Business Context and Reporting Period
Telephone and Data Systems, Inc. (TDS) filed this Form 10-K for the fiscal year ended December 31, 2011. TDS is a diversified U.S. telecommunications company operating primarily through 84%-owned United States Cellular Corporation (wireless) and wholly owned TDS Telecommunications Corporation (wireline). U.S. Cellular represented approximately 84% of consolidated 2011 revenue, TDS Telecom approximately 15%, and Airadigm and Suttle-Straus approximately 1% combined.
- U.S. Cellular served approximately 5.9 million customers in 26 states and operated markets covering approximately 46.9 million people.
- TDS Telecom served approximately 1.1 million equivalent access lines through ILEC and CLEC operations.
- TDS had approximately 12,300 employees at year-end and no foreign operations.
Financial Metrics and Operating Indicators
The supplied filing text incorporates TDS’s consolidated statements of operations, cash flows, balance sheet and selected financial data by reference to Exhibit 13, but does not reproduce the consolidated financial amounts. Accordingly, consolidated revenue, net income, operating income, cash flow, margins, debt, cash and liquidity balances are not clearly provided in the supplied text.
| Metric | 2011 disclosure |
|---|---|
| TDS Telecom operating revenue | $815.4 million, comprising residential revenue of $269.7 million, commercial revenue of $265.6 million and wholesale revenue of $280.1 million |
| U.S. Cellular customers | 5.9 million |
| TDS Telecom equivalent access lines | 1.0719 million |
| U.S. Cellular federal USF contribution | $101 million |
| U.S. Cellular high-cost support received | Approximately $160.5 million |
| TDS Telecom access revenue | Approximately $266 million, including approximately $90 million from USF programs |
| Property, plant and equipment, net | $2.7903 billion at U.S. Cellular; $850.6 million for TDS Telecom ILEC; $86.2 million for TDS Telecom CLEC; and $57.5 million for Corporate, Airadigm and Suttle-Straus |
Separate financial statements for the 5.5%-owned Los Angeles SMSA Limited Partnership reported 2011 revenue of $4.375 billion, operating income of $992.8 million, net income of $1.000 billion and operating cash flow of $1.376 billion. These amounts relate to the partnership, not TDS consolidated results. The partnership distributed $1.2 billion to partners in 2011 and reported no cash balance because cash was managed through an affiliate.
Material Changes Versus Prior Comparable Period
- TDS Telecom acquired one Hosted and Managed Services company in 2011; combined consideration for acquisitions completed in 2010 and 2011 was $161 million in cash.
- U.S. Cellular exchanged two PCS spectrum licenses for 18 700 MHz licenses on September 30, 2011, without cash, customers, network assets or liabilities changing hands.
- U.S. Cellular began initial 4G LTE deployment in selected markets in late 2011 and planned to cover more than 50% of customers by the end of 2012.
- TDS Telecom’s ILEC equivalent access lines declined to 754,400 in 2011 from 767,200 in 2010, while CLEC equivalent access lines declined to 317,500 from 335,400.
- ILEC high-speed data customers increased to 238,400 from 227,700, and managedIP stations increased to 6,900 from 3,600. CLEC managedIP stations increased to 36,200 from 23,800.
- On January 24, 2012, TDS completed a share consolidation: Special Common Shares were reclassified as Common Shares, and Common Shares and Series A Common Shares were reclassified at a 1.087-for-one ratio. Special Common Shares ceased trading on January 25, 2012.
Guidance, Outlook, Risks and Unusual Items
- Management planned continued U.S. Cellular investment in 4G LTE and advanced data services, subject to device availability, spectrum capacity and execution risk.
- TDS Telecom planned to expand terrestrial video service to additional markets and expand IPTV to 26 additional markets during 2012 and 2013.
- FCC reforms are expected to reduce U.S. Cellular high-cost support beginning with a 20% reduction in July 2012 and further annual reductions, although the timing and offsetting Mobility Fund or CAF support were uncertain.
- Intercarrier compensation reforms are expected to reduce related operating expenses but also reduce related revenues over time. TDS stated that the net financial effect could not be predicted.
- TDS received an FCC Office of Inspector General subpoena on November 1, 2011 seeking information about Federal Universal Service Fund support. TDS provided the requested information and could not predict the outcome.
- Key risks include intense wireless and wireline competition, declining wireline access lines, reliance on roaming and spectrum, technology transition and LTE deployment, regulatory changes, impairment of licenses and goodwill, acquisitions, litigation, cybersecurity and network disruptions, supplier concentration, and access to capital.
- The filing states that disclosure controls and internal control over financial reporting were effective as of December 31, 2011. No material changes in internal control were reported during the fourth quarter.
Most Important Facts for Investors to Verify
- Obtain Exhibit 13 and verify consolidated 2011 and 2010 revenue, operating income, net income, cash flow, capital expenditures, margins, debt, cash and liquidity.
- Assess the financial effect of the FCC USF and intercarrier compensation reforms, including the expected phase-down in wireless support.
- Evaluate U.S. Cellular customer trends, churn, data adoption, handset availability and the economics and coverage timetable of the LTE rollout.
- Review TDS Telecom access-line losses, wholesale revenue exposure, broadband growth and the profitability of CLEC and Hosted and Managed Services operations.
- Review debt maturities, revolver availability, covenant requirements and consolidated parent-versus-subsidiary liquidity, which are not quantified in the supplied text.
- Monitor the FCC subpoena, pending regulatory appeals, litigation contingencies and potential impairment of wireless licenses, goodwill and other long-lived assets.
- Consider the share consolidation, Series A voting rights and TDS Voting Trust, which may limit change-of-control opportunities.