Business Context and Reporting Period
Telephone and Data Systems, Inc. (TDS) filed this Form 10-K for the fiscal year ended December 31, 2012. TDS is a diversified U.S. telecommunications company consisting primarily of 84%-owned United States Cellular Corporation (U.S. Cellular) and wholly owned TDS Telecommunications Corporation (TDS Telecom), with smaller Airadigm and Suttle-Straus operations.
- U.S. Cellular represented approximately 83% of consolidated 2012 revenue and served approximately 5.8 million customers.
- TDS Telecom represented approximately 16% of consolidated revenue and served approximately 1.0 million customer connections, including 979,900 ILEC and CLEC connections.
- TDS Telecom provides wireline voice, broadband, video, network access, competitive local exchange, and hosted and managed IT services.
Financial Metrics and Liquidity
The supplied filing text incorporates the consolidated statements of operations, balance sheet, cash flows, and selected financial data by reference to Exhibit 13, but does not provide clear consolidated TDS values for revenue, net income, operating cash flow, capital expenditures, margins, debt balances, or cash balances.
| Metric | 2012 information disclosed |
|---|---|
| TDS Telecom ILEC and CLEC operating revenue | $751.8 million, including $578.4 million from ILEC and $173.4 million from CLEC operations |
| TDS Telecom wholesale revenue | $219.0 million, including approximately $87.0 million from universal service fund programs |
| U.S. Cellular federal USF contribution | $112.0 million |
| U.S. Cellular high-cost support received | Approximately $140.8 million |
| U.S. Cellular Mobility Fund Phase I award | Up to $40.1 million, subject to build-out and other regulatory conditions |
| Property, plant and equipment, net | $3,022.6 million at U.S. Cellular; $767.4 million at TDS Telecom ILEC; $85.1 million at TDS Telecom CLEC; $81.7 million at TDS Telecom HMS; and $40.5 million for Corporate, Airadigm and Suttle-Straus |
| Consolidated debt and liquidity | The filing lists senior notes and revolving credit facilities, but the supplied text does not provide clear consolidated debt balances, available revolver capacity, or cash balances |
Management stated that U.S. Cellular expected existing cash and investment balances, operating and investing cash flows, and revolving-credit availability to provide substantial liquidity for normal financing needs. TDS Telecom’s capital-intensive broadband and network projects require continued access to internally generated funds, debt financing, grants, and other capital sources.
Material Changes Versus the Prior Comparable Period
- TDS changed its reportable segment presentation in the first quarter of 2012 to separately report U.S. Cellular wireless, ILEC, CLEC, hosted and managed services, and the non-reportable segment. Prior periods were re-presented.
- U.S. Cellular launched 4G LTE services in 2012; LTE coverage reached approximately 61% of postpaid customers at year-end, with further expansion planned for 2013.
- U.S. Cellular agreed to transfer certain Chicago, central Illinois, St. Louis, and Indiana/Michigan/Ohio market assets to Sprint for $480 million in cash, subject to approvals and other conditions. Closing was expected in mid-2013.
- TDS acquired Vital Support Systems in June 2012, expanding its hosted and managed IT solutions business.
- The $250 million TDS share repurchase authorization expired on November 19, 2012. TDS repurchased 867,841 shares during November at an average price of $23.08, exhausting the remaining authorization.
- U.S. Cellular’s current wireless USF support was reduced by approximately $16 million in 2012 and is scheduled to decline further under the FCC reform framework, subject to the timing of Phase II Mobility Fund implementation.
Guidance, Outlook, Risks, and Unusual Items
- TDS Telecom entered into an agreement on February 25, 2013 to acquire substantially all of Baja Broadband’s assets for $267.5 million in cash, subject to working-capital adjustments, regulatory approvals, and other conditions. Closing was expected in the third quarter of 2013.
- Management planned further U.S. Cellular LTE expansion and continued development of advanced data services, while pursuing targeted acquisitions, exchanges, and spectrum transactions.
- TDS Telecom planned continued investment in broadband, IPTV, managedIP, cloud, and hosted IT services. Under federal broadband grants, TDS Telecom expects to complete 44 projects before June 2015; total project capital expenditures were $65.0 million through December 31, 2012.
- Major risks include intense wireless, cable, VoIP, wireline, and IT-services competition; customer and access-line losses; declining intercarrier compensation and USF support; spectrum availability; roaming economics and LTE interoperability; technology deployment and billing-system execution; acquisition integration; cybersecurity and network outages; regulatory proceedings; litigation; impairment of licenses or goodwill; and access to capital.
- The FCC’s USF and intercarrier compensation reforms may reduce TDS Telecom wholesale revenues and related expenses over five to ten years. The filing states that the future level of replacement CAF and Mobility Fund support remains uncertain.
- TDS reported effective disclosure controls and effective internal control over financial reporting as of December 31, 2012, with no material fourth-quarter changes to internal control.
Most Important Facts for Investors to Verify
- Verify the consolidated 2012 and 2011 income statements, cash flows, balance sheets, earnings per share, margins, and segment operating results in Exhibit 13, which is not reproduced in the supplied text.
- Verify consolidated and subsidiary-level debt, cash, investment balances, revolving-credit availability, maturities, covenants, and interest expense.
- Verify the accounting and cash proceeds from the planned Sprint divestiture and the subsequent Baja Broadband acquisition, including closing status and purchase-price adjustments.
- Assess the impact of declining USF support and intercarrier compensation on TDS Telecom and U.S. Cellular cash flows.
- Evaluate wireless customer additions, churn, ARPU, roaming revenue, LTE coverage, handset subsidies, and network capital requirements.
- Review contingencies, pending regulatory and legal proceedings, impairment testing, and the terms of related-party allocations in the Los Angeles SMSA Limited Partnership financial statements.