NONCONTROLLING INTERESTS (Continued)
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, 2013 was $8.2 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 due primarily 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.
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 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. 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 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
92
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 15 COMMON SHAREHOLDERS’ EQUITY (Continued)
and all prior periods presented in this Form 10-K have been retroactively restated to reflect the impact of
the increased shares outstanding.
Common Stock
As of December 31, 2013, Series A Common Shares were convertible, on a share for share basis, into
Common Shares and 7,166,195 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, 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
57,093
—
63,442
—
7,198
—
15,911
748
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance December 31, 2012 . . . . . . . . . . . . . . . . . . .
Repurchase of shares . . . . . . . . . . . . . . . . . . . . . .
Conversion of Series A Common Shares . . . . . . . .
Dividend reinvestment, incentive and compensation
plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
125,502
—
10
— 24,165
868
—
—
—
— 7,119
—
—
(10)
—
—
—
(392)
—
51
125,512
—
33
— 24,641
339
—
—
—
—
— (1,026)
— 7,160
—
—
(33)
—
—
39
— 7,166
Balance December 31, 2013 . . . . . . . . . . . . . . . . . . .
125,545
— 23,954
(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.
Tax-Deferred Savings Plan
TDS has reserved 90,341 Common Shares at December 31, 2013, 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.
93
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 15 COMMON SHAREHOLDERS’ EQUITY (Continued)
Common Share Repurchases
TDS and U.S. Cellular Share Repurchases
On August 2, 2013, the Board of Directors of TDS authorized a $250 million stock repurchase program
for the purchase of TDS Common Shares from time to time pursuant to open market purchases, block
transactions, private purchases or otherwise, depending on market conditions. This authorization does
not have an expiration date. In 2012, TDS had a prior share repurchase authorization for $250 million
that expired on November 19, 2012.
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,
(Dollar amounts and shares in thousands)
2013
Number of
Shares
Average Cost
Per Share
Amount
U.S. Cellular Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . .
TDS Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
U.S. Cellular Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . .
TDS Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
499
339
571
868
2011
U.S. Cellular Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . .
TDS Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TDS Special Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,276
—
748
$37.19
28.60
$35.11
23.08
$48.82
—
28.73
$18,544
9,692
$20,045
20,026
$62,294
—
21,500
NOTE 16 STOCK-BASED COMPENSATION
TDS Consolidated
The following table summarizes stock-based compensation expense recognized during 2013, 2012 and
2011:
Year Ended December 31,
2013
2012
2011
(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 . . . . . . . . . .
$ 12,973
15,535
550
—
1,280
$ 20,884
19,025
749
—
1,213
$ 20,443
14,905
124
485
880
Total stock-based compensation, before income taxes . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30,338
(11,459)
41,871
(15,848)
36,837
(13,862)
Total stock-based compensation expense, net of income taxes . . . . . . .
$ 18,879
$ 26,023
$ 22,975
At December 31, 2013, unrecognized compensation cost for all stock-based compensation awards was
$36.8 million and is expected to be recognized over a weighted average period of 2.2 years.
94
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 16 STOCK-BASED COMPENSATION (Continued)
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,
2013
2012
2011
(Dollars in thousands)
Selling, general and administrative expense . . . . . . . . . . . . . . . . . . . . . .
Cost of services and products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$27,130
3,208
$38,563
3,308
$33,949
2,888
Total stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$30,338
$41,871
$36,837
TDS’ tax benefits realized from the exercise of stock options and other awards totaled $9.6 million in
2013.
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 Long-Term Incentive Plans, 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.
TDS had reserved 13,315,000 Common Shares at December 31, 2013 for equity awards granted and to
be granted under the TDS Long-Term Incentive Plans in effect. At December 31, 2013, 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, 2013, 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
200,000 TDS Common Shares at December 31, 2013 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, 2013 expire between 2014 and 2023.
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
95
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 16 STOCK-BASED COMPENSATION (Continued)
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 2013, 2012 and 2011 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
2012
2011
5.7 Years
5.5 Years
5.5 Years
41.0%
2.3%
1.0%
2.9%
41.1%
2.4%
0.9%
2.9%
37.6%
1.6%
2.1%
3.0%
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, 2013, is presented in the tables and narrative below. The December 31, 2011
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, 2010 . . . . . . . . . . . . . . . . . .
(651,000 exercisable) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification of Tandem Options due to Share
Number of
Options
651,000
(2,000)
—
(78,000)
Weighted Weighted
Average
Average
Grant Date
Exercise
Fair Value
Price
Aggregate
Intrinsic
Value
$69.60
69.60
53.77
—
99.23
$ 30,000
Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(571,000)
65.64
$158,000
Outstanding at December 31, 2011 . . . . . . . . . . . . . . . . . .
—
96
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 16 STOCK-BASED COMPENSATION (Continued)
Special Common Share Options
Outstanding at December 31, 2010 . . . . . . . . . . . . . . . . .
(2,506,000 exercisable) . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification of Special Common Options due to
Number of
Options
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
$35.41
43.14
29.94
26.95
28.12
35.00
$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)
Reclassification of Tandem Options due to
Share Consolidation . . . . . . . . . . . . . . . .
1,192,000
31.45
Reclassification of Special Common
Options due to Share Consolidation . . . .
6,024,000
34.38
Outstanding at December 31, 2011 . . . . . .
(4,865,000 exercisable) . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2012 . . . . . .
(5,782,000 exercisable) . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2013 . . . . . .
(6,160,000 exercisable) . . . . . . . . . . . . . . .
7,216,000
1,702,000
(1,000)
(106,000)
(298,000)
8,513,000
1,259,000
(683,000)
(81,000)
(228,000)
8,780,000
$33.89
36.67
20.79
20.65
23.81
30.12
$31.53
35.12
22.60
25.33
23.75
34.10
$30.74
$34.13
$6.28
$
4,000
$7.01
$ 2,450,000
$11,483,000
$ 2,256,000
6.0
4.9
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, 2013.
Long-Term Incentive Plans—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
convertible into one Common Share Award. The restricted stock unit awards currently outstanding were
granted in 2012 and 2013 and will vest in December 2014 and May 2016, respectively.
97
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 16 STOCK-BASED COMPENSATION (Continued)
TDS estimates the fair value of restricted stock units by reducing the grant-date price of TDS’ 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,
2013 is presented in the table below:
Common Restricted Stock Units
Nonvested at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted
Average
Grant Date
Fair Value
$23.44
$21.09
$28.94
$23.16
Number
547,000
353,000
(213,000)
(24,000)
Nonvested at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
663,000
$20.43
The total fair values as of the respective vesting dates of restricted stock units vested during 2013, 2012
and 2011 were $5.8 million, $3.4 million and $4.1 million, respectively. The weighted average grant date
fair value of restricted stock units granted in 2013, 2012 and 2011 was $21.09, $19.62 and $28.73,
respectively.
Long-Term Incentive Plans—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 2013, 2012 and 2011 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 2013, 2012 and 2011 was $21.99, $24.18 and $28.15,
respectively. As of December 31, 2013, there were 227,000 vested but unissued deferred compensation
stock units valued at $5.9 million.
Compensation of Non-Employee Directors—TDS issued 33,000, 22,000 and 19,000 Common Shares
under its Non-Employee Director plan in 2013, 2012 and 2011, respectively.
Dividend Reinvestment Plans (‘‘DRIP’’)—TDS had reserved 1,403,000 Common Shares at December 31,
2013, for issuance under Automatic Dividend Reinvestment and Stock Purchase Plans and 179,000
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.
98
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 16 STOCK-BASED COMPENSATION (Continued)
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: long-term incentive plans
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 Long-Term Incentive Plans, 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, 2013, the only types of awards
outstanding are fixed non-qualified stock option awards, restricted stock unit awards, and deferred
compensation stock unit awards.
On June 25, 2013, U.S. Cellular paid a special cash dividend to all holders of U.S. Cellular Common
Shares and Series A Common Shares as of June 11, 2013. Outstanding U.S. Cellular stock options,
restricted stock unit awards and deferred compensation stock units were equitably adjusted for the
special cash dividend. The impact of such adjustments are fully reflected for all years presented. See
Note 4—Earnings Per Share for additional information.
At December 31, 2013, U.S. Cellular had reserved 10,139,000 Common Shares for equity awards granted
and to be granted under the Long-Term Incentive Plans. 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 212,000 Common Shares at December 31, 2013 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 Plans—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, 2013 expire between 2014 and 2023.
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.
99
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 2013, 2012, and 2011 using the
Black Scholes valuation model and the assumptions shown in the table below.
2013
2012
2011
Expected life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated annual forfeiture rate . . . . . . . . . . . . . . . . . .
4.5 years
4.3 years
4.6-9.0 years
29.2%-39.6% 40.7%-42.6% 43.4%-44.8%
0%
0.7%-2.0%
0.0%-7.8%
0%
0.5%-0.9%
0.0%-9.1%
0%
0.7%-2.4%
0.0%-8.1%
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, 2013, is presented in the table below:
Common Share Options
Outstanding at December 31, 2010 . . . . . .
(1,333,000 exercisable) . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2011 . . . . . .
(1,533,000 exercisable) . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2012 . . . . . .
(1,928,000 exercisable) . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2013 . . . . . .
(1,359,000 exercisable) . . . . . . . . . . . . . . .
Number of
Options
2,627,000
694,000
(201,000)
(83,000)
(203,000)
2,834,000
677,000
(47,000)
(117,000)
(133,000)
3,214,000
1,213,000
(892,000)
(574,000)
(247,000)
2,714,000
Weighted Weighted
Average
Average
Grant Date
Exercise
Fair Value
Price
Aggregate
Intrinsic
Value
Weighted
Average
Remaining
Contractual
Life
(in years)
$42.28
47.18
44.34
32.32
39.42
49.32
$43.07
46.23
34.91
29.82
38.45
46.17
$41.58
43.99
32.45
34.78
34.17
48.35
$42.22
$46.91
$16.66
$ 2,099,000
$12.61
$
205,000
$11.53
$ 6,787,000
$13,015,000
$ 2,632,000
6.80
4.60
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, 2013.
Long-Term Incentive Plans—Restricted Stock Units—U.S. Cellular grants restricted stock unit awards,
which generally vest after three years, to key employees.
100
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, 2013 and changes during
the year then ended is presented in the table below:
Common Restricted Stock Units
Nonvested at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number
1,139,000
601,000
(238,000)
(332,000)
1,170,000
Weighted Average
Grant Date
Fair Value
$38.40
32.06
42.26
35.63
$36.46
The total fair value of restricted stock units that vested during 2013, 2012 and 2011 was $8.8 million,
$8.9 million and $9.5 million, respectively, as of the respective vesting dates. The weighted average grant
date fair value of restricted stock units granted in 2013, 2012 and 2011 was $32.06, $34.09 and $42.33,
respectively.
Long-Term Incentive Plans—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
2013, 2012 and 2011. The weighted average grant date fair value of deferred compensation stock units
granted in 2013, 2012 and 2011 was $31.50, $36.34 and $41.79, respectively. As of December 31, 2013,
there were 12,000 vested but unissued deferred compensation stock units valued at $0.5 million.
Compensation of Non-Employee Directors—U.S. Cellular issued 13,000, 7,600 and 6,600 Common
Shares in 2013, 2012 and 2011, respectively, under its Non-Employee Director compensation plan.
NOTE 17 RECLASSIFICATION ADJUSTMENTS OUT OF ACCUMULATED OTHER
COMPREHENSIVE INCOME
Accumulated other comprehensive loss includes amounts related to TDS’ defined benefit post-retirement
plan. During 2013, reclassifications from Accumulated other comprehensive loss into Operating
expenses, related to the retirement plan, were approximately $0.8 million (net of income tax of
$0.4 million). Of this amount, $0.5 million was recorded as a decrease to Cost of services and products
and $0.3 million was recorded as a decrease to Selling, general and administrative expense.
101
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 18 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.
Financial data for TDS’ reportable segments for 2013, 2012 and 2011, is as follows. During the year
ended December 31, 2013, TDS reevaluated and changed its operating segments, which resulted in the
following reportable segments: U.S. Cellular; TDS Telecom Wireline, Cable, HMS; and the
Non-Reportable Segment. 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 as of December 31, 2013
U.S.
Cellular
Wireline
Cable
HMS
(Dollars in thousands)
Operating revenues . . . . . . . . . . . $3,918,836 $ 726,567 $ 35,883 $185,616
Cost of services and products
TDS Telecom
TDS
Telecom
Eliminations
TDS
Telecom
Total
Corporate,
Eliminations
and Other
Reportable Reconciling
Non-
Segment
Items
Total
$(1,063)
$ 947,003
$59,703
$ (24,306) $4,901,236
(excluding Depreciation, amortization
and accretion expense reported
below)
. . . . . . . . . . . . . . . . . .
Selling, general and administrative . . .
Depreciation, amortization and accretion
(Gain) loss on asset disposals, net
. . .
(Gain) loss on sale of business and
1,762,435
1,677,395
803,781
30,606
270,466
220,097
170,868
130
17,274
11,054
7,571
28
136,414
44,945
24,262
125
(1,000)
(63)
—
—
423,154
276,033
202,701
283
43,049
14,526
5,980
(8)
(3,322)
(20,176)
5,615
(40)
2,225,316
1,947,778
1,018,077
30,841
other exit costs, net . . . . . . . . . . .
(246,767)
(Gain) loss on license sales and
exchanges . . . . . . . . . . . . . . . .
(255,479)
—
—
—
—
—
—
Operating income (loss) . . . . . . . . .
Equity in earnings of unconsolidated
entities . . . . . . . . . . . . . . . . . .
Interest and dividend income . . . . . . .
Gain (loss) on investments . . . . . . . .
Interest expense . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . .
146,865
65,006
(44)
(20,130)
131,949
3,961
18,556
(43,963)
288
19
1,759
830
3,265
(214)
—
2
—
(74)
—
—
63
—
(1,626)
29
Income (loss) before income taxes . .
257,656
70,665
(116)
(21,664)
Add back:
Depreciation, amortization and accretion
(Gain) loss on sale of business and
803,781
170,868
7,571
24,262
other exit costs, net . . . . . . . . . . .
(246,767)
—
(Gain) loss on license sales and
exchanges . . . . . . . . . . . . . . . .
Gain (loss) on investments . . . . . . . .
Interest expense . . . . . . . . . . . . . .
(255,479)
(18,556)
43,963
—
(830)
(3,265)
—
—
—
74
—
—
—
1,626
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(53,889)
(300,656)
—
(255,479)
44,832
(3,844)
47,506
235,359
19
1,824
830
1,565
(185)
—
4
—
(4,062)
(161)
746
3,303
(4,839)
(52,351)
21
132,714
9,092
14,547
(98,811)
(37)
48,885
(8,063)
(5,614)
292,864
202,701
5,980
5,615
1,018,077
—
—
(53,889)
(300,656)
—
(830)
(1,565)
—
—
4,062
—
4,839
52,351
(255,479)
(14,547)
98,811
Adjusted income before income taxes $ 584,598 $ 237,438 $ 7,529 $ 4,224
$ — $ 249,191
$ 1,979
$ 3,302
$ 839,070
Investments in unconsolidated entities . $ 265,585 $
Total assets . . . . . . . . . . . . . . . . . $6,445,708 $1,188,433 $543,038 $328,397
Capital expenditures . . . . . . . . . . . . $ 737,501 $ 140,009 $ 8,375 $ 16,474
3,809 $
— $
— $ — $
3,809
$ — $2,059,868
$ — $ 164,858
$
$58,275
866
$
— $ 32,378
$340,296
$ 6,435
$ 301,772
$8,904,147
$ 909,660
102
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 18 BUSINESS SEGMENT INFORMATION (Continued)
Year Ended or as of December 31, 2012
TDS Telecom
U.S.
Cellular
Wireline
HMS
TDS
Telecom
Eliminations
TDS
Telecom
Total
Corporate,
Eliminations
and Other
Reportable Reconciling
Non-
Segment
Items
Total
(Dollars in thousands)
Operating revenues . . . . . . . . . . . . . . . . . . $4,452,084 $ 741,748 $113,010
Cost of services and products (excluding
$(252)
$ 854,506
$60,830
$ (22,143) $5,345,277
Depreciation, amortization and accretion
expense reported below)
. . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . .
Depreciation, amortization and accretion . . . . . .
Loss on impairment of assets . . . . . . . . . . . . .
(Gain) loss on asset disposals, net . . . . . . . . . .
(Gain) loss on sale of business and other exit
1,882,752
1,764,933
608,633
—
18,088
274,065
235,716
172,526
—
1,020
75,781
34,193
20,568
—
108
(252)
—
—
—
—
349,594
269,909
193,094
—
1,128
42,150
16,189
6,102
515
(1)
(1,926)
(17,130)
5,797
—
526
2,272,570
2,033,901
813,626
515
19,741
costs, net
. . . . . . . . . . . . . . . . . . . . . . .
21,022
39
—
Operating income (loss) . . . . . . . . . . . . . . .
Equity in earnings of unconsolidated entities . . . .
Interest and dividend income . . . . . . . . . . . . .
Gain (loss) on investments . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
Other, net
156,656
90,364
3,644
(3,718)
(42,393)
500
58,382
10
3,085
—
2,674
(353)
(17,640)
—
25
—
(1,160)
(1)
Income (loss) before income taxes . . . . . . . .
205,053
63,798
(18,776)
Add back:
Depreciation, amortization and accretion . . . . . .
(Gain) loss on sale of business and other exit
costs, net
. . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on investments . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . .
608,633
172,526
20,568
21,022
3,718
42,393
39
—
(2,674)
—
—
1,160
—
—
—
—
—
—
—
—
—
—
—
—
39
—
—
21,061
40,742
10
3,110
—
1,514
(354)
(4,125)
—
8
—
(3,938)
575
(9,410)
2,493
2,486
—
(41,928)
(1)
183,863
92,867
9,248
(3,718)
(86,745)
720
45,022
(7,480)
(46,360)
196,235
193,094
6,102
5,797
813,626
39
—
(1,514)
—
—
3,938
—
—
41,928
21,061
3,718
86,745
Adjusted income before income taxes . . . . . . . $ 880,819 $ 233,689 $ 2,952
$ —
$ 236,641
$ 2,560
$ 1,365
$1,121,385
Investments in unconsolidated entities . . . . . . . . $ 144,531 $
—
Total assets . . . . . . . . . . . . . . . . . . . . . . . $6,587,450 $1,519,698 $267,798
Capital expenditures . . . . . . . . . . . . . . . . . . $ 836,748 $ 158,580 $ 15,344
3,809 $
$ —
$ —
$ —
$
3,809
$1,787,496
$ 173,924
$
$62,931
$ 1,789
$ 179,921
— $ 31,581
$186,023
$8,623,900
$ (7,840) $1,004,621
Year Ended or as of December 31, 2011
TDS Telecom
U.S.
Cellular
Wireline
HMS
TDS
Telecom
Eliminations
TDS
Telecom
Total
Corporate,
Eliminations
and Other
Reportable Reconciling
Non-
Segment
Items
Total
(Dollars in thousands)
Operating revenues . . . . . . . . . . . . . . . . . . $4,343,346 $ 768,208 $ 47,180
Cost of services and products (excluding
Depreciation, amortization and accretion
expense reported below)
. . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . .
Depreciation, amortization and accretion . . . . . .
(Gain) loss on asset disposals, net . . . . . . . . . .
(Gain) loss on license sales and exchanges . . . .
Operating income (loss) . . . . . . . . . . . . . . .
Equity in earnings of unconsolidated entities . . . .
Interest and dividend income . . . . . . . . . . . . .
Gain (loss) on investments . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
Other, net
1,721,181
1,769,701
573,557
9,889
(11,762)
280,780
83,566
3,395
11,373
(65,614)
(678)
274,701
221,114
167,663
1,128
—
103,602
8
3,548
—
2,702
2,719
23,502
15,647
12,867
115
—
(4,951)
—
—
—
(78)
(9)
Income (loss) before income taxes . . . . . . . .
312,822
112,579
(5,038)
Add back:
Depreciation, amortization and accretion . . . . . .
(Gain) loss on license sales and exchanges . . . .
Gain (loss) on investments . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . .
573,557
(11,762)
(11,373)
65,614
167,663
—
—
(2,702)
12,867
—
—
78
Adjusted income before income taxes . . . . . . . $ 928,858 $ 277,540 $ 7,907
Investments in unconsolidated entities . . . . . . . . $ 138,096 $
—
Total assets . . . . . . . . . . . . . . . . . . . . . . . $6,327,976 $1,494,362 $209,109
Capital expenditures . . . . . . . . . . . . . . . . . . $ 782,526 $ 164,163 $ 26,999
3,808 $
$—
$ 815,388
$45,133
$ (23,396) $5,180,471
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$—
$—
$—
$—
298,203
236,761
180,530
1,243
—
98,651
8
3,548
—
2,624
2,710
32,952
8,609
3,021
(197)
—
748
—
2
—
(1,359)
650
(1,692)
(12,712)
8,668
17
—
(17,677)
(1,036)
2,200
12,730
(53,852)
976
2,050,644
2,002,359
765,776
10,952
(11,762)
362,502
82,538
9,145
24,103
(118,201)
3,658
107,541
41
(56,659)
363,745
180,530
—
—
(2,624)
3,021
—
—
1,359
8,668
—
(12,730)
53,852
765,776
(11,762)
(24,103)
118,201
$ 285,447
$ 4,421
$ (6,869) $1,211,857
$
3,808
$1,703,471
$ 191,162
$
$68,870
$ 3,206
— $ 31,806
$100,688
$ 10,324
$ 173,710
$8,201,005
$ 987,218
Adjusted income before income taxes is a segment measure reported to the principal operating decision
maker for purposes of making decisions about allocating resources to the segments and assessing their
performance. Adjusted income before income taxes is defined as Income (loss) before income taxes,
103
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 18 BUSINESS SEGMENT INFORMATION (Continued)
adjusted for the items set forth in the reconciliation above. Adjusted income before income taxes
excludes these items in order to show operating results on a more comparable basis from period to
period. In addition, TDS may also exclude other items from adjusted income before income taxes if such
items help reflect operating results on a more comparable basis. TDS does not intend to imply that any
of such amounts that are excluded are non-recurring, infrequent or unusual; such amounts may occur in
the future. TDS believes Adjusted income before income taxes is a useful measure of TDS’ operating
results before significant recurring non-cash charges, discrete gains and losses and financing charges
(Interest expense).
NOTE 19 SUPPLEMENTAL CASH FLOW DISCLOSURES
Following are supplemental cash flow disclosures regarding interest paid and income taxes paid.
Year Ended December 31,
2013
2012
2011
(Dollars in thousands)
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes paid (refunded)
$ 96,241
175,629
$ 88,208
(62,042)
$ 96,174
(66,994)
Following are supplemental cash flow disclosures regarding transactions related to stock-based
compensation awards. 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.
TDS:
Year Ended December 31,
(Dollars in thousands)
Common Shares withheld . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special Common Shares withheld . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . .
Net cash receipts (disbursements) from exercise of stock options and
2013
2012
2011
265,748
—
$ 7,639
$
12,092
(2,438)
49,840
1,381
$ 1,102
33
16
(1,135)
— $
—
65,638
—
$
$ 1,537
1,463
(1,431)
vesting of other stock awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,654
$ (1,119) $
32
U.S. Cellular:
Year Ended December 31,
(Dollars in thousands)
Common Shares withheld . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aggregate value of Common Shares withheld . . . . . . . . . . . . . . . . . . .
Cash receipts upon exercise of stock options . . . . . . . . . . . . . . . . . . .
Cash disbursements for payment of taxes . . . . . . . . . . . . . . . . . . . . . .
Net cash receipts (disbursements) from exercise of stock options and
2013
2012
2011
606,582
$ 25,179
10,468
(4,684)
92,846
$ 3,604
900
(3,105)
120,250
$ 5,952
5,447
(3,512)
vesting of other stock awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,784
$ (2,205) $ 1,935
104
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 19 SUPPLEMENTAL CASH FLOW DISCLOSURES (Continued)
Under the American Recovery and Reinvestment Act of 2009 (‘‘the Recovery Act’’), TDS Telecom was
awarded $105.1 million in federal grants and will provide $30.9 million of its own funds to complete
44 projects to provide broadband access in unserved areas. TDS Telecom received $41.9 million,
$16.7 million, and $4.9 million in grants during the twelve months ended December 31, 2013, 2012 and
2011, respectively. TDS Telecom has received cumulative grants of $63.6 million as of December 31,
2013. These funds reduced the carrying amount of the assets to which they relate. TDS Telecom had
recorded $23.6 million and $27.6 million in grants receivable at December 31, 2013 and 2012,
respectively. These amounts were included as a component of Accounts receivable, Other, in the
Consolidated Balance Sheet.
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. U.S. Cellular and several of its wholly-owned subsidiaries participated in
Auction 901 and were winning bidders in eligible areas within 10 states and will receive up to
$40.1 million in one-time support from the Mobility Fund. These funds will reduce the carrying amount of
the assets to which they relate or will offset operating expenses. U.S. Cellular has received $13.4 million
in support funds as of December 31, 2013, of which $10.3 million is included as a component of Other
assets and deferred charges in the Consolidated Balance Sheet and $3.1 million reduced the carrying
amount of the assets to which they relate, which are included in Property, plant and equipment in the
Consolidated Balance Sheet.
TDS declared and paid dividends on Series A Common and Common Shares of $55.2 million or
$0.51 per share during 2013 and $53.1 million or $0.49 per share during 2012. TDS declared and paid
dividends on Series A Common, Common and Special Common Shares of $48.6 million or $0.47 per
share during 2011.
On June 25, 2013, U.S. Cellular paid a special cash dividend of $5.75 per share, for an aggregate
amount of $482.3 million, to all holders of U.S. Cellular Common Shares and Series A Common Shares
as of June 11, 2013. Of the $482.3 million paid, TDS received $407.1 million while noncontrolling public
shareholders received $75.2 million. The cash paid to noncontrolling public shareholders is presented as
U.S. Cellular dividends paid to noncontrolling public shareholders on the Consolidated Statement of
Cash Flows.
NOTE 20 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 $17.6 million in 2013, $13.6 million in
2012 and $13.7 million in 2011.
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.
105
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/ Douglas D. Shuma
LeRoy T. Carlson, Jr.
President and
Chief Executive Officer
(principal executive officer)
Douglas D. Shuma
Senior Vice President
and Controller
(principal financial officer and
principal accounting officer)
106
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 principal executive
officer and principal financial officer, TDS conducted an evaluation of the effectiveness of its internal
control over financial reporting as of December 31, 2013, based on the criteria established in the 1992
version of 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, 2013 based on criteria established in the 1992
version of Internal Control—Integrated Framework issued by the COSO.
The effectiveness of TDS’ internal control over financial reporting as of December 31, 2013 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/ Douglas D. Shuma
LeRoy T. Carlson, Jr.
President and
Chief Executive Officer
(principal executive officer)
Douglas D. Shuma
Senior Vice President
and Controller
(principal financial officer and
principal accounting officer)
107
Telephone and Data Systems, Inc.
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, 2013 and 2012, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2013 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, 2013, based on criteria established in Internal Control—Integrated Framework
(1992) 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 $112,200,000 and $105,300,000 as of December 31, 2013 and 2012,
respectively, and equity earnings of $78,400,000, $67,200,000 and $55,300,000 for each of the three years
in the period ended December 31, 2013. 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 28, 2014
108
Telephone and Data Systems, Inc.
SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended or at December 31,
2013
2012
2011
2010
2009
(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
$4,901,236
—
$5,345,277
515
$5,180,471
—
$4,986,829
—
$5,019,943
14,000
other exit costs, net . . . . . . . . . . . .
(300,656)
21,061
—
—
—
(Gain) loss on license sales and
exchanges . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . .
Gain (loss) on investments . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . .
Net income attributable to
(255,479)
235,359
14,547
166,821
—
183,863
(3,718)
122,653
(11,762)
362,502
24,103
250,242
—
296,091
—
190,586
—
407,844
—
249,949
noncontrolling interests, net of tax .
24,894
40,792
49,676
45,737
58,602
Net income attributable to TDS
shareholders . . . . . . . . . . . . . . . . .
Net income available to common . . .
Basic weighted average shares
141,927
$ 141,878
$
81,861
81,811
200,566
$ 200,516
144,849
$ 144,799
191,347
$ 191,296
outstanding . . . . . . . . . . . . . . . . .
108,490
108,671
108,562
110,016
114,354
Basic earnings per share attributable
to TDS shareholders . . . . . . . . . . .
$
1.31
$
0.75
$
1.85
$
1.32
$
1.67
Diluted weighted average shares
outstanding . . . . . . . . . . . . . . . . .
109,132
108,937
109,098
110,488
114,572
Diluted earnings per share
attributable to TDS shareholders . .
$
1.29
$
0.75
$
1.83
$
1.31
$
1.67
Dividends per Common, Special
Common and Series A Common
Share(2) . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . .
$
0.51
$
0.49
$
0.47
$
0.45
$
0.43
$ 830,014
3,878,144
8,904,147
$ 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
1,720,074
4,117,837
$ 909,660
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)
Includes Loss on Impairment of intangible assets related to Goodwill in 2012 and Licenses in 2009.
(2) 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. See Note 15—Common
Shareholders’ Equity for additional information.
109
Telephone and Data Systems, Inc.
CONSOLIDATED QUARTERLY INFORMATION (UNAUDITED)
(Amounts in thousands, except per share amounts)
2013
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) loss on sale of business and other exit costs, net(1) . . . . . .
(Gain) loss on license sales and exchanges(1) . . . . . . . . . . . . . .
Operating income (loss)(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on investments(1) . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss)(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to TDS shareholders . . . . . . . . . . .
Basic weighted average shares outstanding . . . . . . . . . . . . . . . .
Basic earnings (loss) per share attributable to TDS shareholders . . .
Diluted weighted average shares outstanding . . . . . . . . . . . . . . .
Diluted earnings (loss) per share attributable to TDS shareholders . .
Stock price
TDS Common Shares(3)
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Close . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Amounts in thousands, except per share amounts)
2012
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) loss on sale of business and other exit costs, net(1) . . . . . .
Loss on impairment of intangible assets . . . . . . . . . . . . . . . . . .
Operating income (loss)(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss)(1)(2)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to TDS shareholders . . . . . . . . . . .
Basic weighted average shares outstanding . . . . . . . . . . . . . . . .
Basic earnings (loss) per share attributable to TDS shareholders . . .
Diluted weighted average shares outstanding . . . . . . . . . . . . . . .
Diluted earnings (loss) per share attributable to TDS shareholders . .
Stock price
TDS Common Shares(3)
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Close . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31
June 30
September 30
December 31
Quarter Ended
$1,308,573
6,931
—
7,154
—
6,989
1,419
108,255
$
$
$
$
$
0.01
108,693
0.01
26.17
20.79
21.07
0.1275
$1,228,166
(303,034)
—
282,227
14,518
178,397
$ 156,077
108,385
$
$
$
$
1.44
108,913
1.42
24.87
20.57
24.65
0.1275
$1,180,980
(1,534)
—
(33,085)
—
(11,054)
(9,512)
108,571
$
$
$
$
$
(0.09)
108,571
(0.09)
29.83
23.21
29.55
0.1275
$1,183,517
(3,019)
(255,479)
(20,937)
29
(7,511)
(6,057)
108,742
$
$
$
$
$
(0.06)
108,742
(0.06)
31.52
24.22
25.78
0.1275
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
0.26
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
(1) See Note 5—Acquisitions, Divestitures and Exchanges for additional information related to sales of businesses and spectrum
licenses. See Note 7—Investments in Unconsolidated Entities for additional information on Gain (loss) on investments in 2013.
(2) 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 and promotional activities, which may cause operating income to vary from
quarter to quarter.
(3)
The high, low and closing sales prices as reported by the New York Stock Exchange (‘‘NYSE’’).
(4) 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.
110
Telephone and Data Systems, Inc.
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, 2014, the last trading day of the month, TDS Common Shares were held by
approximately 1,520 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 $0.51 per
Common and Series A Common Share during 2013. During 2012, TDS paid dividends of $0.49 per
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 for 2013 and 2012.
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,
2013, the Dow Jones U.S. Telecommunications Index was composed of the following companies:
AT&T Inc., CenturyLink Inc., Crown Castle International Corp., Frontier Communications Corp., Level 3
Communications Inc., NII Holdings Inc., SBA Communications Corp., Sprint Corp., T-Mobile US Inc.,
Telephone and Data Systems, Inc. (TDS), TW Telecom, Inc., Verizon Communications Inc., and
Windstream Holdings, Inc.
Telephone & Data Systems Inc.
S&P 500 Index
Dow Jones U.S. Telecommunications Index
$250
$200
$150
$100
$50
$0
2008
2009
2010
2011
2012
4MAR201421523406
2013
*
Cumulative total return assumes reinvestment of dividends.
111
Telephone and Data Systems, Inc.
SHAREHOLDER INFORMATION
Telephone and Data Systems Common Shares
2008
2009
2010
2011
2012
2013
(NYSE: TDS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100 $108.43 $118.33 $ 85.32 $ 80.97 $ 96.31
228.19
182.32
S&P 500 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dow Jones U.S. Telecommunications Index . . . . . . .
148.59
134.48
145.51
129.35
126.46
109.85
172.37
159.75
100
100
Assumes $100.00 invested at the close of trading on the last trading day preceding the first day of 2008,
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.
112
Telephone and Data Systems, Inc.
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 2014 for
the 2014 Annual Meeting.
Principal counsel
Sidley Austin LLP, Chicago, Illinois
Transfer agent
Computershare Trust Company, N.A.
211 Quality Circle, Suite 210
College Station, TX 77845
877.337.1575
Independent registered public accounting firm
PricewaterhouseCoopers LLP
Visit TDS’ web site at www.teldta.com
113
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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
• 40 years of annual dividend increases
• Strong balance sheet
• Investment-grade debt ratings
Telephone and Data Systems headquarters,
Chicago
TDS headquarters, Chicago, IL
U.S. Cellular operations
U.S. Cellular operations
TDS Telecom operations
TDS Telecom operations
OneNeck IT Solutions data center
HMS operations
Datacenter
Sales Office
OneNeck IT Solutions sales office
Baja Broadband
Baja Broadband operations
About Our Businesses
U.S. Cellular Provides outstanding
wireless experiences to nearly five million
customers, with a high-quality nationwide
network, competitive devices, plans, and
pricing, and a Rewards Program that makes
customers feel like neighbors, not numbers.
TDS Telecom Trusted provider of residential high-speed
Internet, phone, and TV entertainment services, and
commercial VoIP (managedIP Hosted) phone service,
dedicated high-speed Internet, and hosted-managed
services. TDS Telecom manages the operations of:
OneNeck IT Solutions Offers comprehensive IT solutions,
including colocation, cloud and hosting solutions,
ReliaCloud enterprise cloud services, managed services,
ERP application management, professional services, and
IT hardware.
Baja Broadband Delivers high-quality residential and
commercial cable TV, high-speed Internet, phone and
data services.
Officers
Board of Directors
LeRoy T. Carlson, Jr.
President and
Chief Executive 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
Alan Schultz
Vice President -
Enterprise Growth and
Portfolio Strategy
John M. Toomey
Assistant Treasurer
Theodore E. Wiessing
Vice President and
Chief Information
Security Officer
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
President and
Chief Executive Officer,
U.S. Cellular
LeRoy T. Carlson
Director Emeritus, 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
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
Managing Member,
Richfield Capital Partners
Member, Compensation
Committee
Herbert S. Wander
Partner, Katten Muchin
Rosenman LLP
Chairman, Compensation
Committee
Member, Audit Committee
Telephone and Data Systems, Inc.
30 N. LaSalle Street, Suite 4000
Chicago, IL 60602
Tel: 312.630.1900
www.teldta.com
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