Telephone and Data Systems, Inc. — 2010 Form 10-K Summary
Business Context and Reporting Period
TDS filed its annual report for the fiscal year ended December 31, 2010. The company is a diversified U.S. telecommunications provider with three principal operating areas: wireless services through 83%-owned United States Cellular Corporation, wireline services through wholly owned TDS Telecommunications Corporation, and printing and distribution services through majority-owned Suttle-Straus, Inc.
- TDS served approximately 7.2 million customers in 36 states at year-end, including 6.1 million wireless customers and 1.1 million wireline equivalent access lines.
- U.S. Cellular, TDS Telecom and Suttle-Straus contributed approximately 84%, 15% and less than 1% of 2010 consolidated revenue, respectively.
- TDS had approximately 12,400 employees and no foreign operations.
Financial and Operating Metrics
The filing incorporates the consolidated statements of operations, cash flows and balance sheet by reference from the 2010 Annual Report to Shareholders. The provided filing text does not provide clear consolidated values for revenue, net income, operating income, cash flow, margins, total debt, cash balances or liquidity ratios.
| Metric | 2010 information disclosed |
|---|---|
| Wireless customers | Approximately 6.1 million; consolidated operating-market penetration was 13.0% across a population of 46.5 million. |
| TDS Telecom ILEC lines | 767,200 equivalent access lines. |
| TDS Telecom CLEC lines | 335,400 equivalent access lines. |
| TDS Telecom access revenue | $272 million, approximately 44% of ILEC revenue. |
| U.S. Cellular high-cost support | Approximately $144 million received in 2010; $112 million contributed to the federal Universal Service Fund. |
| TDS Telecom Recovery Act grants | $105.1 million awarded, with $30.9 million of company funding expected for 44 projects. |
| Property, plant and equipment, net | $2,615.1 million at U.S. Cellular; $824.3 million in TDS Telecom ILEC; $85.6 million in TDS Telecom CLEC; and $33.3 million at Corporate and Suttle-Straus. |
| Wireless investment-market exposure | U.S. Cellular held investment interests representing approximately 1.519 million population equivalents, including a 5.5% interest in the Los Angeles market. |
The separately presented Los Angeles SMSA Limited Partnership, in which U.S. Cellular owns a 5.5% interest, reported 2010 revenue of $3.915 billion, operating income of $1.137 billion, net income of $1.179 billion and operating cash flow of $1.531 billion. These are partnership-level amounts and are not TDS consolidated results.
Material Changes Versus Prior Comparable Period
- TDS Telecom acquired two Hosted and Managed Services companies in 2010 for total cash consideration of $66 million, expanding into colocation, dedicated hosting and cloud-computing services.
- U.S. Cellular launched The Belief Project in the fourth quarter, including loyalty rewards, promotional device upgrades, phone replacement benefits and overage caps.
- U.S. Cellular expanded smartphone and tablet offerings and nationwide 3G data roaming. It planned initial LTE deployment for late 2011 or early 2012.
- TDS Telecom substantially completed an inter-regional core network connecting eight regional hubs; its 10-gigabit core network reached 78% of access lines.
- ILEC equivalent access lines declined to 767,200 from 775,900 in 2009, while high-speed data customers increased to 227,700 from 208,300.
- CLEC equivalent access lines declined to 335,400 from 355,900, and CLEC high-speed data customers declined to 33,100 from 36,900. ManagedIP stations increased to 23,800 from 12,000.
- U.S. Cellular entered into a multi-year agreement to develop a new billing and operational support system, including a consolidated billing and point-of-sale platform.
- TDS repurchased 610,277 Special Common Shares during the fourth quarter at an average price of $28.69. Remaining authorization under the $250 million program was $179.1 million at December 31, 2010.
- TDS issued or established a new 6.875% Senior Notes due 2059 and entered into new revolving credit agreements dated December 17, 2010. The provided text does not state the outstanding principal or available borrowing capacity.
Guidance, Outlook, Risks and Unusual Items
- Management expected continued investment in wireless data services, LTE, wireline broadband, IP-based services and network modernization.
- U.S. Cellular anticipated completing LTE vendor selection in 2011 and beginning initial deployment in late 2011 or early 2012.
- TDS Telecom planned to launch SIP trunking in 2011 and continue expanding managed services, IPTV, MPLS and hosted communications offerings.
- The filing provides no clear consolidated 2011 revenue, earnings, cash-flow or capital-expenditure guidance.
- Primary risks include intense competition from national wireless carriers, cable companies, RBOCs, VoIP providers and other regional providers; declining wireline access lines; pricing pressure; customer churn; and falling roaming or access revenues.
- Potential reform of Universal Service Fund support and intercarrier compensation could reduce revenue for both U.S. Cellular and TDS Telecom. U.S. Cellular also disclosed potential refunds if competitive-ETC support is revised downward.
- Wireless operations depend on FCC spectrum licenses, roaming agreements, network capacity and successful LTE deployment. Device availability and spectrum-band compatibility may constrain TDS relative to larger carriers.
- Regulatory proceedings involving net neutrality, broadband policy, spectrum, license renewals, access charges and universal service could materially affect operations.
- The company identified risks from acquisitions, systems implementation, supplier concentration, cybersecurity, network outages, litigation, impairment of licenses or goodwill, and limited access to capital.
- Legal proceedings are ongoing or may arise before regulatory agencies and courts. The filing states that ultimate outcomes may differ materially from accrued amounts, but does not identify a clear aggregate exposure.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2010. PricewaterhouseCoopers LLP audited the controls.
Most Important Facts for Investors to Verify
- Obtain the incorporated Annual Report sections for consolidated revenue, earnings, cash flow, margins, balance-sheet liquidity, debt maturities, capital expenditures and segment results.
- Verify the principal amount, covenants, maturities and available capacity under the 2010 TDS and U.S. Cellular revolving credit agreements and newly established senior notes.
- Assess the financial impact of declining ILEC and CLEC access lines, access-charge reform and potential reductions in Universal Service Fund support.
- Evaluate LTE deployment timing, spectrum sufficiency, device availability and the related capital requirements.
- Review the accounting and integration results for the two 2010 Hosted and Managed Services acquisitions and the new U.S. Cellular billing-system project.
- Review contingencies, litigation accruals, impairment testing for wireless licenses and goodwill, and possible refunds of competitive-ETC support.
- Consider the effect of the TDS Voting Trust and multiple classes of shares on voting control and potential change-of-control transactions.