Telephone and Data Systems, Inc. — 2011 Q2 Form 10-Q Summary
Reporting period: Quarterly and six-month periods ended June 30, 2011. Financial statements are unaudited and consolidate TDS, 84%-owned U.S. Cellular, TDS Telecom and other majority-owned entities. TDS provided wireless service to approximately 6.0 million customers and wireline service to approximately 1.1 million equivalent access lines at quarter-end.
Financial Performance and Position
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Operating revenues | $1.280 billion | $1.232 billion | $2.538 billion | $2.455 billion |
| Operating income | $125.6 million | $86.4 million | $212.8 million | $188.4 million |
| Net income | $108.7 million | $52.4 million | $160.9 million | $114.7 million |
| Net income attributable to TDS shareholders | $91.1 million | $40.3 million | $132.7 million | $88.7 million |
| Diluted EPS | $0.87 | $0.38 | $1.27 | $0.83 |
| Cash flow from operating activities | Not separately reported | Not separately reported | $537.7 million | $502.3 million |
| Free cash flow | Not separately reported | Not separately reported | $199.0 million | $184.4 million |
Six-month operating margin was approximately 8.4%, compared with 7.7% in the prior-year period; six-month net margin was approximately 6.3%, compared with 4.7%. Six-month adjusted OIBDA increased to $604.5 million from $574.7 million.
- Wireless: U.S. Cellular revenue increased 4% to $2.133 billion and operating income increased 13% to $159.4 million. Service revenue increased 3% to $1.987 billion, led by inbound roaming and other revenue. However, retail customers declined by 89,000, and total customers declined by 109,000 during the six-month period.
- Wireline: TDS Telecom revenue increased 1% to $397.8 million and operating income increased 15% to $58.1 million. Equivalent access lines declined 3% to 1.093 million, while growth in hosted and managed services, data customers and cost reductions supported profitability.
- Liquidity: June 30 cash and cash equivalents were $584.4 million; short-term investments were $270.9 million and long-term investments were $90.9 million, for total cash and investments of approximately $946.2 million. Revolving credit availability was approximately $699.6 million, with no borrowings outstanding.
- Debt: Long-term debt was $1.530 billion, plus $1.9 million of current maturities. TDS and U.S. Cellular issued $300 million of 7% notes and $342 million of 6.95% notes, respectively, and used the proceeds primarily to redeem higher-rate notes. The weighted-average interest rate on long-term debt declined to 6.8% from 7.1% at December 31, 2010.
- Capital expenditures: Six-month capital expenditures were $338.7 million, including $258.0 million for U.S. Cellular and $71.6 million for TDS Telecom.
Material Changes Versus the Prior Comparable Period
- Revenue increased 3% for the six months and 4% for the second quarter, primarily from wireless growth.
- Operating income increased 13% for the six months and 45% for the second quarter, with the largest contribution from U.S. Cellular.
- Net income attributable to TDS shareholders increased 50% for the six months and more than doubled in the second quarter.
- Results benefited from substantially lower income tax expense. The effective tax rate was 19.8% for the six months and 9.1% for the quarter, versus 37.7% and 37.5%, respectively, in 2010. State tax law changes and statute-of-limitations expirations reduced tax expense by $30.8 million for the six months and $29.1 million for the quarter.
- Interest expense increased $15.3 million for the six months, primarily because $15.4 million of previously capitalized debt issuance costs were written off upon redemption of senior notes.
- A $13.4 million gain was recorded when U.S. Cellular acquired the remaining interest in a wireless business previously accounted for under the equity method. The acquired business was classified as held for sale, with $53.9 million of assets and $0.9 million of liabilities so classified.
- U.S. Cellular’s smartphone penetration increased to 23% from 10.1%, but its retail customer base declined and competitive pressures continued.
Guidance, Outlook, Risks and Contingencies
- U.S. Cellular 2011 estimates: Service revenue of $4.0–$4.1 billion; operating income of $210–$285 million; adjusted OIBDA of $800–$875 million; and capital expenditures of $750–$800 million. Most guidance was unchanged, while the operating income and adjusted OIBDA ranges were raised at the low end.
- TDS Telecom 2011 estimates: ILEC and CLEC revenue of $800–$830 million; operating income of $85–$115 million; adjusted OIBDA of $270–$300 million; and capital expenditures of $175–$200 million. Revenue, operating income and adjusted OIBDA ranges were raised from prior estimates.
- Key outlook factors include wireless competition, customer losses, pricing pressure, prepaid mix, smartphone and data growth, network investment, LTE deployment, roaming revenue, universal service funding and regulatory changes.
- U.S. Cellular’s B/OSS implementation is expected to continue through 2013, with estimated payments to Amdocs of approximately $122 million; $13.8 million had been paid by June 30, 2011.
- TDS may provide additional capital contributions or advances to consolidated variable interest entities supporting wireless spectrum licenses. At June 30, 2011, TDS contributions and advances to these entities totaled $568.9 million.
- Legal proceedings and unasserted claims accrued were $4.3 million. Management stated that potential additional losses were not expected to be material, although ultimate outcomes could differ from recorded accruals.
- On July 1, 2011, TDS acquired OneNeck IT Services for $95 million in cash, subject to working-capital adjustments. The acquisition was not included in the June 30 financial statements.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether wireless customer losses stabilize and whether smartphone, data and roaming revenue growth offsets pricing and equipment-subsidy pressures.
- Progress, total cost and expected benefits of the LTE deployment and Amdocs B/OSS implementation.
- The sustainability of the unusually low 2011 effective tax rate and the timing of future federal tax payments after bonus depreciation benefits decline.
- Actual capital expenditures versus the combined guidance ranges and the effect on free cash flow and leverage.
- Execution of the planned sale of the acquired wireless business classified as held for sale.
- Potential additional funding requirements for consolidated variable interest entities and the impact of regulatory or universal service funding changes.
- The financial and operational impact of the OneNeck acquisition and the proposed August 2011 charter amendments.