Telephone and Data Systems, Inc. 2015 Form 10-K Summary
Business context and reporting period
TDS filed its annual report for the fiscal year ended December 31, 2015. TDS is a diversified U.S. telecommunications company operating through majority-owned U.S. Cellular and wholly owned TDS Telecom. At year-end, TDS served approximately 4.9 million wireless customers and 1.2 million wireline and cable connections. TDS owned 84% of U.S. Cellular’s combined shares and controlled 96% of its combined voting power.
- Primary segments: U.S. Cellular, Wireline, Cable, and Hosted and Managed Services.
- U.S. Cellular operated in 23 states; its 4G LTE network covered approximately 99% of postpaid customers.
- TDS Telecom operated wireline businesses in 25 states, cable businesses primarily in several western states, and HMS data-center and IT-services operations.
- The consolidated income statement, balance sheet, cash-flow statement, and detailed MD&A were incorporated by reference from the 2015 Annual Report to Shareholders. The supplied filing text therefore does not provide clear consolidated TDS revenue, net income, cash flow, margin, debt, or liquidity totals.
Key financial and operating metrics
| Metric | 2015 information disclosed |
|---|---|
| Wireline wholesale revenue | $181.4 million, including $74.6 million from federal Universal Service Fund programs |
| U.S. Cellular high-cost support | $92.1 million |
| Net property, plant and equipment | $2,648.9 million U.S. Cellular; $753.7 million Wireline; $212.5 million Cable; $127.6 million HMS; $21.8 million Corporate and Suttle-Straus |
| Capital expenditure disclosure | Consolidated amount not clearly provided in the supplied TDS filing text |
| Dividends | $0.1410 per share quarterly in 2015, versus $0.1340 in 2014 and $0.1275 in 2013 |
| 2016 dividend | Increased to $0.1480 per share in the first quarter of 2016 |
| Share repurchase authorization | $201.2 million remained available at December 31, 2015 under the $250 million program; no purchases were made during the fourth quarter |
| Employees | Approximately 10,400 full-time and part-time employees |
TDS stated that it had significant indebtedness and that its credit rating had declined to sub-investment grade. The filing identifies TDS and U.S. Cellular revolving credit facilities, a U.S. Cellular term loan, and multiple long-term senior notes, but the supplied text does not provide a clear consolidated debt balance, cash balance, unused borrowing capacity, or leverage ratio.
Material changes versus prior comparable periods
- TDS increased its quarterly dividend for the third consecutive year and raised it again in the first quarter of 2016.
- U.S. Cellular expanded 4G LTE coverage and began selected-market VoLTE user trials during 2015.
- U.S. Cellular filed to participate directly as a bidder in the FCC’s 2016 Auction 1000 for 600 MHz spectrum. Any winning bids could require substantial payments and reduce consolidated liquidity.
- TDS Telecom continued expanding broadband, cable, fiber, IPTV, managedIP, cloud, colocation, and other hosted services.
- Wireless and wireline operations remained exposed to declining traditional voice and access-line usage, aggressive wireless pricing, cable competition, VoIP substitution, and lower intercarrier compensation.
- U.S. Cellular received no 2015 cash distribution from its 5.5% interest in the Los Angeles SMSA Limited Partnership, although it remained responsible for taxes on its share of taxable income. The filing states that future distributions are uncertain.
- The filing states that TDS expected negative free cash flow in 2016, defined as operating cash flow less additions to property, plant and equipment.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide a clear consolidated revenue or earnings forecast in the supplied text. The outlook emphasizes continued investment in LTE, broadband, fiber, cable plant, cloud, data centers, and customer-service capabilities, while acknowledging that TDS and U.S. Cellular did not expect to earn returns on capital above their cost of capital in the near term.
- Major risks include intense competition from national wireless carriers, cable companies, RBOCs, VoIP providers, fiber overbuilders, satellite providers, online video services, and larger IT-service providers.
- Liquidity is sensitive to negative free cash flow, declining regulatory support, reduced asset-sale proceeds, spectrum purchases, credit-rating changes, debt covenant compliance, and the potential loss or reduction of distributions from the LA Partnership.
- U.S. Cellular received 60% of its baseline high-cost support following a 40% phase-down under FCC reforms; future support levels remain uncertain.
- Device installment plans may reduce near-term operating cash flow and increase churn, credit losses, bad-debt expense, and exposure to device values.
- Cybersecurity incidents, network outages, technology transitions, spectrum limitations, vendor dependence, regulatory changes, litigation, intellectual-property claims, and impairment of licenses, goodwill, franchise rights, or other assets could materially affect results.
- TDS had no unresolved SEC staff comments, reported no changes in internal control that materially affected financial reporting, and management concluded that disclosure controls and internal control over financial reporting were effective at December 31, 2015.
Most important facts for investors to verify
- Retrieve Exhibit 13 and verify consolidated 2015 and 2014 revenue, operating income, net income, operating cash flow, capital expenditures, free cash flow, margins, cash, debt, and liquidity.
- Review the maturity schedule, covenants, borrowing capacity, and credit ratings for TDS and U.S. Cellular debt.
- Assess the financial impact and funding requirements of the 600 MHz Auction 1000 and other spectrum investments.
- Quantify customer trends, churn, ARPU, equipment subsidies or installment-plan exposure, and roaming revenue dependence at U.S. Cellular.
- Evaluate Wireline access-line declines, federal and state support exposure, intercarrier compensation reductions, and Cable broadband and video trends.
- Review the LA Partnership distribution history and the potential effect of future distribution reductions on liquidity.
- Read the incorporated financial statements and Note 13 contingencies for material litigation, commitments, guarantees, and impairment exposure.