Telephone and Data Systems, Inc. 2019 Form 10-K Summary
Business Context and Reporting Period
TDS filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed February 25, 2020. TDS operates entirely in the United States through three reportable segments: U.S. Cellular wireless, TDS Telecom Wireline, and TDS Telecom Cable. It also operates smaller hosted and managed services and printing businesses.
- U.S. Cellular had 4.9 million wireless connections and operated in 20 states serving a population of approximately 31 million.
- TDS Telecom had approximately 1.2 million Wireline and Cable connections.
- TDS owned approximately 82% of U.S. Cellular’s outstanding common equity and controlled approximately 96% of its combined voting power.
- TDS had approximately 9,400 employees at year-end.
Financial Metrics, Liquidity and Capital Structure
The provided filing text does not include TDS’s consolidated statements of operations, balance sheet, cash flows, or the detailed management discussion incorporated by reference from Exhibit 13. Accordingly, consolidated revenue, net income, operating income, cash flow, margins, total debt, cash balances, and liquidity ratios cannot be stated reliably from the supplied text.
- Gross property, plant and equipment at December 31, 2019 was $8.293 billion for U.S. Cellular, $3.714 billion for Wireline, $507 million for Cable, and $350 million for Parent and Other.
- TDS and U.S. Cellular had no cash borrowings outstanding under their revolving credit facilities at December 31, 2019 or through the filing date. U.S. Cellular also had no borrowings outstanding under its receivables securitization facility.
- TDS disclosed that its credit rating was sub-investment grade and that it had experienced negative free cash flow at times in the past.
- TDS paid quarterly dividends of $0.165 per share in 2019, compared with $0.160 in 2018 and $0.155 in 2017. The dividend increased to $0.170 per share in the first quarter of 2020.
- The $250 million share-repurchase authorization had $199 million remaining at December 31, 2019. No TDS share repurchases were made during the fourth quarter of 2019.
Material Changes Versus the Prior Comparable Period
- On December 31, 2019, TDS acquired substantially all assets of MI Connection Communications System, doing business as Continuum, for $80 million in cash, subject to working-capital adjustments. The cable business passes approximately 40,000 service addresses in North Carolina.
- U.S. Cellular became the provisional winning bidder for 690 spectrum licenses in FCC Auctions 101 and 102, with an aggregate purchase price of $256 million. The licenses were granted in October and December 2019.
- U.S. Cellular began deploying 5G technology and expected to launch commercial 5G services in selected markets in 2020. VoLTE was available to nearly 70% of U.S. Cellular subscribers, with additional deployments expected in 2020 and 2021.
- TDS Telecom continued expanding fiber and Cable DOCSIS 3.1 infrastructure, including out-of-territory fiber construction.
- Wireline’s annual Connect America Fund support increased to $82 million in 2018 and 2019, with the program extended through 2028 and additional speed requirements added.
- TDS adopted lease accounting under ASC 842 during 2019. The supplied balance-sheet information for TDS itself does not quantify the adoption impact.
Outlook, Commentary, Risks and Unusual Items
Management’s operating focus is on network quality, broadband and fiber expansion, 5G deployment, spectrum acquisition, customer retention, and selective acquisitions. The filing does not provide a clear consolidated 2020 revenue, earnings, cash flow, or capital-expenditure guidance figure.
- Management expects continued significant investment in wireless spectrum and network capacity to support data growth and 5G.
- TDS disclosed that current forecasts indicated TDS and each major operating business would not achieve returns on capital above their respective costs of capital in the foreseeable future.
- Major risks include intense competition from larger national wireless carriers, cable companies, fiber overbuilders, RBOCs, satellite providers, VoIP providers, and technology companies.
- Pricing pressure, unlimited data plans, customer churn, roaming costs and revenues, device economics, and the need to fund 5G and fiber investment may pressure margins and cash flow.
- Regulatory support is material: U.S. Cellular received $92 million of high-cost support in 2019, while TDS Telecom received $86 million under federal regulatory support programs. Future support levels and build-out obligations are uncertain.
- TDS identified liquidity, refinancing, sub-investment-grade credit ratings, debt covenants, capital-market access, and potential negative free cash flow as material risks.
- Cyberattacks and denial-of-service attacks occur regularly, although TDS stated that it had not discovered a material security breach as of the filing.
- Pending legal and regulatory matters are subject to uncertainty. The filing states that the ultimate outcomes could differ materially from accrued amounts, but the supplied text does not identify a specific material loss amount for TDS.
Most Important Facts for Investors to Verify
- Verify consolidated 2019 and 2018 revenue, operating income, net income, EBITDA or comparable operating measures, margins, and segment results in Exhibit 13.
- Verify consolidated operating cash flow, capital expenditures, free cash flow, cash balances, total debt, maturities, and covenant headroom.
- Assess whether the $256 million spectrum purchase, $80 million Continuum acquisition, 5G deployment, and fiber expansion are supported by recurring operating cash flow.
- Review U.S. Cellular customer additions, churn, service revenue, equipment margins, roaming economics, and 5G capital requirements.
- Review Wireline and Cable broadband growth, connection trends, video declines, fiber-overbuild returns, and exposure to cable and fiber competition.
- Evaluate the sustainability of regulatory support revenues, including the $92 million received by U.S. Cellular and $86 million received by TDS Telecom in 2019.
- Review debt agreements and financial covenants in light of TDS’s sub-investment-grade credit rating and disclosed return-on-capital concerns.
- Consider the effect of TDS’s controlled-company structure and the TDS Voting Trust, which limits the influence of holders of Common Shares.