Telephone and Data Systems, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
TDS filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed February 22, 2019. TDS is a diversified U.S. telecommunications company operating through three reportable segments: U.S. Cellular wireless, TDS Telecom Wireline, and TDS Telecom Cable. It also owns hosted and managed services and printing businesses, which were not significant to consolidated operations.
- U.S. Cellular served approximately 5.0 million wireless connections in 22 states; TDS owned 82% of its combined shares and controlled 96% of its voting power.
- TDS Telecom served approximately 1.2 million wireline and cable connections.
- TDS employed approximately 9,400 full-time and part-time employees.
- Effective January 1, 2018, hosted and managed services was treated as a non-reportable segment and was no longer reported under TDS Telecom.
Financial metrics, debt and liquidity
The supplied filing text incorporates TDS’s primary consolidated statements and MD&A by reference to Exhibit 13 but does not reproduce the consolidated revenue, operating income, net income, cash flow, margin, total debt, or cash balances. Accordingly, clear consolidated values for those metrics are not provided in the source text.
| Metric | 2018 information available in the filing text |
|---|---|
| Property, plant and equipment, net | U.S. Cellular: $2.202 billion; Wireline: $751 million; Cable: $266 million; Parent and Other: $128 million. |
| Regulatory support | U.S. Cellular received $92 million in high-cost support; TDS Telecom received $86 million under federal regulatory support programs. |
| Wireline Connect America Fund support | Approximately $75 million annually for ten years, plus an additional $3 million annually retroactive to January 2017, subject to build-out obligations and regulatory requirements. |
| Dividends | $0.160 per share per quarter in 2018, compared with $0.155 in 2017 and $0.148 in 2016. The quarterly dividend increased to $0.165 in the first quarter of 2019. |
| Share repurchases | Up to $199 million remained available under the $250 million authorization at December 31, 2018. No TDS Common Shares were repurchased during the fourth quarter. |
| Revolving facilities | Neither TDS nor U.S. Cellular borrowed under their revolving facilities during the fourth quarter or through the filing date; no borrowings were outstanding at December 31, 2018 or the filing date. |
| U.S. Cellular receivables securitization facility | No borrowings were outstanding at December 31, 2018 or the filing date. |
| Credit profile | Management disclosed that TDS’s credit rating was sub-investment grade and that negative free cash flow had occurred at times in the past. |
The filing identifies TDS as capital-intensive and dependent on operating cash flow, financing facilities, asset sales, investment distributions, and access to debt markets. It states that TDS’s current forecast did not indicate returns on capital exceeding its cost of capital in the foreseeable future for TDS, U.S. Cellular, Wireline, Cable, and hosted and managed services.
Material changes versus the prior comparable period
- TDS adopted the new revenue recognition standard, ASC 606, effective January 1, 2018. The filing states that adoption generally accelerated equipment revenue recognition, deferred and amortized certain customer acquisition costs, and changed the timing of service revenue recognition.
- TDS implemented controls during the fourth quarter for the new lease accounting standard, effective January 1, 2019.
- U.S. Cellular introduced its Unlimited with Payback plan and continued migrating postpaid handset sales primarily to equipment installment plans.
- U.S. Cellular began preparing for 5G deployment, including a fourth-quarter 2018 trial using 5G standards and equipment on its LTE core network. Additional VoLTE deployments were planned for 2019.
- TDS Telecom continued fiber-to-the-home expansion, including out-of-territory builds. At year-end, approximately 49% of Wireline service addresses could receive broadband speeds of at least 25 Mbps.
- Cable continued DOCSIS 3.1 deployment and offered speeds of up to 600 Mbps in almost all markets, with up to 1 Gbps available in selected markets.
- TDS’s quarterly dividend increased from $0.160 per share in 2018 to $0.165 per share in the first quarter of 2019.
Guidance, outlook, management commentary, risks and unusual items
No formal consolidated revenue or earnings guidance is included in the supplied text. Management’s operating priorities were to improve customer experience, invest in wireless network capacity and 5G, acquire or obtain additional spectrum, expand fiber and broadband coverage, enhance cable networks, and evaluate acquisitions, divestitures, exchanges, and other portfolio actions.
- Competition: U.S. Cellular competes with larger national carriers that have greater financial resources, broader networks, more spectrum, and significant promotional capabilities. Wireline and Cable face competition from cable operators, wireless providers, fiber overbuilders, satellite providers, VoIP providers, RBOCs, and online video services.
- 5G and technology transition: 5G deployment and related spectrum and network investments may require substantial capital and may not generate expected incremental revenue. Legacy technologies may become less competitive or obsolete.
- Liquidity and leverage: TDS disclosed sub-investment-grade credit ratings, significant indebtedness, covenant requirements, possible negative free cash flow, and reliance on financing access. Adverse conditions could constrain capital expenditures, acquisitions, spectrum purchases, dividends, or share repurchases.
- Regulatory support: Universal service and other regulatory support payments are subject to legislative, regulatory, and build-out risks. Reductions or failure to satisfy obligations could reduce revenue and cash flow.
- Spectrum and roaming: Wireless performance depends on obtaining adequate spectrum and maintaining economically viable roaming agreements. Changes in industry network footprints, roaming rates, or FCC rules could reduce roaming revenue or increase costs.
- Network construction: Fiber, network modernization, 5G, DOCSIS 3.1, and other construction programs are capital-intensive and subject to permitting, execution, vendor, technology, and customer-adoption risks.
- Cybersecurity and privacy: TDS experiences cyber-attacks of varying degrees on a regular basis, including denial-of-service attacks. The filing states that no material security breach had been discovered as of the filing, but future incidents could result in service disruption, litigation, regulatory penalties, and remediation costs.
- Impairment: TDS has significant wireless licenses, goodwill, franchise rights, and other long-lived assets that could require material impairment charges if operating performance, market conditions, or enterprise values deteriorate.
- Control structure: The TDS Voting Trust and dual-class share structure give the trustees substantial voting control and may make a change in control more difficult.
Most important facts for investors to verify
- Verify consolidated 2018 and 2017 revenue, operating income, net income, EBITDA or comparable margins, and segment results in Exhibit 13, which is not reproduced in the supplied text.
- Verify consolidated operating cash flow, capital expenditures, free cash flow, cash balances, total debt, maturities, and leverage ratios.
- Assess the effect of ASC 606 on reported revenue mix, customer acquisition costs, contract assets, and comparability with 2017.
- Review 2019 capital spending plans and the funding required for 5G, spectrum auctions, fiber expansion, and Connect America Fund obligations.
- Evaluate exposure to competitive pricing, wireless churn, roaming economics, video subscriber losses, programming costs, and broadband substitution.
- Review covenant headroom and the implications of TDS’s sub-investment-grade credit rating for refinancing and liquidity.
- Examine regulatory proceedings, pending litigation, cybersecurity disclosures, impairment testing, and the potential variability of universal service support.