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TABLE OF CONTENTS
2015 Annual Report www.tdsinc.com
HONORING OUR FOUNDER TDS celebrates the 100th birthday of our founder and chairman emeritus, LeRoy (Roy) T. Carlson. His vision, leadership, values and business principles set the foundation for the company that TDS is today. Roy’s belief in delivering exceptional customer service and the latest technology, and his unwavering commitment to the nation’s rural and suburban communities, are still the focus of our businesses; they provide the basis on which TDS will continue to grow our businesses to serve the needs of our customers, associates and shareholders. “Roy always has faith that ways will be found to accomplish the objectives. He places great confidence in people, and as a result, they accomplish things that they thought might not be possible.” – LeRoy T. (Ted) Carlson, Jr., President and CEO – TDS “A deep-rooted conviction of mine has always been that the customer is king.” – LeRoy Carlson, 1989, TDS: The First Twenty Years “ The people who live in these rural and suburban areas should have the same and equal access to the full range of technological advances available today as those enjoyed by people who live in urban areas.” – LeRoy Carlson, 1979, TDS Annual Report “ The concept I had in mind was simple: bring together a group of small, primarily rural, telephone companies whose skills, strengths and assets could be shared by all.” – LeRoy Carlson, 1989, TDS: The First Twenty Years “ The key to harnessing the business power and potential of communications technology is to respect and understand the people who use, develop and support it.” – LeRoy Carlson, 2002 KPMG Illinois High Tech Awards ceremony
Dear SHareHoLDerS TDS’ mission is to provide outstanding communication services to our customers and meet the needs of our shareholders, our people, and our communities. In pursuing this mission, we seek to continuously grow our businesses, create opportunities for our associates and employees, and steadily build value over the long term for our shareholders. Building on 2015 successes At TDS we strive to differentiate ourselves from the national telecommunication giants by providing the best services and products together with exceptional customer service. We focus our efforts on America’s suburban and rural markets, including some of the most remote areas of the country. We have strengthened and expanded our high-quality networks and improved our data and communications service offerings. Combined with our customer-focused culture, our networks and service offerings are the foundation upon which we are growing and building value for our shareholders. TDS businesses achieved significant milestones in 2015: • U.S. Cellular completed 4G LTE deployment. • U.S. Cellular began Voice over LTE (VoLTE) trials. VoLTE will bring customer benets, including enabling both voice and data to be delivered simultaneously to devices. • TDS Telecom continued to deploy ber technology in key markets, reaching 21% of its ILEC service addresses. • OneNeck IT Solutions opened one and expanded another data center. In a very competitive industry dominated by large players, we take a personal approach to our customers and to the communities in which we operate. Our prominent local presence in these markets is a competitive advantage. From sponsoring high school sports teams to staffing call centers in our markets, we have built local presence that allows us to know and better serve our customers and their changing needs. A further strength, that is an advantage, is that we have expanded our business into a diversified portfolio of data and communications companies. We are growing and prospering by sharing expertise and capabilities from wireless, wireline, cable, and hosted and managed services to develop services for the customers in our markets. telephone and data systems 1
U.S. Cellular exists to provide exceptional wireless communication services which enhance consumers’ lives, increase the competitiveness of local businesses, and improve the efficiency of government operations in the mid-sized and rural markets we serve. As a mid-sized operator, we seek to use our relatively smaller size to our competitive advantage. This starts with a network that provides high-quality services in the “Middle of Anywhere” and is complemented by our associates, who take a more personal approach to knowing and serving our customers. This local focus is a unique differentiator that allows our associates to deliver outstanding customer service by treating customers like neighbors, not numbers. We achieved two important goals in 2015: we reignited customer growth and improved profitability, laying the foundation for continued success. We plan to grow by focusing on what our customers desire: competitive pricing and promotions that showcase our high-quality 4G LTE network. Supporting this effort, we are redesigning our stores into retail destinations that can enhance the customer experience and further boost sales. We successfully repositioned our company to grow our customer base again, even in the face of a very competitive wireless market. We saw a steady and meaningful improvement in our churn levels as we delivered high levels of customer satisfaction. We also continued to see former customers return to U.S. Cellular, representing approximately 20% of new accounts. We continue to manage our expense levels, which contributed to stronger margins and growth in operating cash ow in 2015. Growing our customer base and revenue also is crucial to improving our margins and profitability. We see opportunity for revenue growth with further smartphone penetration allowing us to monetize data usage. In addition, sales of our Shared Connect data plans create more devices per account. These plans, and the increasing use of connected devices like tablets by our customers, drive them to choose larger data buckets resulting in revenue growth. Operating on a network quality foundation In 2015, we continued our investment in our network to provide more capacity to meet growing demands for data services and to provide better in-home coverage. With 4G LTE, we can provide our customers, even in the more remote rural areas, with all the benefits of our data services, also creating new growth opportunities for us. We secured 4G LTE roaming agreements with national carriers to further enhance our customers’ data experience. Building on the strength of our newly completed 4G LTE network, we are further refining our network strategy and are planning to begin the multi-year rollout of VoLTE. We are designing VoLTE to bring even more quality products and services to our customers over the next few years, and increase our exibility to pursue attractive new revenue opportunities. Reigniting customer growth Customer growth has been and will continue to be our number one priority. We are proud of our 2015 accomplishments and excited about our prospects, even while acknowledging that adding new customers is increasingly difficult in the wireless industry. The rapidly growing small and medium business (SMB) market and regional government agencies are a natural t for U.S. Cellular given our local focus. We have reorganized our sales channel and expanded our business pricing portfolio to include shared data and machine-to-machine offerings. As the needs of our SMB customers grow, we continue to expand our Business Solutions Product Catalog with products like international roaming, eet management applications, wireless priority service, and more. 2 telephone and data systems
TDS TeLeCoM TDS Telecom seeks to own and offer our customers “the best data pipe” into their homes and businesses through a portfolio of broadband offerings. The TDS Telecom businesses—wireline, cable, and hosted and managed services—pursue communications and data market opportunities to provide compelling services, solutions, and products to both residential and commercial consumers. Wireline In our wireline business, our targeted investments in fiber technology have strengthened our triple play bundle offerings and resulted in higher average revenue per connection and low churn rates. Take rates for our IPTV service, TDS TV, have exceeded expectations in 2015, with 98% of all TDS TV customers subscribing to triple play bundles. We have now launched TDS TV in 27 markets, enabling 167,000 service addresses, which is roughly 23% of our total footprint. By mid-year 2016, we intend to deepen our fiber build to reach approximately 25% of our residential ILEC footprint. In order to accelerate sales, we have continued our Fiberville marketing campaign, which markets high-speed broadband and TDS TV in new neighborhoods prior to build-outs. The campaign has been increasingly effective over the past year, as we have seen 10-20% market penetration in advance of turning up service. HMS Our hosted and managed services (HMS) business, OneNeck IT Solutions, is another key element of our strategy to expand our business as it builds upon our core capabilities. As a communications service provider, we have foundational expertise in building and managing data networks and IT infrastructure. HMS plays an important role in TDS Telecom’s growth strategy. We are in the advanced stages of integrating the ve HMS businesses we acquired. In 2015, we completed both the construction of a new data center in Denver, Colorado and an expansion of another data center in Madison, Wisconsin. With this additional capacity up and running, combined with a highly motivated sales force trained on our extensive line of services and products, we are poised for more growth. While we saw higher equipment sales in 2015, there’s still progress to be made in increasing recurring sales revenues. We believe the HMS industry has attractive long-term growth potential as mid-market companies look to outsource their IT needs. Cable We are pleased with the progress of our cable business since we entered the industry in 2013. Cable is a natural extension of TDS Telecom’s original wireline business that enables us to leverage our existing expertise and infrastructure. Both wireline and cable share the common strategy to “own the best data pipe in the market.” As part of this broadband strategy, we plan to continue growing high-margin broadband services bundled with video and voice products. We are seeing our cable customer base continue to grow, accelerated by the attractive demographics in these markets, with household growth greater than the national average. We continue to evaluate additional strategic cable acquisitions that can further augment our growth and profitability. telephone and data systems 3
TDS CorporaTe Creating long-term value At the corporate level of TDS, we are continually looking to build value in the TDS portfolio of businesses. We intend to supplement organic growth through strategic acquisitions. Our long-term strategy calls for the majority of our capital to be reinvested in our operating businesses to strengthen their growth and competitive positions. We also return value to TDS shareholders through the payment of regular quarterly cash dividends and through share repurchases. In 2015, TDS primarily focused on investing in the networks that we believe will strengthen our competitive position and improve operating performance. Looking forward, we will continue to execute on our strategies to build strong, competitive businesses providing high-quality, data-focused products and services. Since August of 2013, TDS has invested $581.4 million, primarily through the acquisition of cable companies, and has returned $195.8 million to shareholders through payments of $147.0 million in cash dividends and $48.8 million in stock repurchases. Upgrading our Annual Report We have changed the format of our annual report this year, revising the Management’s Discussion and Analysis section by adding charts and other graphics to more plainly and clearly present our business and our performance. We hope you find this information and format helpful and, as always, welcome your feedback. Honoring Our Visionary Founder and Looking Ahead As TDS begins its 48th year of business, we look forward to celebrating the legacy of our centenarian founder, LeRoy T. (Roy) Carlson. From our humble origins in rural Wisconsin to our nationwide presence today, we continue to operate and serve with Roy’s basic principle, that “the customer is king.” It is the foundation upon which we intend to continue building shareholder value with our growing portfolio of businesses. Thank you Thank you to each of the associates and employees of the TDS companies for your dedication and innovation in providing outstanding services, products, and total customer experiences to each of our customers across the nation. Thank you also to each of our shareholders and our debt holders for your continuing support of our long-term growth and development. Regulatory TDS and its subsidiaries are active participants in the public policy arena, engaging policy makers on issues that directly impact our customers and our businesses. We advocated in Washington that the government auction of new spectrum later this year be structured to benefit all carriers and not just the very largest ones. We are thoroughly considering our participation in this 600 MHz auction. We also are advocating in support of programs to fund the ongoing needs for high-quality wireless and wired broadband communications in rural communities. Sincerely, LeRoy T. Carlson, Jr. President and Chief Executive Officer Walter C. D. Carlson Chairman of the Board 4 telephone and data systems
TELEPHONE AND DATA SYSTEMS, INC.
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 2015
Pursuant to SEC Rule 14a-3
The following audited financial statements and certain other financial information for the year ended December 31, 2015, represent Telephone and Data Systems' annual report to shareholders as required by the rules and regulations of the Security and Exchange Commission ("SEC").
The following information was filed with the SEC on February 24, 2016 as Exhibit 13 to Telephone and Data Systems' Annual Report on Form 10-K for the year ended December 31, 2015. Such information has not been updated or revised since the date it was originally filed with the SEC. Accordingly, you are encouraged to review such information together with any subsequent information that we have filed with the SEC and other publicly available information.
| Telephone and Data Systems, Inc. | Exhibit 13 |
Financial Reports Contents
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the Financial Statements and Notes to Consolidated Financial Statements for the year ended December 31, 2015. This report contains statements that are not based on historical facts, including the words "believes," "anticipates," "intends," "expects" and similar words. These statements constitute and represent "forward looking statements" as this term is defined in the Private Securities Litigation Reform Act of 1995. Such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward looking statements.
TDS uses certain "non-GAAP financial measures" throughout the MD&A. A discussion of the reason TDS uses these measures and a reconciliation to their most directly comparable GAAP financial measure is included in the Supplemental Information section within this MD&A.
General
Telephone and Data Systems, Inc. ("TDS") is a diversified telecommunications company that provides high-quality telecommunications services to approximately 6 million customers nationwide. TDS provides wireless services through its 84%-owned subsidiary, United States Cellular Corporation ("U.S. Cellular"). TDS also provides wireline services, cable services and hosted and managed services ("HMS"), through its wholly-owned subsidiary, TDS Telecommunications Corporation ("TDS Telecom"). TDS' segments operate almost entirely in the United States. See Note 18 — Business Segment Information in the Notes to Consolidated Financial Statements for summary financial information on each business segment.
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| 2015 Operating Revenues | 2015 Adjusted EBITDA* | |
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* Represents a non-GAAP financial measure. Refer to Supplemental Information within this MD&A for a reconciliation of this measure. |
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TDS Mission and Strategy
TDS' mission is to provide outstanding communications services to its customers and meet the needs of its shareholders, its people, and its communities. In pursuing this mission, TDS seeks to profitably grow its businesses, create opportunities for its associates and employees, and steadily build value over the long-term for its shareholders. Across all of its businesses, TDS is focused on providing exceptional customer experiences through best-in-class services and products and superior customer service.
TDS' long-term strategy calls for the majority of its capital to be reinvested in its operating businesses to strengthen their competitive positions, while still returning value to TDS shareholders through the payment of a regular quarterly cash dividend and share repurchases.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
Throughout 2015, as discussed below, TDS primarily focused on investing in the networks that are the backbone of its commitment to provide outstanding communications services to its customers. TDS believes these investments will strengthen its competitive position and improve operating performance. Looking ahead to 2016, TDS will look to build shareholder value by continuing to execute on its strategies to build strong, competitive businesses providing high-quality, data-focused products and services.
Invest in the business to improve returns and pursue initiatives that align with long-term strategies
Consistent with its strategy, TDS made significant investments in 2015 to improve the performance of its networks. U.S. Cellular completed the rollout of the 4G LTE network giving customers faster data speeds on an even higher-quality wireless network. U.S. Cellular also participated in Auction 97 indirectly through its limited partnership interest in Advantage Spectrum L.P. ("Advantage Spectrum"). Advantage Spectrum was the provisional winning bidder of 124 licenses for an aggregate bid of $338.3 million.
At TDS Telecom, the wireline segment continued its targeted fiber deployment and now offers IPTV service in 27 markets. During 2015, TDS Telecom also worked to integrate cable acquisitions and continued efforts to improve network quality and product offerings of previously acquired cable businesses. The HMS segment opened a new data center in Denver, CO to expand its presence in the IT outsourcing market.
Return value to shareholders
Since August of 2013, TDS has invested $581.4 million, primarily through acquisition of cable companies and returned $195.8 million to shareholders through payment of $147.0 million in regular quarterly cash dividends and $48.8 million of stock repurchases. During 2015, TDS paid $61.2 million in regular quarterly cash dividends. TDS increased the dividend paid to its investors by 5% in 2015 which marks the 41st consecutive year of dividend increases and in February 2016, TDS increased its dividend per share from $0.141 to $0.148. There were no TDS and limited U.S. Cellular share repurchases in 2015. There is no assurance that TDS will continue to increase the dividend rate or pay dividends and no assurance that TDS or U.S. Cellular will make any significant amount of share repurchases in the future.
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| Annual Dividends Per TDS Share | Shares Repurchased (Shares in millions) |
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Support growth initiatives through sound and disciplined financing strategies.
During 2015, U.S. Cellular sold $300 million in 7.25% senior notes and secured a $225 million term loan to fund its operations, current and future spectrum purchases, growth in equipment installment plan receivables and capital expenditures.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
Significant Financial and Operating Matters
The following is a summary of certain selected information contained in the comprehensive MD&A that follows. The overview does not contain all of the information that may be important. You should carefully read the entire MD&A and not rely solely on the highlights.
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- Net income attributable to TDS shareholders was $219.0 million in 2015,
compared to a net loss of $136.4 million in 2014. The year-over-year improvement was attributable to several factors including (i) increased equipment revenues bolstered by equipment
installment plan activity; (ii) reduced cost of equipment sold due to fewer wireless equipment sales transactions overall and lower cost per wireless unit sold; (iii) reduced selling,
general and administrative expenses; (iv) increased gains from sales and exchanges of businesses and licenses; and (v) non-cash losses on impairment in 2014. Diluted earnings per share
was $1.98 compared to a diluted loss per share of $1.26 one year ago.
- §
- In March 2015, U.S. Cellular announced that it would discontinue its loyalty
reward program effective September 1, 2015. All unredeemed reward points expired at that time and the deferred revenue balance related to such expired points was recognized as service revenues.
The amount of deferred revenue recognized upon discontinuation of this program was $58.2 million.
- §
- U.S. Cellular completed license exchanges and the sale of towers outside of its
operating markets. See Note 6 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to these
transactions.
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- Total additions to Property, plant and equipment were $759.4 million, including expenditures to complete the network rollout of 4G LTE, construct cell sites, increase capacity in existing cell sites and switches, outfit new and remodel existing retail stores, enhance billing and other customer management related systems and platforms, perform network upgrades and fiber expansion, and expand HMS data center facilities.
All defined terms in this MD&A are used as defined in the Notes to Consolidated Financial Statements, and additional terms are defined below:
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- 4G LTE – fourth
generation Long-Term Evolution which is a wireless broadband technology.
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- Auction 97 – An
FCC auction of AWS-3 spectrum licenses that ended in January 2015.
- §
- Average Billings per Account
("ABPA") – metric is calculated by dividing total postpaid service revenues plus equipment installment plan billings by the average number of postpaid
accounts by the number of months in the period.
- §
- Average Billings per User
("ABPU") – metric is calculated by dividing total postpaid service revenues plus equipment installment plan billings by the average number of postpaid
customers by the number of months in the period.
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- Average Revenue per Account
("ARPA") – metric is calculated by dividing total postpaid service revenues by the average number of postpaid accounts by the number of months in the period.
- §
- Average Revenue per User
("ARPU") – metric is calculated by dividing a revenue base by an average number of customers by the number of months in the period. These revenue bases and
customer populations are shown below:
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- Postpaid ARPU –
consists of total postpaid service revenues and postpaid customers.
- §
- Service Revenue
ARPU – consists of total postpaid, prepaid and reseller service revenues, inbound roaming and other service revenues and postpaid, prepaid and reseller
customers.
- §
- Broadband
Connections – refers to the number of Wireline customers provided high-capacity data circuits via various technologies, including DSL and dedicated internet
circuit technologies or the Cable billable number of lines into a building for high-speed data services.
- §
- Churn Rate – represents the percentage of the customers that disconnect service each month. These rates represent the average monthly churn rate for each respective period.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
- §
- FCC – Federal
Communications Commission
- §
- Gross
Additions – represents the total number of new customers added during the period, without regard to customers who terminate service.
- §
- IPTV
Connections – represents the number of customers provided video services using IP networking technology.
- §
- ManagedIP
Connections – refers to the number of telephone handsets, data lines and IP trunks providing communications using IP networking technology.
- §
- Net Additions
(Losses) – represents the total number of new customers added during the period, net of customers who terminate service during that period.
- §
- Smartphone
Penetration – is calculated by dividing postpaid smartphone customers by total postpaid customers.
- §
- Video
Connections – generally, a home or business receiving video programming counts as one video connection. In counting bulk residential or commercial
connections, such as an apartment building or a hotel, connections are counted based on the number of units/rooms within the building receiving service.
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- Voice
Connections – refers to the individual circuit connecting a customer to Wireline's central office facilities or the Cable billable number of lines into a
building for voice services.
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- VoLTE – Voice
over Long-Term Evolution which is a technology specification that defines the standards and procedures for delivering voice communication and data over 4G LTE networks.
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- Wireline Residential Revenue per Connection – is calculated by dividing total wireline residential revenue by the average number of total wireline residential customers.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
RESULTS OF OPERATIONS — TDS CONSOLIDATED
Year Ended December 31, |
2015 | 2014 | 2013 | 2015 vs. 2014 | 2014 vs. 2013 |
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(Dollars in thousands) |
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Operating revenues |
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U.S. Cellular |
$ | 3,996,853 | $ | 3,892,747 | $ | 3,918,836 | $ | 104,106 | 3% | $ | (26,089 | ) | (1)% | ||||||||
TDS Telecom |
1,158,043 | 1,088,312 | 947,003 | 69,731 | 6% | 141,309 | 15% | ||||||||||||||
All other1 |
21,345 | 28,379 | 35,397 | (7,034 | ) | (25)% | (7,018 | ) | (20)% | ||||||||||||
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Total operating revenues |
5,176,241 | 5,009,438 | 4,901,236 | 166,803 | 3% | 108,202 | 2% | ||||||||||||||
Operating expenses |
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U.S. Cellular |
3,683,911 | 4,036,137 | 3,771,971 | (352,226 | ) | (9)% | 264,166 | 7% | |||||||||||||
TDS Telecom |
1,078,583 | 1,098,683 | 902,171 | (20,100 | ) | (2)% | 196,512 | 22% | |||||||||||||
All other1 2 |
16,676 | 64,482 | (8,265 | ) | (47,806 | ) | (74)% | 72,747 | >100% | ||||||||||||
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Total operating expenses |
4,779,170 | 5,199,302 | 4,665,877 | (420,132 | ) | (8)% | 533,425 | 11% | |||||||||||||
Operating income (loss) |
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U.S. Cellular |
312,942 | (143,390 | ) | 146,865 | 456,332 | >100% | (290,255 | ) | >(100)% | ||||||||||||
TDS Telecom |
79,460 | (10,371 | ) | 44,832 | 89,831 | >100% | (55,203 | ) | >(100)% | ||||||||||||
All other1 2 |
4,669 | (36,103 | ) | 43,662 | 40,772 | >100% | (79,765 | ) | >(100)% | ||||||||||||
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Total operating income (loss) |
397,071 | (189,864 | ) | 235,359 | 586,935 | >100% | (425,223 | ) | >(100)% | ||||||||||||
Other income (expenses) |
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Equity in earnings of unconsolidated entities |
140,076 | 131,965 | 132,714 | 8,111 | 6% | (749 | ) | (1)% | |||||||||||||
Interest and dividend income |
38,783 | 16,957 | 9,092 | 21,826 | >100% | 7,865 | 87% | ||||||||||||||
Gain (loss) on investments |
– | – | 14,547 | – | N/M | (14,547 | ) | N/M | |||||||||||||
Interest expense |
(141,719 | ) | (111,397 | ) | (98,811 | ) | (30,322 | ) | (27)% | (12,586 | ) | (13)% | |||||||||
Other, net |
391 | 115 | (37 | ) | 276 | >100% | 152 | >100% | |||||||||||||
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Total other income (expenses) |
37,531 | 37,640 | 57,505 | (109 | ) | – | (19,865 | ) | (35)% | ||||||||||||
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Income (loss) before income taxes |
434,602 | (152,224 | ) | 292,864 | 586,826 | >100% | (445,088 | ) | >(100)% | ||||||||||||
Income tax expense (benefit) |
171,992 | (4,932 | ) | 126,043 | 176,924 | >100% | (130,975 | ) | >(100)% | ||||||||||||
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Net income (loss) |
262,610 | (147,292 | ) | 166,821 | 409,902 | >100% | (314,113 | ) | >(100)% | ||||||||||||
Less: Net income (loss) attributable to noncontrolling interests, net of tax |
43,573 | (10,937 | ) | 24,894 | 54,510 | >100% | (35,831 | ) | >(100)% | ||||||||||||
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Net income (loss) attributable to TDS shareholders |
219,037 | (136,355 | ) | 141,927 | 355,392 | >100% | (278,282 | ) | >(100)% | ||||||||||||
Preferred dividend requirement |
(49 | ) | (49 | ) | (49 | ) | – | – | – | – | |||||||||||
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Net income (loss) available to common shareholders |
$ | 218,988 | $ | (136,404 | ) | $ | 141,878 | $ | 355,392 | >100% | $ | (278,282 | ) | >(100)% | |||||||
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Capital expenditures |
$ | 759,368 | $ | 770,577 | $ | 909,660 | $ | (11,209 | ) | (1)% | $ | (139,083 | ) | (15)% | |||||||
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N/M – Percentage change not meaningful
- 1
- Consists
of corporate and other operations and intercompany eliminations.
- 2
- In 2015 and 2013, TDS recognized an incremental gain compared to U.S. Cellular of $11.9 million on the Tower Sale and $53.5 million upon closing of the Divestiture Transaction, respectively, as a result of lower asset basis in the assets disposed. In 2014, TDS recognized expenses of $20.2 million related to exit and disposal activities due to a License Purchase and Customer Recommendation Agreement between U.S. Cellular and Airadigm. See Note 6 — Acquisitions, Divestitures and Exchanges for additional information related to these transactions.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
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Operating Revenues (Dollars in millions)
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2015-2014 Commentary TDS' 3% increase in operating revenues was driven by Equipment sales revenues at U.S. Cellular due primarily to an increasing number of customers choosing equipment installment plans. Cable acquisitions completed in 2014 also contributed to the improvement. 2014-2013 Commentary Cable and HMS acquisitions completed in 2013 and 2014 drove the 2% increase in TDS's operating revenues in 2014. This was partially offset by a decrease in U.S. Cellular's operating revenues which experienced a decline in retail service revenue and inbound roaming and an improvement in Equipment sales revenue due primarily to the implementation of equipment installment plans on a broad basis in 2014. Refer to individual segment discussions in this MD&A for additional details on operating revenues at the segment level. |
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Operating expenses
TDS' operating expenses decreased by 8% from 2014. Expenses associated with ongoing operations of TDS, specifically Cost of equipment and products, decreased due primarily to an overall lower average price per unit on a fewer number of devices sold in the wireless operations. Additionally, effective cost management of Selling, general and administrative expenses contributed to the decline in operating expenses. Operating cost improvements were partially offset by additional expenses added to support the newly acquired cable operations in 2014. Further contributing to the improvement was increased gains on divestiture and exchange transactions recognized in 2015. Such gains were $282.8 million in 2015 and $128.8 million in 2014. See Note 6 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to these gains.
TDS' operating expenses increased by 11% from 2013 to 2014. Cable and HMS acquisitions completed in 2013 and 2014 partially drove the increase as well as an increase in Cost of equipment and products associated with higher cost per wireless device as U.S. Cellular's customers' preferences shifted toward higher priced devices. Significant gains recognized in 2013 related to divestiture and exchange transactions also contributed to the increased operating expenses from 2013 to 2014. Such gains were $128.8 million in 2014 and $556.1 million in 2013. This was partially offset by accelerated depreciation expense recognized as a result of the Divestiture Transaction in 2013 and a year-over-year decrease caused by the NY1 and NY2 Deconsolidation in 2013. The NY1 and NY2 Deconsolidation and the Divestiture Transaction are discussed in Note 8 — Investments in Unconsolidated Entities and Note 6 — Acquisitions, Divestitures and Exchanges, respectively, in the Notes to Consolidated Financial Statements.
Refer to individual segment discussions in this MD&A for additional details on operating expenses at the segment level.
Equity in earnings of unconsolidated entities
Equity in earnings of unconsolidated entities represents TDS' share of net income from entities in which it has a noncontrolling interest and that are accounted for by the equity method. TDS' investment in the Los Angeles SMSA Limited Partnership ("LA Partnership") contributed $74.0 million, $71.8 million and $78.4 million to Equity in earnings of unconsolidated entities in 2015, 2014 and 2013, respectively.
Interest and dividend income
Interest and dividend income increased due to imputed interest income recognized on equipment installment plans of $33.9 million and $8.7 million in 2015 and 2014, respectively. See Note 3 — Equipment Installment Plans in the Notes to Consolidated Financial Statements for additional information.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
Gain (loss) on investments
In connection with the NY1 & NY2 Deconsolidation, TDS recognized a non-cash pre-tax gain of $14.5 million which was recorded in Gain (loss) on investments in 2013. See Note 8 — Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.
Interest expense
Interest expense increased from 2014 to 2015 due primarily to U.S. Cellular's issuance of $275 million of 7.25% Senior Notes in December 2014 and the $225 million Term Loan in July 2015. Interest expense increased from 2013 to 2014 due primarily to a decrease in capitalized interest related to network and systems projects.
Income tax expense
The effective tax rates on Income before income taxes and extraordinary items ("pre-tax income") for 2015, 2014 and 2013 were 39.6%, 3.2% and 43.0%, respectively. The following significant discrete and other items impacted income tax expense for these years:
2015 — The effective tax rate for 2015 is consistent with a normalized tax rate inclusive of federal and state tax. There were no significant discrete items that impacted the rate.
2014 — The effective tax rate for 2014 includes tax expense of $38.5 million related to valuation allowances recorded against certain state deferred tax assets, higher tax expense of $18.3 million due to the tax effects of a nondeductible impairment of Goodwill, and a tax benefit of $10.8 million related to a release of valuation allowance on federal net operating losses previously limited under loss utilization rules. The overall effective tax rate is lower due to the effect of these items combined with the loss in 2014 in Income (loss) before income taxes.
2013 — The effective tax rate for 2013 includes tax expense of $14.9 million related to the NY1 & NY2 Deconsolidation and the Divestiture Transaction, and a tax benefit of $5.5 million resulting from statute of limitation expirations. The NY1 and NY2 Deconsolidation and the Divestiture Transaction are discussed in Note 8 — Investments in Unconsolidated Entities and Note 6 — Acquisitions, Divestitures and Exchanges, respectively, in the Notes to Consolidated Financial Statements.
See Note 4 — Income Taxes in the Notes to Consolidated Financial Statements for further information on the effective tax rate.
Net income (loss) attributable to noncontrolling interests, net of tax
Net income (loss) attributable to noncontrolling interests, net of tax includes the noncontrolling public shareholders' share of U.S. Cellular's net income (loss), the noncontrolling shareholders' or partners' share of certain U.S. Cellular subsidiaries' net income (loss) and other TDS noncontrolling interests.
Year Ended December 31, |
2015 | 2014 | 2013 |
|||||||
| | | | | | | | | | | |
(Dollars in thousands) |
||||||||||
Net income (loss) attributable to noncontrolling interests, net of tax |
||||||||||
U.S. Cellular noncontrolling public shareholders' |
$ | 38,230 | $ | (6,826 | ) | $ | 21,775 | |||
Noncontrolling shareholders' or partners' |
5,343 | (4,111 | ) | 3,119 | ||||||
| | | | | | | | | | | |
|
$ | 43,573 | $ | (10,937 | ) | $ | 24,894 | |||
| | | | | | | | | | | |
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
| | | |
Earnings (Dollars in millions) |
2015-2014 Commentary Adjusted EBITDA increased due primarily to increased revenues and decreased cash expenses in U.S. Cellular's operations. U.S. Cellular's Loss on equipment (Equipment sales less Cost of equipment sold) decreased $291.5 million from 2014 to 2015 as a result of the continued adoption of equipment installment plans, less devices sold, and a lower average cost per device sold. Net income (loss) increased from 2014 to 2015 due to the same reasons as Adjusted EBITDA, and also due to an increase in Gain on sale of business and other exit costs in U.S. Cellular, and a Loss on impairment of Goodwill recognized in the HMS segment in 2014. 2014-2013 Commentary Adjusted EBITDA decreased due primarily to decreased revenues and increased cash expenses in U.S. Cellular's operations. U.S. Cellular's Service revenues declined due to a decrease in the average retail customer base and a decrease in Inbound roaming revenue, among other factors. Net income (loss) decreased from 2013 to 2014 due to the same reasons as Adjusted EBITDA, and also due to a decrease in both Gain on sale of business and other exit costs and Gain on license sales and exchanges in U.S. Cellular. In addition, a Loss on impairment of Goodwill recognized in the HMS segment in 2014 further decreased Net income from 2013 to 2014. |
|
* Represents a non-GAAP measure. Refer to Supplemental Information within this MD&A for a reconciliation of this measure. |
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
|
U.S. CELLULAR OPERATIONS |
U.S. Cellular owns, operates, and invests in wireless markets throughout the United States. U.S. Cellular is an 84%-owned subsidiary of TDS. U.S. Cellular's strategy is to attract and retain wireless customers through a value proposition comprised of a high-quality network, outstanding customer service, and competitive devices, plans, and pricing, all provided with a local focus.
| |
OPERATIONS |
- §
- Serves approximately 4.9 million customers including 4.4 million
postpaid and 0.4 million prepaid customers.
- §
- Operates in 23 states.
- §
- Employs approximately 6,400 employees.
- §
- Headquartered in Chicago, Illinois.
- §
- 6,297 cell sites including 3,978 owned towers in service.
| |
SIGNIFICANT TRENDS AND DEVELOPMENTS
Technology and Support Systems:
- §
- U.S. Cellular continued to deploy 4G LTE as a result of U.S. Cellular's
strategic initiative to enhance its network. 4G LTE now reaches 99% of postpaid customers and 98% of cell sites. The adoption of data-rich smartphones and connected devices is driving significant
growth in data traffic. At the end of the year, 72% of postpaid customers had 4G capable devices, with the LTE network handling 81% of data traffic. Also, U.S. Cellular began user trials related to
VoLTE technology to allow customers to utilize the LTE network for both voice and data services, and these trials are anticipated to continue into 2016.
- §
- In 2015, U.S. Cellular spent $285.8 million in cash for license acquisitions, the majority of which came from U.S. Cellular's participation in Auction 97 indirectly through its limited partnership interest in Advantage Spectrum.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
Advantage Spectrum was the provisional winning bidder of 124 AWS licenses for an aggregate bid of $338.3 million, after its expected designated entity discount of 25%. Advantage Spectrum's bid amount, less the initial deposit amount of $60.0 million paid in 2014, was paid to the FCC in March 2015. These licenses have not yet been granted by the FCC. U.S. Cellular's strategy is to continue to obtain interests in and access to wireless licenses in current operating markets. This strategy will help ensure adequate spectrum to deliver a best-in-class network that meets the growing capacity and speed requirements of U.S. Cellular customers.
Asset Management:
- §
- U.S. Cellular continued to pursue opportunities to monetize non-strategic assets
to support investment in the business. In December 2014, U.S. Cellular entered into an agreement with a third party to sell 595 towers and certain related contracts, assets, and liabilities for
$159.0 million in cash. The gain recognized was $3.8 million and $108.2 million in 2014 and 2015, respectively. This agreement and related transactions are referred to as the
"Tower Sale."
- §
- Additionally, U.S. Cellular entered into various agreements to transfer certain
non-operating licenses to third parties in exchange for receiving licenses in operating markets and cash. In connection with these various agreements, U.S. Cellular received cash totaling
$145.0 million and recognized an aggregate pre-tax gain of $149.1 million in 2015.
- §
- In January 2016, U.S. Cellular entered into an agreement to purchase a 700 MHz A Block license for $36.0 million. The transaction is expected to close in the third quarter of 2016 pending regulatory approval. In February 2016, U.S. Cellular entered into multiple agreements with third parties that provide for the transfer of certain AWS and PCS spectrum licenses and approximately $30 million in cash to U.S. Cellular, in exchange for U.S. Cellular transferring certain AWS, PCS and 700 MHz licenses to the third parties. The transactions are subject to regulatory approval and other customary closing conditions, and are expected to close in 2016. Upon closing of the transactions, U.S. Cellular expects to recognize a gain.
Products and Services:
- §
- U.S. Cellular continued to leverage competitive value-based pricing for its
plans and services, including equipment installment plan offerings. U.S. Cellular will continue to offer equipment installment plans in 2016. To the extent that customers adopt these plans, U.S.
Cellular expects an increase in equipment sales revenues. However, certain of the equipment installment plans provide the customer with a reduction in the monthly access charge for the device; thus,
to the extent that existing customers adopt such plans, U.S. Cellular expects a reduction in retail service revenues and ARPU.
- §
- U.S. Cellular launched iconic Samsung and Apple devices and expanded the
portfolio of tablets and connected devices in line with the strategic initiative to increase gross additions, reduce churn, and increase data usage.
- §
- U.S. Cellular continued to expand distribution through third-party national and
on-line retailers. As a growing base of customers purchase wireless service outside of corporate and agent owned locations, U.S. Cellular will continue to explore new relationships with additional
third-party retailers as part of the strategy to expand distribution.
- §
- U.S. Cellular also expanded its solutions available to business and government customers, including a growing suite of machine-to-machine solutions across various categories. U.S. Cellular will continue to enhance its advanced wireless services and connected solutions for consumer, business and government customers.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
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Retail Customer Composition |
|
2015-2014 Commentary
Postpaid customers comprised approximately 92% of U.S. Cellular's retail customers at December 31, 2015. U.S. Cellular believes the increase in net additions in 2015 is a result of competitive products and services priced to offer the best value to customers, improved speed to market for product offerings, and expanded equipment installment plan offerings. U.S. Cellular also believes postpaid churn continued to decline from 2014 levels due to an improved customer experience and strong retention programs. Total retail customers at the period ended December 31, 2015, 2014 and 2013 were 4,796,000, 4,646,000 and 4,610,000, respectively.
2014-2013 Commentary
Postpaid customers comprised approximately 93% of U.S. Cellular's retail customers at December 31, 2014. Postpaid churn in 2013 and the first half of 2014 was adversely affected by the billing system conversion in 2013; however it improved over the course of 2014.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
Quarterly Postpaid Churn Rate |
Smartphone Penetration |
2015-2014 Commentary
Smartphone penetration increased to 74% of the postpaid handset customer base, up from 65% a year ago.
The percentage of postpaid handset customers with feature phones has continued to decrease from 35% in 2014 to 26% in 2015 and is expected to continue declining as handset gross additions consist primarily of smartphones. During the fourth quarter of 2015, smartphones represented 91% of total handset sales.
Continued growth in revenues and costs related to data products and services may result in increased operating expenses and the need for additional investment in spectrum, network capacity and network enhancements.
2014-2013 Commentary
Smartphone penetration increased to 65% of the postpaid handset customer base, up from 53% a year ago. This contributed to increased service revenues from data.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
Postpaid ARPU/ABPU |
Postpaid ARPA/ABPA |
2015-2014 Commentary
Postpaid ARPU decreased in 2015 due to industry-wide price competition, including discounts on shared data plans provided to customers on equipment installment plans and those providing their own device at the time of activation or renewal partially offset by the continued adoption of smartphones and shared data plans. The increase in postpaid ARPA is the result of increased postpaid connections per account driven by increased connected device penetration.
U.S. Cellular implemented equipment installment plans on a broad basis in 2014. These plans increase equipment sales revenue as customers pay for their wireless devices in installments at a total device price that is generally higher than the device price offered to customers in conjunction with alternative plans that are subject to a service contract. Equipment installment plans also have the impact of reducing service revenues as many equipment installment plans provide for reduced monthly access charges. In order to reflect the ARPU and ARPA trend for the impact of equipment installment plans in 2014 and 2015, U.S. Cellular has also presented ARPU and ARPA plus average monthly equipment installment plan billings per customer (ABPU) and account (ABPA), respectively. U.S. Cellular believes presentation of these measures is useful in order to reflect the trends in total revenues per customer and account.
2014-2013 Commentary
The increases are a result of increased smartphone penetration, increased adoption of shared data plans, and the special issuance of loyalty rewards points which negatively impacted these metrics in 2013, partially offset by discounts on shared data plans provided to customers on equipment installment plans and those providing their own device at the time of activation or renewal.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
The Divestiture Transaction and the NY1 & NY2 Deconsolidation were consummated in the second quarter of 2013 as further described in Note 6 — Acquisitions, Divestitures and Exchanges and Note 8 — Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements. The information presented below includes the Divestiture Markets and the NY1 & NY2 Partnerships for the portion of 2013 prior to the respective transactions.
Components of Operating Income (Loss)
Year Ended December 31, |
2015 | 2014 | 2013 | 2015 vs. 2014 | 2014 vs. 2013 |
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| | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) |
|||||||||||||||||||||
Retail service |
$ | 2,994,353 | $ | 3,012,984 | $ | 3,165,496 | $ | (18,631 | ) | (1)% | $ | (152,512 | ) | (5)% | |||||||
Inbound roaming |
191,801 | 224,090 | 263,186 | (32,289 | ) | (14)% | (39,096 | ) | (15)% | ||||||||||||
Other |
164,277 | 160,863 | 166,091 | 3,414 | 2% | (5,228 | ) | (3)% | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Service revenues |
3,350,431 | 3,397,937 | 3,594,773 | (47,506 | ) | (1)% | (196,836 | ) | (5)% | ||||||||||||
Equipment sales |
646,422 | 494,810 | 324,063 | 151,612 | 31% | 170,747 | 53% | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total operating revenues |
3,996,853 | 3,892,747 | 3,918,836 | 104,106 | 3% | (26,089 | ) | (1)% | |||||||||||||
System operations (excluding Depreciation, amortization and accretion reported below) |
775,042 | 769,911 | 763,435 | 5,131 | 1% | 6,476 | 1% | ||||||||||||||
Cost of equipment sold |
1,052,810 | 1,192,669 | 999,000 | (139,859 | ) | (12)% | 193,669 | 19% | |||||||||||||
Selling, general and administrative |
1,493,730 | 1,591,914 | 1,677,395 | (98,184 | ) | (6)% | (85,481 | ) | (5)% | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
|
3,321,582 | 3,554,494 | 3,439,830 | (232,912 | ) | (7)% | 114,664 | 3% | |||||||||||||
Operating cash flow* |
675,271 | 338,253 | 479,006 | 337,018 | 100% | (140,753 | ) | (29)% | |||||||||||||
Depreciation, amortization and accretion |
606,455 | 605,997 | 803,781 | 458 | – | (197,784 | ) | (25)% | |||||||||||||
(Gain) loss on asset disposals, net |
16,313 | 21,469 | 30,606 | (5,156 | ) | (24)% | (9,137 | ) | (30)% | ||||||||||||
(Gain) loss on sale of business and other exit costs, net |
(113,555 | ) | (32,830 | ) | (246,767 | ) | (80,725 | ) | >(100)% | 213,937 | 87% | ||||||||||
(Gain) loss on license sales and exchanges |
(146,884 | ) | (112,993 | ) | (255,479 | ) | (33,891 | ) | (30)% | 142,486 | 56% | ||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total operating expenses |
3,683,911 | 4,036,137 | 3,771,971 | (352,226 | ) | (9)% | 264,166 | 7% | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Operating income (loss) |
$ | 312,942 | $ | (143,390 | ) | $ | 146,865 | $ | 456,332 | >100% | $ | (290,255 | ) | >(100)% | |||||||
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| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA* |
$ | 852,152 | $ | 480,325 | $ | 615,204 | $ | 371,827 | 77% | $ | (134,879 | ) | (22)% | ||||||||
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| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures |
$ | 533,053 | $ | 557,615 | $ | 737,501 | $ | (24,562 | ) | (4)% | $ | (179,886 | ) | (24)% | |||||||
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| | | | | | | | | | | | | | | | | | | | | | |
- *
- Represents a non-GAAP financial measure. Refer to Supplemental Information within this MD&A for a reconciliation of this measure.
14
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
| | | |
Total Operating Revenues |
Service revenues consist of:
§ Charges for access, airtime, roaming, recovery of regulatory costs and value added services, including data products and services ("retail service")
§ Charges to other wireless carriers whose customers use U.S. Cellular's wireless systems when roaming
§ Amounts received from the Federal USF
§ Tower rental revenues Equipment revenues consist of:
§ Sales of wireless devices and related accessories to new and existing customers, agents, and third-party distributors |
|
| | | |
Key components of changes in the statement of operations line items were as follows:
2015-2014 Commentary
Total operating revenues
Service revenues decreased as a result of (i) a decrease in retail service revenues driven by industry-wide price competition, including discounts on shared data plans provided to customers on equipment installment plans and those providing their own device at the time of activation or renewal; and (ii) reductions in inbound roaming revenue driven by lower roaming rates. Such reductions were partially offset by an increase in the average customer base, continued adoption of shared data plans, and the $58.2 million of revenue recognized in 2015 from unredeemed rewards points upon termination of U.S. Cellular's rewards program.
Revenue representing amounts received from the Federal USF for the year ended December 31, 2015 was $92.1 million, which remained flat year over year. Pursuant to the FCC's Reform Order ("Reform Order"), U.S. Cellular's current Federal USF support is being phased down at the rate of 20% per year beginning July 1, 2012. The Phase II Mobility Fund was not operational as of July 2014 and, therefore, as provided by the Reform Order, the phase down was suspended at 60% of the baseline amount. U.S. Cellular will continue to receive USF support at the 60% level until the FCC takes further action. At this time, U.S. Cellular cannot predict what changes that the FCC might make to the USF high cost support program and, accordingly, cannot predict whether such changes will have a material adverse effect on U.S. Cellular's business, financial condition or results of operations.
Equipment sales revenues increased due primarily to an increase in average revenue per device sold driven by sales under equipment installment plans, a mix shift to smartphones and connected devices and an increase in accessory sales, partially offset by a decrease in the number of devices sold. Equipment installment plan sales contributed $350.7 million and $190.4 million in 2015 and 2014, respectively.
System operations expenses
Maintenance, utility and cell site expenses increased $13.3 million, or 4%, reflecting higher support costs and utility usage for the expanded 4G LTE network and the completion of certain tower maintenance and repair projects.
Expenses incurred when U.S. Cellular's customers used other carriers' networks while roaming increased $19.4 million, or 11%, driven primarily by an increase in data roaming usage, partially offset by lower rates and voice volume.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
Customer usage expenses decreased $27.6 million, or 13%, driven by lower fees for platform and content providers, a decrease in long distance charges driven by rate reductions, and a decrease in circuit costs from the migration to LTE.
U.S. Cellular expects system operations expenses to increase in the future to support the continued growth in cell sites and other network facilities as it continues to add capacity, enhance quality and deploy new technologies as well as to support increases in total customer usage, particularly data usage. However, these increases are expected to be offset to some extent by cost savings generated by shifting data traffic to the 4G LTE network from the 3G network.
Cost of equipment sold
The decrease in Cost of equipment sold is a result of an 11% reduction in devices sold and a decrease in the average cost per device sold driven by the lower cost of smartphones and connected devices. Cost of equipment sold in 2015 included $448.7 million related to equipment installment plan sales compared to $280.3 million in 2014. Loss on equipment was $406.4 million and $697.9 million for 2015 and 2014, respectively.
Selling, general and administrative expenses
Selling expenses decreased $20.5 million, or 3%, due primarily to lower agent and retail commission expenses driven by fewer activations and renewals, partially offset by increased advertising expenses.
General and administrative expenses decreased $77.7 million, or 9%, due primarily to lower consulting expenses related to the billing system and customer service operations, and lower rates for roamer administration.
Depreciation, amortization and accretion expense
Depreciation, amortization and accretion expense remained relatively flat year over year.
(Gain) loss on asset disposals, net
The decrease in Loss on asset disposals was due primarily to fewer write-offs and disposals of certain network assets.
(Gain) loss on sale of business and other exit costs, net
The net gain in 2015 was due primarily to a $108.2 million gain recognized on the Tower Sale. The net gain in 2014 was due primarily to $29.3 million of gain related to the continuing impact of the Divestiture Transaction. See Note 6 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.
(Gain) loss on license sales and exchanges, net
The net gains in 2015 and 2014 were due to license sales and exchanges with third parties. See Note 6 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.
2014-2013 Commentary
Total operating revenues
Service revenues decreased as a result of a decrease in the average customer base (including the reductions caused by the Divestiture Transaction and NY1 and NY2 Deconsolidation) and a reduction in revenues from the Federal USF. A decrease in Inbound roaming revenues caused by reductions in inbound roaming rates and voice volumes partially offset by higher inbound roaming data usage further contributed to the decrease in service revenues.
Such reductions were partially offset by increased revenues as a result of higher smartphone penetration and tower rental revenues.
Equipment sales revenues increased due to an increase in the average revenue per device sold due primarily to the implementation of equipment installment plans on a broad basis in 2014, and increases in the sales of connected devices and accessories. This increase is partially offset by a decrease in sales of other device categories, primarily the feature phone category, and the effects of the Divestiture Transaction and the NY1 & NY2 Deconsolidation. Equipment installment plan sales contributed $190.4 million and $0.8 million in 2014 and 2013, respectively.
System operations expenses
Maintenance, utility and cell site expenses increased $26.6 million, or 8%, reflecting higher support costs for the expanded 4G LTE network and completion of certain maintenance projects, partially offset by the impacts of the Divestiture Transaction and NY1 & NY2 Deconsolidation.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
Expenses incurred when U.S. Cellular's customers used other carriers' networks while roaming increased $5.8 million, or 3%, driven primarily by an increase in data roaming usage, partially offset by lower rates, lower voice usage, and the impacts of the Divestiture Transaction and NY1 & NY2 Deconsolidation.
Customer usage expenses decreased $25.9 million, or 11%, driven by impacts of the Divestiture Transaction and NY1 & NY2 Deconsolidation, by lower fees for platform and content providers, a decrease in long distance charges driven by rate reductions, and a decrease in circuit costs from LTE migration.
Cost of equipment sold
The increase in Cost of equipment sold was the result of a 22% increase in the average cost per device sold, which more than offset the impact of selling fewer devices. Average cost per device sold increased due to general customer preference for higher priced 4G LTE smartphones and tablets. Cost of equipment sold in 2014 includes $280.3 million related to equipment installment plan sales compared to $0.8 million in 2013. Loss on equipment was $697.9 million and $674.9 million for 2014 and 2013, respectively.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased $85.5 million, or 5%, in 2014 due to the impacts of the Divestiture Transaction, NY1 & NY2 Deconsolidation and lower consulting expenses in 2014 related to the billing system conversion in the prior year.
Depreciation, amortization and accretion expense
Depreciation, amortization and accretion decreased due to acceleration of Depreciation, amortization and accretion resulting from the Divestiture Transaction. Accelerated depreciation resulting from the Divestiture Transaction was $13.1 million and $158.5 million in 2014 and 2013, respectively.
(Gain) loss on asset disposals, net
The decrease in Loss on asset disposals was due primarily to fewer write-offs and disposals of certain network assets.
(Gain) loss on sale of business and other exit costs, net
The net gain in 2014 and 2013 was due primarily to $29.3 million and $248.4 million of gain recognized related to the Divestiture Transaction. See Note 6 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.
(Gain) loss on license sales and exchanges
The net gain in 2014 and 2013 was due to license sales and exchanges with third parties. See Note 6 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
|
TDS TELECOM OPERATIONS |
TDS Telecom operates in three reportable segments: Wireline, Cable and HMS. The overall strategy for the Wireline and Cable businesses is to own the best pipe in the market in order to capitalize on data growth and the need for higher broadband speeds. In addition, through its HMS business, TDS Telecom provides a wide range of Information Technology ("IT") services including colocation, dedicated hosting, hosted application management, cloud computing services and planning, engineering, procurement, installation, sales and management of IT infrastructure hardware solutions.
OPERATIONS |
- §
- Wireline and Cable serve approximately 1.2 million broadband, video and
voice connections in 34 states.
- §
- Wireline operates 105 incumbent local exchange carriers ("ILEC") in 25 states
and competitive local exchange carriers ("CLEC") in 4 states.
- §
- Cable operates primarily in Colorado, New Mexico, Texas, Utah and Oregon.
- §
- HMS operates a total of eight data centers. It owns two data centers in Iowa, one each in Minnesota, Wisconsin, Colorado and Oregon and it leases two data centers in Arizona.
18
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
SIGNIFICANT TRENDS AND DEVELOPMENTS
Acquisition/ Divestiture:
- §
- TDS Telecom entered the cable business with the acquisition of substantially all
of the assets of Baja Broadband, LLC ("Baja") on August 1, 2013, which operates cable systems in markets primarily in Colorado, New Mexico, Texas, and Utah. Baja was rebranded as TDS in
2015. On September 1, 2014, TDS Telecom expanded it cable operations with the acquisition of substantially all of the assets of a group of companies operating as BendBroadband
("BendBroadband"), headquartered in Bend, Oregon. As part of the agreement, a Tier III data center providing colocation and managed services and a cable advertising and broadcast business were
also acquired. The operations of the data center are included in the HMS segment. The operations of the cable and the advertising and broadcast businesses are included in the Cable segment. Through
its Cable operations, TDS Telecom is expanding broadband services while leveraging its core competencies in network management and customer focus. Additionally, TDS Telecom will continue to pursue
cable acquisitions that meet its criteria of having favorable competitive environments, attractive market demographics and the ability to grow broadband penetration.
- §
- As a result of continually reviewing all of its operations, in 2015 and 2014,
TDS Telecom divested certain ILEC markets that it considered non-strategic. On an annualized basis these ILEC divestitures collectively represented approximately 1% of TDS Telecom 2015 Total operating
revenues.
- §
- In 2013, TDS Telecom acquired 100% of the outstanding shares of MSN Communications, Inc. ("MSN") for $43.6 million in cash. MSN is an information technology solutions provider whose service offerings complement the HMS portfolio of products.
Technology & Support Systems:
- §
- TDS Telecom's Wireline segment continued to upgrade and expand its network to
respond to the needs of its customers for greater bandwidth and advanced technologies. Where economically feasible, TDS Telecom is deploying fiber technology to provide internet speeds of up to
1 Gigabits per second ("Gbps"). In non-fiber markets, TDS Telecom offers speeds reaching up to 50 Megabits per second ("Mbps") using a bonded product.
- §
- TDS Telecom launched ARRIS' Whole Home Solution branded as CatchTV, and TV
Everywhere, and successfully trialed managedIP services in certain cable markets. TDS Telecom has continued to make capacity investments in its cable markets in line with its strategy to increase
broadband penetration in those markets.
- §
- Beginning in 2014 TDS Telecom was able to offer a full suite of end-to-end IT
solutions through its OneNeck IT Solutions unified brand. These integration efforts continued in 2015 across all markets.
- §
- TDS Telecom launched a data center in Colorado and completed a Madison data center expansion in 2015. TDS Telecom will continue to explore additional facility expansion, reconfiguration, and development opportunities in 2016 and beyond.
Products and Services:
- §
- In 2015, TDS Telecom continued rolling out IPTV, branded as TDS TV, to new
markets in order to leverage its high-speed network. TDS TV provides customers with connected-home DVRs, video-on-demand ("VOD") and TV Everywhere. TDS Telecom has now launched TDS TV in 27 markets,
enabling 167,000 service addresses, which is roughly 23% of its service addresses. Where TDS TV is not available, TDS Telecom partners with a satellite TV provider to allow for triple or double play
bundling.
- §
- TDS Telecom strives to be the preferred broadband provider in its ILEC
residential markets. As such, TDS Telecom continues to invest to offer higher speed data service. As of December 31, 2015, TDS Telecom was able to provide broadband service to 94% of its ILEC
physical access lines. At December 31, 2015, 65% of the service addresses in its ILEC markets had 10 Mbps or faster service available and 36% of the service addresses in its ILEC markets
had 25 Mbps or faster service available.
- §
- TDS Telecom continues to focus its commercial sales on managedIP. TDS managedIP is available in Wireline markets that cover 88% of all commercial customers at December 31, 2015 and is also available in certain cable markets.
19
| | ||
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
Components of Operating Income (Loss)
Year Ended December 31, |
2015 | 2014 | 2013 | 2015 vs. 2014 | 2014 vs. 2013 |
||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) |
|||||||||||||||||||||
Operating revenues |
|||||||||||||||||||||
Wireline |
$ | 700,903 | $ | 716,422 | $ | 726,567 | $ | (15,519 | ) | (2)% | $ | (10,145 | ) | (1)% | |||||||
Cable |
174,966 | 116,855 | 35,883 | 58,111 | 50% | 80,972 | >100% | ||||||||||||||
HMS |
286,795 | 258,732 | 185,616 | 28,063 | 11% | 73,116 | 39% | ||||||||||||||
Intra-company elimination |
(4,621 | ) | (3,697 | ) | (1,063 | ) | (924 | ) | (25)% | (2,634 | ) | >(100) | |||||||||
| | | | | | | | | | | | | | | | | | | | | | |
TDS Telecom operating revenues |
1,158,043 | 1,088,312 | 947,003 | 69,731 | 6% | 141,309 | 15% | ||||||||||||||
Operating expenses |
|||||||||||||||||||||
Wireline |
612,346 | 617,948 | 661,561 | (5,602 | ) | (1)% | (43,613 | ) | (7)% | ||||||||||||
Cable |
168,627 | 116,565 | 35,927 | 52,062 | 45% | 80,638 | >100% | ||||||||||||||
HMS |
302,231 | 367,867 | 205,746 | (65,636 | ) | (18)% | 162,121 | 79% | |||||||||||||
Intra-company elimination |
(4,621 | ) | (3,697 | ) | (1,063 | ) | (924 | ) | (25)% | (2,634 | ) | >(100) | |||||||||
| | | | | | | | | | | | | | | | | | | | | | |
TDS Telecom operating expenses |
1,078,583 | 1,098,683 | 902,171 | (20,100 | ) | (2)% | 196,512 | 22% | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
TDS Telecom operating income (loss) |
$ | 79,460 | $ | (10,371 | ) | $ | 44,832 | $ | 89,831 | >100% | $ | (55,203 | ) | >(100)% | |||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA* |
$ | 306,029 | $ | 298,042 | $ | 249,474 | $ | 7,987 | 3% | $ | 48,568 | 19% | |||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures |
$ | 219,065 | $ | 208,063 | $ | 164,858 | $ | 11,002 | 5% | $ | 43,205 | 26% | |||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
- *
- Represents a non-GAAP financial measure. Refer to Supplemental Information within this MD&A for a reconciliation of this measure.
| |
|
Operating Revenues (Dollars in millions) |
|
| |
Key components of changes in the statement of operations items were as follows:
2015-2014 Commentary
Total operating revenues
Operating revenues increased in 2015 due to $55.5 million from Cable acquisitions, offset by declines in Wireline commercial and wholesale revenues of $19.3 million. HMS equipment sales increased $21.0 million.
20
| | ||
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
Total operating expenses
Operating expenses decreased in 2015 due to the impact of an $84.0 million non-cash goodwill impairment loss in 2014 offset by a $43.8 million increase from Cable acquisitions. HMS equipment cost of goods sold increased $16.6 million.
2014-2013 Commentary
Total operating revenues
Operating revenues increased in 2014 due primarily to $164.5 million from Cable and HMS acquisitions.
Total operating expenses
Operating expenses increased in 2014 due primarily to $160.6 million from Cable and HMS acquisitions and an $84.0 million non-cash goodwill impairment loss, which was partially offset by a $43.6 million decrease in Wireline expenses.
An $84.0 million loss on impairment of goodwill was recognized in the HMS segment during the quarter ended September 30, 2014. See Note 7 — Intangible Assets in the Notes to Consolidated Financial Statements for more information related to this impairment.
21
| | ||
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
|
|
WIRELINE OPERATIONS |
TDS Telecom's Wireline business provides broadband, video and voice services. These services are provided to residential, commercial, and wholesale customers in a mix of rural, small town and suburban markets, with the largest concentration of its customers in the Upper Midwest and the Southeast. TDS Telecom's strategy is to offer its residential customers broadband, video, and voice services through value-added bundling. In its commercial business TDS Telecom's focus is on small- to medium-sized businesses and its sales efforts emphasize advanced IP-based voice and data services.
| | | |
| ILEC Residential Customers by Broadband Speeds | Wireline Residential Revenue per Connection | |
| | | |
|
|
Residential broadband customers are increasingly choosing higher speeds in ILEC markets with 47% choosing speeds of 10 Mbps or greater, and 16% choosing speeds of 25 Mbps or greater, driving increases in average revenue per connection.
22
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
| | | |
| Residential Connections | Commercial Connections | |
| | | |
|
|
|
| TDS Telecom added 11,000 IPTV connections in 2015 with expansion into nine new markets. Voice connections continued to decline in 2015. | TDS managedIP connections grew in 2015; however, this did not completely offset the decline in voice connections. | |
| | | |
23
| | ||
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
Components of Operating Income (Loss)
Year Ended December 31, |
2015 | 2014 | 2013 | 2015 vs. 2014 | 2014 vs. 2013 |
||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) |
|||||||||||||||||||||
Service revenues |
|||||||||||||||||||||
Residential |
$ | 296,943 | $ | 293,304 | $ | 293,217 | $ | 3,639 | 1% | $ | 87 | – | |||||||||
Commercial |
220,643 | 229,306 | 229,715 | (8,663 | ) | (4)% | (409 | ) | – | ||||||||||||
Wholesale |
181,352 | 191,976 | 200,440 | (10,624 | ) | (6)% | (8,464 | ) | (4)% | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total service revenues |
698,938 | 714,586 | 723,372 | (15,648 | ) | (2)% | (8,786 | ) | (1)% | ||||||||||||
Equipment and product sales |
1,965 | 1,836 | 3,195 | 129 | 7% | (1,359 | ) | (43)% | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total operating revenues |
700,903 | 716,422 | 726,567 | (15,519 | ) | (2)% | (10,145 | ) | (1)% | ||||||||||||
Cost of services (excluding depreciation, amortization and accretion reported below) |
254,879 | 256,878 | 266,635 | (1,999 | ) | (1)% | (9,757 | ) | (4)% | ||||||||||||
Cost of equipment and products |
2,212 | 2,336 | 3,831 | (124 | ) | (5)% | (1,495 | ) | (39)% | ||||||||||||
Selling, general and administrative |
193,850 | 189,956 | 220,097 | 3,894 | 2% | (30,141 | ) | (14)% | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
|
450,941 | 449,170 | 490,563 | 1,771 | – | (41,393 | ) | (8)% | |||||||||||||
Operating cash flow* |
249,962 | 267,252 | 236,004 | (17,290 | ) | (6)% | 31,248 | 13% | |||||||||||||
Depreciation, amortization and accretion |
165,841 | 169,044 | 170,868 | (3,203 | ) | (2)% | (1,824 | ) | (1)% | ||||||||||||
(Gain) loss on asset disposals, net |
5,094 | 2,091 | 130 | 3,003 | >100% | 1,961 | >100% | ||||||||||||||
(Gain) loss on sale of business and other exit costs, net |
(9,530 | ) | (2,357 | ) | – | (7,173 | ) | >(100)% | (2,357 | ) | N/M | ||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total operating expenses |
612,346 | 617,948 | 661,561 | (5,602 | ) | (1)% | (43,613 | ) | (7)% | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total operating income |
$ | 88,557 | $ | 98,474 | $ | 65,006 | $ | (9,917 | ) | (10)% | $ | 33,468 | 51% | ||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA* |
$ | 252,150 | $ | 269,624 | $ | 237,568 | $ | (17,474 | ) | (6)% | $ | 32,056 | 13% | ||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures |
$ | 140,433 | $ | 135,805 | $ | 140,009 | $ | 4,628 | 3% | $ | (4,204 | ) | (3)% | ||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
N/M – Not meaningful
- *
- Represents a non-GAAP financial measure. Refer to Supplemental Information within this MD&A for a reconciliation of this measure.
24
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
| | | |
|
Operating Revenues (Dollars in millions) |
Residential revenues consist of: § Broadband services, including fiber-based and digital and other premium and enhanced data services § IPTV and satellite video § Voice services Commercial revenues consist of: § TDS managedIP voice and data services § High-speed and dedicated business internet services § Voice services Wholesale revenues consist of: § Network access services to interexchange carriers for the origination and termination of interstate and intrastate long distance phone calls on TDS Telecom's network and special access services to carriers and others § Amounts received from state and Federal USF |
|
| | | |
Key components of changes in the statement of operations items were as follows:
2015-2014 Commentary
Total operating revenues
Residential revenues increased in 2015 as growth in data and IPTV more than offset the decline in legacy voice services. A 2% increase in average revenue per residential connection driven by price increases for broadband and video services, growth in customers opting for faster broadband speeds and growth in customers selecting higher-tier IPTV packages increased revenues $1.3 million. IPTV average connections grew 53% increasing revenues $9.4 million, while average legacy voice connections declined by 4% decreasing revenues by $4.9 million.
Commercial revenues decreased in 2015 as declining legacy voice and data connections reduced revenues $13.9 million, while 8% growth in average managedIP connections increased commercial revenues $5.5 million.
In 2015, TDS Telecom received $74.6 million in wholesale revenues under Federal USF programs. At this time, TDS Telecom cannot predict what changes that the FCC might make to the USF high cost support program and, accordingly, cannot predict whether such changes will have a material adverse effect on TDS Telecom's business, financial condition or results of operations.
Wholesale revenues decreased in 2015 due primarily to a $4.4 million reduction in revenues received through inter-state and intra-state regulatory support mechanisms and $1.6 million due to an 11% reduction in intra-state minutes-of-use.
Cost of services
Cost of services decreased in 2015 due primarily to $10.8 million in reduced costs of provisioning circuits, purchasing unbundled network elements and providing long-distance services, offset by $7.2 million in increased charges related to the growth in IPTV.
Selling, general and administrative expenses
Selling, general and administrative expenses increased in 2015 due to $3.8 million of employee-related expenses and a $2.0 million increase in Federal USF contribution expense.
Gain on sale of business and other exit costs, net
Divestitures of certain Wireline companies resulted in a Gain on sale of business and other exit costs, net in 2015 and 2014.
25
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
2014-2013 Commentary
Total operating revenues
Residential revenues were relatively unchanged from the prior year. Legacy voice connections declined by 5%, decreasing revenues by $7.1 million, while IPTV connections grew 73% increasing revenues $6.6 million. A 1% increase in average revenue per residential connection driven by price increases for broadband services, growth in customers opting for faster broadband speeds and growth in customers selecting higher-tier IPTV packages increased revenues $1.8 million.
Commercial revenues were relatively unchanged from the prior year. Decreases in revenue from declining legacy voice and data connections exceeded increases in revenues from a 19% growth in average managedIP connections by $3.1 million. A 1% increase in average revenue per connection driven by price increases on legacy voice and data services and managedIP customers moving to higher speed data services increased commercial revenues $2.8 million.
Wholesale revenues decreased 4% in 2014. Revenues received through inter-state and intra-state regulatory support mechanisms decreased $6.9 million. Wholesale revenues declined $2.7 million due to a 10% reduction in intra-state minutes-of-use.
Cost of services
Costs of providing long-distance services, provisioning circuits and purchasing unbundled network elements decreased by $9.8 million and employee expenses decreased by $5.0 million due primarily to reductions in employees. Charges related to the growth in IPTV increased cost of services $4.5 million.
Selling, general and administrative expenses
The decrease of selling, general and administrative expenses in 2014 was due to cost control efforts. Employee expenses decreased $18.1 million due primarily to reductions in employees, and consulting and IT maintenance charges decreased $2.5 million and $2.1 million, respectively. Federal USF charges decreased $3.0 million.
26
| | ||
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
|
CABLE OPERATIONS |
TDS Telecom entered the cable business with the acquisition of Baja on August 1, 2013 and the acquisition of BendBroadband on September 1, 2014. TDS Telecom's strategy is to expand its broadband services while leveraging its core competencies in network management and customer focus. TDS Telecom seeks to be the leading provider of broadband and video services in its targeted markets.
| | | |
Market Penetration |
Cable Connections |
|
|
|
|
Market Penetration is calculated by dividing the number of customer connections by the service addresses passed. |
Cable connections grew 5% in 2015 with increases in broadband and voice outpacing declines in video. The growth in 2014 was due primarily to the acquisition of BendBroadband. |
|
| | | |
27
| | ||
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
Components of Operating Income (Loss)
Year Ended December 31, |
2015 | 20142 | 20131 | 2015 vs. 2014 | 2014 vs. 2013 |
||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) |
|||||||||||||||||||||
Service revenues |
|||||||||||||||||||||
Residential |
$ | 138,377 | $ | 93,985 | $ | 29,016 | $ | 44,392 | 47% | $ | 64,969 | >100% | |||||||||
Commercial |
36,152 | 22,870 | 6,867 | 13,282 | 58% | 16,003 | >100% | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total service revenues |
174,529 | 116,855 | 35,883 | 57,674 | 49% | 80,972 | >100% | ||||||||||||||
Equipment and product sales |
437 | – | – | 437 | N/M | – | N/M | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total operating revenues |
174,966 | 116,855 | 35,883 | 58,111 | 50% | 80,972 | >100% | ||||||||||||||
Cost of services (excluding depreciation, amortization and accretion reported below) |
78,758 | 54,265 | 17,274 | 24,493 | 45% | 36,991 | >100% | ||||||||||||||
Cost of equipment and products |
169 | – | – | 169 | N/M | – | N/M | ||||||||||||||
Selling, general and administrative |
53,738 | 36,175 | 11,054 | 17,563 | 49% | 25,121 | >100% | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
|
132,665 | 90,440 | 28,328 | 42,225 | 47% | 62,112 | >100% | ||||||||||||||
Operating cash flow* |
42,301 | 26,415 | 7,555 | 15,886 | 60% | 18,860 | >100% | ||||||||||||||
Depreciation, amortization and accretion |
35,271 | 23,643 | 7,571 | 11,628 | 49% | 16,072 | >100% | ||||||||||||||
(Gain) loss on asset disposals, net |
691 | 2,482 | 28 | (1,791 | ) | (72)% | 2,454 | >100% | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total operating expenses |
168,627 | 116,565 | 35,927 | 52,062 | 45% | 80,638 | >100% | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total operating income |
$ | 6,339 | $ | 290 | $ | (44 | ) | $ | 6,049 | >100% | $ | 334 | >100% | ||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA* |
$ | 42,341 | $ | 26,422 | $ | 7,557 | $ | 15,919 | 60% | $ | 18,865 | >100% | |||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures |
$ | 51,573 | $ | 35,640 | $ | 8,375 | $ | 15,933 | 45% | $ | 27,265 | >100% | |||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
N/M – Not meaningful
- 1
- Represents
the operations of Baja from August 1, 2013 (date of acquisition) to December 31, 2013.
- 2
- Represents
the operations of Baja for twelve months and BendBroadband from September 1, 2014 (date of acquisition) to December 31,
2014.
- *
- Represents a non-GAAP financial measure. Refer to Supplemental Information within this MD&A for a reconciliation of this measure.
| | | |
Operating Revenues |
Residential revenues consist of: § Broadband services utilizing DOCSIS 3.0 technology for high-speed internet, security and support services § Video services including premium programming in HD, multi-room and TV Everywhere offerings § Voice services Commercial revenues consist of: § Broadband and VoIP services § Voice services § Video services |
|
| | | |
28
| | ||
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
Key components of changes in the statement of operations items were as follows:
2015-2014 Commentary
Changes in operating revenues and operating expenses in 2015 are due primarily to acquisitions. Acquisitions contributed $55.5 million to operating revenues. Cable revenues grew 2% excluding acquisitions due primarily to an increase in broadband and voice connections. Acquisitions contributed $43.8 million to operating expenses. The remaining increase is due to higher advertising, plant maintenance and programming content costs.
2014-2013 Commentary
Changes in operating revenues and operating expenses in 2014 are due primarily to acquisitions. Acquisitions contributed $79.4 million to operating revenues. Cable revenues grew 5% excluding acquisitions. Acquisitions contributed $75.5 million to operating expenses. The remaining increase is due to higher programming content costs.
29
| | ||
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
|
HMS OPERATIONS |
Under TDS Telecom's OneNeck IT Solutions brand, TDS Telecom offers a full-suite of IT solutions ranging from equipment resale to full management and hosting of a customer's IT infrastructure and applications. The goal of HMS operations is to create, deliver, and support a platform of IT products and services tailored for mid-market business customers.
Components of Operating Income (Loss)
Year Ended December 31, |
2015 | 2014 | 2013 | 2015 vs. 2014 | 2014 vs. 2013 |
||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) |
|||||||||||||||||||||
Service revenues |
$ | 116,810 | $ | 109,766 | $ | 94,875 | $ | 7,044 | 6% | $ | 14,891 | 16% | |||||||||
Equipment and product sales |
169,985 | 148,966 | 90,741 | 21,019 | 14% | 58,225 | 64% | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total operating revenues |
286,795 | 258,732 | 185,616 | 28,063 | 11% | 73,116 | 39% | ||||||||||||||
Cost of services (excluding depreciation, amortization and accretion reported below) |
85,163 | 77,392 | 60,423 | 7,771 | 10% | 16,969 | 28% | ||||||||||||||
Cost of equipment and products |
142,927 | 126,362 | 75,991 | 16,565 | 13% | 50,371 | 66% | ||||||||||||||
Selling, general and administrative |
47,104 | 53,020 | 44,945 | (5,916 | ) | (11)% | 8,075 | 18% | |||||||||||||
| | | | | | | | |||||||||||||||