Telephone and Data Systems, Inc. — 2013 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2013, filed February 28, 2014. TDS is a diversified U.S. telecommunications company operating primarily through 84%-owned United States Cellular Corporation and wholly owned TDS Telecommunications Corporation.
- U.S. Cellular: approximately 4.8 million wireless customers in 23 states; 4G LTE coverage reached approximately 87% of postpaid customers.
- TDS Telecom: approximately 1.1 million wireline and cable connections, including Wireline, Cable and Hosted and Managed Services (HMS).
- Other operations: Airadigm and Suttle-Straus were not significant to 2013 operations.
- Reportable segments were revised to U.S. Cellular, Wireline, Cable, HMS and a Non-Reportable Segment; comparative periods were re-presented.
Key financial and operating metrics
| Metric | 2013 disclosure |
|---|---|
| Wireline operating revenue | $726.6 million |
| Wireline revenue mix | Residential $293.2 million; Commercial $232.9 million; Wholesale $200.4 million |
| Wireline connections | 966,000, including 592,900 residential and 373,100 commercial |
| Cable connections | 147,400 at December 31, 2013 |
| U.S. Cellular operating customers | 4.774 million in consolidated operating markets |
| U.S. Cellular operating-market penetration | 15.0%; total consolidated-market penetration 8.2% |
| U.S. Cellular federal USF contribution | $90 million |
| U.S. Cellular high-cost support received | Approximately $106.8 million |
| U.S. Cellular Mobility Fund Phase I support | Up to $40.1 million; $13.4 million received by year-end |
| Property, plant and equipment, net | U.S. Cellular $2.857 billion; Wireline $821.3 million; Cable $79.1 million; HMS $84.2 million; Corporate and other $37.0 million |
| Employees | Approximately 10,500 full- and part-time employees |
The filing incorporates TDS’s 2013 Annual Report to Shareholders for the consolidated statements of operations, cash flows, balance sheet, debt, liquidity, margins and selected financial data. The supplied filing text does not provide clear consolidated values for revenue, net income, operating cash flow, capital expenditures, debt balances, cash balances or consolidated margins.
Material changes versus the prior comparable period
- U.S. Cellular completed the May 16, 2013 divestiture of customers and PCS spectrum in the Chicago, central Illinois, St. Louis and certain Indiana/Michigan/Ohio markets to Sprint for $480 million in cash. The divested markets represented approximately 560,000 customers at December 31, 2012.
- U.S. Cellular deconsolidated the NY1 and NY2 partnerships in April 2013 and began accounting for them as equity-method investments.
- TDS Telecom acquired substantially all of Baja Broadband’s assets on August 1, 2013, adding the Cable segment and 147,400 connections at year-end.
- TDS changed its operating-segment structure and re-presented prior periods to conform to the new presentation.
- U.S. Cellular migrated most customers to a new billing and operational support system in the third quarter. The conversion caused billing delays, intermittent outages and slower system response times.
- TDS authorized a $250 million common-share repurchase program in August 2013. It repurchased 134,303 shares in the fourth quarter for approximately $3.9 million, leaving $240.3 million authorized at year-end.
Guidance, outlook, commentary and risks
- Management planned further 4G LTE expansion and additional advanced wireless services in 2014, with anticipated readiness for compatible inbound and outbound LTE roaming in the second half of 2014.
- Wireline continued investing in broadband, fiber, IPTV, managedIP and IP-network transformation. Its broadband service reached 96% of ILEC physical access lines, while 61% of households passed had access to speeds of at least 10 Mbps.
- HMS operations were consolidated under the OneNeck IT Solutions brand effective January 1, 2014.
- Wireline expects continued pressure from declining access lines, wireless and cable substitution, VoIP competition, and reductions in intercarrier compensation and universal-service support.
- Federal USF support is being phased down, while the replacement CAF and Mobility Fund mechanisms remain subject to regulatory development. TDS could not determine whether replacement support would offset reductions.
- Principal risks include intense competition, spectrum limitations, technology obsolescence, dependence on roaming and device suppliers, execution and integration risk from acquisitions and divestitures, regulatory changes, cyber and system disruptions, litigation, impairment of licenses or goodwill, and access to capital.
- The filing states that disclosure controls and internal control over financial reporting were effective as of December 31, 2013. No unresolved staff comments, accountant disagreements or fourth-quarter material control changes were reported.
Most important facts for investors to verify
- Review the incorporated Annual Report for consolidated revenue, profitability, cash flow, capital expenditures, debt, liquidity, segment results and impairment charges.
- Separate the effects of the Sprint divestiture and NY1/NY2 deconsolidation from underlying U.S. Cellular trends.
- Assess the financial contribution, purchase accounting and integration progress of the Baja Cable acquisition.
- Monitor customer trends, churn, ARPU, device subsidies and the financial effects of the new billing-system conversion.
- Evaluate exposure to declining USF and intercarrier-compensation revenue and the availability of replacement CAF or Mobility Fund support.
- Review debt covenants, revolving-credit availability, maturities and liquidity requirements, which are not clearly quantified in the supplied text.
- Review commitments under the Apple device purchase agreement and other supplier, spectrum, tower and network obligations.