Telephone and Data Systems, Inc. — 2017 Form 10-K Summary
Business context and reporting period
TDS filed its annual report for the fiscal year ended December 31, 2017. TDS is a diversified U.S. telecommunications company operating primarily through United States Cellular Corporation and TDS Telecommunications LLC. At year-end, the company had approximately 5.1 million wireless connections and 1.2 million wireline and cable connections. TDS owned 83% of U.S. Cellular’s combined outstanding shares and controlled 96% of its combined voting power.
Reportable operations through December 31, 2017 included U.S. Cellular, TDS Telecom Wireline, Cable, and Hosted and Managed Services (HMS). Effective January 1, 2018, HMS became a non-reportable segment and will no longer be reported under TDS Telecom.
Financial metrics and capital structure
- The filing text provided does not include TDS consolidated revenue, net income, operating cash flow, free cash flow, margins, total debt, cash balances, or consolidated liquidity amounts; these data are incorporated by reference from the 2017 Annual Report to Shareholders.
- TDS had approximately 9,900 employees at December 31, 2017.
- Net property, plant and equipment totaled $2.320 billion for U.S. Cellular, $710 million for Wireline, $260 million for Cable, $111 million for HMS, and $23 million for Corporate and Suttle-Straus.
- TDS had no cash borrowings outstanding under its revolving credit facilities at December 31, 2017 or through the filing date. U.S. Cellular also had no borrowings outstanding under its receivables securitization facility at those dates.
- TDS’s credit rating was described as sub-investment grade. Management noted that the company may have negative free cash flow in future periods if operating performance does not improve or capital expenditures are not reduced.
- TDS paid quarterly dividends of $0.155 per share in 2017, compared with $0.148 in 2016 and $0.141 in 2015. The dividend increased to $0.16 per share in the first quarter of 2018. The company stated that it had no current plans to change its dividend policy.
- A $250 million common-share repurchase authorization remained in place, with $199 million available at December 31, 2017. No TDS share purchases occurred during the fourth quarter.
Material changes versus the prior comparable period
- U.S. Cellular won 188 FCC 600 MHz spectrum licenses in 2017 for an aggregate purchase price of $329 million.
- During 2017, TDS recognized goodwill impairment related to the HMS and U.S. Cellular reporting segments, reducing the goodwill balances for those segments to zero.
- U.S. Cellular introduced unlimited postpaid plans and continued transitioning to equipment installment plans for consumer handset sales.
- U.S. Cellular commercially deployed VoLTE in one key market and expected additional market launches beginning in early 2018.
- TDS Telecom began receiving more than $75 million annually for ten years under the Connect America Fund/A-CAM program, subject to broadband build-out obligations covering approximately 160,000 locations. The filing states that TDS Telecom received $82 million under federal regulatory support programs in 2017.
- TDS implemented controls for adoption of the new revenue recognition standard effective January 1, 2018. The filing text states that the standard was expected to affect revenue allocation, contract-cost deferrals, and the timing of reported revenue and expenses.
Guidance, outlook, risks, contingencies, and unusual items
- TDS’s current forecast indicated that TDS and each of its major operating businesses would not achieve returns on capital exceeding their respective costs of capital in the foreseeable future.
- Management expects continued pressure from aggressive wireless pricing, unlimited plans, device promotions, cable and fiber competition, wireless substitution of wireline services, declining traditional access lines, programming costs, and competition from larger national carriers.
- Liquidity risks include sub-investment-grade credit ratings, substantial indebtedness, capital-intensive network and spectrum requirements, potential reductions in regulatory support or affiliate distributions, limited future asset-sale proceeds, and possible restrictions on dividends or share repurchases.
- Debt facilities contain affirmative, negative, and financial covenants. A covenant breach could result in defaults, cross-defaults, acceleration of debt, termination of facilities, higher financing costs, or additional restrictions.
- Other significant risks include spectrum availability and cost, roaming revenue and expense changes, technology transitions including VoLTE and future 5G deployment, cybersecurity incidents, regulatory changes, litigation, impairment of licenses or other assets, supplier and device commitments, and acquisition or integration risks.
- The company stated that it experiences cyberattacks of varying degrees regularly, although it had not discovered a material security breach as of the filing.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2017. PricewaterhouseCoopers LLP audited the effectiveness of internal control over financial reporting.
Important facts for investors to verify
- Verify TDS consolidated revenue, operating income, net income, cash flow, capital expenditures, free cash flow, cash, debt, and liquidity using the incorporated 2017 Annual Report and financial statement notes.
- Assess the magnitude and recurring nature of the 2017 goodwill impairments and their implications for HMS and U.S. Cellular returns.
- Review covenant headroom, debt maturities, interest expense, credit ratings, and the availability and terms of revolving credit facilities.
- Evaluate whether Connect America Fund support and related build-out obligations generate adequate returns after required capital expenditures.
- Monitor wireless customer trends, churn, pricing, unlimited-plan economics, roaming costs, spectrum capacity, and VoLTE/5G investment requirements.
- Review the accounting impact of the January 1, 2018 revenue recognition adoption, including changes to equipment-versus-service revenue allocation and deferred sales commissions.
- Consider the governance and control implications of the TDS Voting Trust, dual-class share structure, and controlled-company status.