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TABLE OF CONTENTS
2017 Annual Report www.tdsinc.com
DEAR SHAREHOLDER S, We embraced a number of opportunities and challenges in 2017. It is an exciting time to be expanding our communications business with leading-edge wireless and broadband technology. Our strong rural and suburban footprint and modest size enable us to be nimble and better understand evolving customer and business needs. U.S. Cellular Offering high-quality and reliable national wireless service in the Middle of Anywhere™ enables us to achieve our first priority: to attract new customers and retain our loyal customer base. While revenue declined in 2017 due to competitive pricing pressures, our strategic focus on cost reductions helped us to achieve a modest increase in profitability. In 2017, we introduced Total Plans, which include an unlimited data option. Leveraging strong customer adoption of our Total Plans, we increased postpaid handset connections during the past year and achieved historically low postpaid handset churn. We completed our first commercial deployment of Voice over LTE, or VoLTE, in Iowa. It provides customers with an even higher quality network experience, and expands our roaming opportunities. We continue to deploy VoLTE in some of our largest markets. Our low-frequency spectrum has long been a competitive network advantage, providing exceptional coverage in the suburban and rural markets we serve. In the 600 MHz auction in 2017, we secured 188 new licenses covering the vast majority of our footprint. TDS Telecom In 2017, TDS Telecom increased its wireline and cable revenues, while hosted and managed service revenues declined. TDS Telecom, in total, significantly increased its profitability. Our wireline and cable businesses share a common strategy. Our goal is to grow high-margin broadband services, bundled with video and voice services to reduce churn. In TDS Telecom’s wireline business, we continued to focus on driving IPTV connections and bundles with high-speed broadband. We are constantly evaluating opportunities to deploy fiber inside our current footprint and adjacent areas. With funding from the Alternative Connect America Cost Model (A-CAM), we are enhancing broadband services in some of our most rural markets. Cable is a natural extension of TDS Telecom’s wireline business. We’ve grown residential cable video connections and achieved seven consecutive quarters of double-digit year-over-year cable broadband growth. TDS Telecom completed three small cable acquisitions, which help us solidify our presence in our existing markets. We continue to evaluate additional cable acquisitions. OneNeck IT Solutions In 2018, OneNeck transitioned to its own business unit within the TDS family of companies, better positioning the company to leverage TDS corporate IT resources. In this hosted and managed services business, we seek to grow recurring revenues in high-margin IT services for mid-market clients. Creating long-term shareholder value Our TDS corporate capital allocation strategy calls for investing available cash resources into the business and returning value to shareholders. TDS has increased its dividend every year for the past 43 years and announced another increase for 2018. 2018 We are focused on our strategic imperatives at each business unit. U.S. Cellular is working diligently to attract new customers and protect its customer base, increase revenues, reduce costs and invest in our future. TDS Telecom is deploying more fiber where economically sound, increasing broadband penetration and evaluating potential cable acquisitions. OneNeck is working to grow recurring service revenues, to add new customers and to improve and standardize its processes. Video message We have created a video to accompany this annual report that provides more information about our progress in 2017 and plans for 2018. Please visit investors.tdsinc.com. Thank you We are grateful to the associates and employees of TDS companies, for their dedication and innovation in providing outstanding experiences for our customers. Thank you to our shareholders and debt holders for your continuing support of our long-term plans and strategies. Very truly yours, LeRoy T. Carlson, Jr. President and Chief Executive Officer Walter C. D. Carlson Chairman of the Board
TELEPHONE AND DATA SYSTEMS, INC.
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 2017
Pursuant to SEC Rule 14a-3
The following audited financial statements and certain other financial information for the year ended December 31, 2017, 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 26, 2018, as Exhibit 13 to Telephone and Data Systems' Annual Report on Form 10-K for the year ended December 31, 2017. 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 |
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
The following Management's Discussion and Analysis (MD&A) should be read in conjunction with Telephone and Data Systems, Inc.'s (TDS) audited consolidated financial statements and notes for the year ended December 31, 2017, and with the description of TDS' business included herein. Certain numbers included herein are rounded to millions for ease of presentation; however, calculated amounts and percentages are determined using the unrounded numbers.
This report contains statements that are not based on historical facts, including the words "believes," "anticipates," "estimates," "expects," "plans," "intends," "projects" and similar expressions. 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. See Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement for additional information.
TDS uses certain "non-GAAP financial measures" and each such measure is identified in the MD&A. A discussion of the reason TDS determines these metrics to be useful and a reconciliation of these measures to their most directly comparable measures determined in accordance with accounting principles generally accepted in the United States of America (GAAP) are included in the Supplemental Information Relating to Non-GAAP Financial Measures section within the MD&A of this Form 10-K Report.
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General |
2017 Operating Revenues by Segment |
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TDS is a diversified telecommunications company that provides high-quality communications services to approximately 6 million connections nationwide. TDS provides wireless services through its 83%-owned subsidiary,
United States Cellular Corporation (U.S. Cellular). TDS also provides wireline, cable and hosted and managed services (HMS), through its wholly-owned subsidiary, TDS Telecommunications LLC (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 additional information about TDS' segments. TDS has re-evaluated internal reporting roles with regard to its HMS business unit and, as a result, will be changing its reportable segments. Effective January 1, 2018, HMS will be considered a non-reportable segment and will no longer be reported under TDS Telecom. See Note 21 – Subsequent Events 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' 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 grow its businesses, create opportunities for its associates and employees, and 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 and financial performance, while also returning value to TDS shareholders through the payment of a regular quarterly cash dividend and share repurchases.
Throughout 2017, TDS 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 2018, TDS will continue to execute on its strategies to build strong, competitive businesses providing high-quality, data-focused services and products.
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 2017 to improve the performance of its networks. U.S. Cellular added capacity to its 4G LTE network responding to customers' growing use of data. U.S. Cellular enhanced its service and product offerings by commercially deploying VoLTE technology for the first time in one key market and will continue to build out VoLTE services over the next few years. The next commercial launch is expected to occur in several additional operating markets in early 2018. VoLTE technology allows customers to utilize a 4G LTE network for both voice and data services, and offers enhanced services such as high definition voice, video calling and simultaneous voice and data sessions. In addition, the deployment of VoLTE technology expands U.S. Cellular's ability to offer roaming services to other carriers. U.S. Cellular continued to enhance its spectrum position and monetize non-strategic assets by entering into multiple spectrum exchange and purchase agreements with third parties and participating in Auction 1002.
TDS Telecom's Wireline segment began work on bringing higher broadband speeds to its most rural customers as part of the Connect America Fund. Beginning in 2017, TDS Telecom receives over $75 million per year for 10 years (with incremental funding for transition in the early years for certain states) for operating and maintaining its network along with the obligation to provide broadband service at various speeds to about 160,000 locations. In 2017, TDS Telecom's Cable segment expanded its footprint by acquiring several small cable companies that complement its market portfolio, services and products.
Since August of 2013, TDS has invested $611 million, primarily through acquisition of cable companies and returned $333 million to shareholders through payment of $282 million in regular quarterly cash dividends and $51 million of stock repurchases. During 2017, TDS paid $69 million in regular quarterly cash dividends. TDS increased the dividend per share paid to its investors by 5% in 2017 which marks the 43rd consecutive year of dividend increases and in February 2018, TDS increased its dividend per share from $0.155 to $0.16. There were no TDS or U.S. Cellular share repurchases in 2017. As of December 31, 2017, $199 million was available for share repurchase under the announced TDS stock repurchase program. 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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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
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| Annual Dividends Per TDS Share | ||
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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.
- §
- Net income available to TDS common shareholders was $153 million in 2017, compared
to $43 million in 2016. Diluted earnings per share was $1.37 compared to $0.39 in 2017 and 2016, respectively.
- §
- In 2017, TDS recognized a loss on impairment of goodwill totaling $262 million
($188 million, net of tax and noncontrolling interests impacts) bringing the amount of recorded goodwill for the U.S. Cellular and HMS reporting units to zero.
- §
- Due to the enactment on December 22, 2017, of H.R.1, originally known as the Tax Cuts and Jobs Act of 2017, which reduced the U.S. federal statutory corporate income tax rate from 35% to 21%, TDS recognized a deferred tax benefit of $327 million ($282 million, net of noncontrolling interests impacts) due to the revaluation of its deferred tax assets and liabilities at the new corporate rate. Refer to Note 4 – Income Taxes in the Notes to Consolidated Financial Statements for further information.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
The following is a list of definitions of certain industry terms that are used throughout this document:
- §
- 4G LTE – fourth
generation Long-Term Evolution which is a wireless broadband technology.
- §
- 5G – fifth generation
wireless broadband technology.
- §
- Account – represents an
individual or business financially responsible for one or multiple associated connections. An account may include a variety of types of connections such as handsets and connected devices.
- §
- Alternative Connect America Cost Model
(A-CAM) – a USF support mechanism for rate-of-return carriers, which provides revenue support annually for ten
years beginning in 2017. This support comes with an obligation to build defined broadband speeds to a certain number of locations.
- §
- Auction 97 – a Federal
Communications Commission (FCC) auction of AWS-3 spectrum licenses that ended in January 2015.
- §
- Auctions 1000, 1001, and 1002 – Auction 1000 is an FCC auction of 600 MHz spectrum licenses that started in 2016 and
concluded in 2017 involving: (1) a "reverse auction" in which broadcast television
licensees submitted bids to voluntarily relinquish spectrum usage rights in exchange for payments (referred to as Auction 1001); (2) a "repacking" of the broadcast television bands in order to
free up certain broadcast spectrum for other uses; and (3) a "forward auction" of licenses for spectrum cleared through this process to be used for wireless communications (referred to as
Auction 1002).
- §
- 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 connections that disconnect service each month. These rates represent the average monthly churn rate for each respective period.
- §
- Connected Devices – non-handset devices that connect directly to the U.S. Cellular network. Connected devices include
products such as tablets, modems, and hotspots.
- §
- EBITDA – refers to
earnings before interest, taxes, depreciation, amortization and accretion and is used in the non-GAAP metric Adjusted EBITDA throughout this document.
- §
- DOCSIS – Data Over Cable
Service Interface Specification is an international telecommunications standard that permits the addition of high-bandwidth data transfer to an existing cable TV (CATV) system. DOCSIS 3.1 is a system
specification that increases data transmission rates.
- §
- Eligible Telecommunications Carrier (ETC) – designation by states for providing specified services in "high cost" areas
which enables participation in universal service support mechanisms.
- §
- Free Cash Flow – non-GAAP metric defined as Cash flows from operating activities less Cash paid for additions to property,
plant, and equipment.
- §
- Gross Additions – represents the total number of new connections added during the period, without regard to connections
that were terminated during that period.
- §
- IPTV Connections –
represents the number of Wireline customers provided video services using IP networking technology.
- §
- Machine-to-Machine or
M2M – technology that involves the transmission of data between networked devices, as well as the performance of actions by devices without human
intervention. U.S. Cellular sells and supports M2M solutions to customers, provides connectivity for M2M solutions via the U.S. Cellular network, and has agreements with device manufacturers and
software developers which offer M2M solutions.
- §
- ManagedIP Connections – refers to the number of telephone handsets, data lines and IP trunks providing communications using IP networking technology.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
- §
- Net Additions – represents the total number of new connections added during the period, net of connections that were terminated during that
period.
- §
- OIBDA – refers to
operating income before depreciation, amortization and accretion and is used in the non-GAAP metric Adjusted OIBDA throughout this document.
- §
- Postpaid Average Billings per Account (Postpaid
ABPA) – non-GAAP metric which is calculated by dividing total postpaid service revenues plus equipment installment plan billings by the average number of
postpaid accounts and by the number of months in the period.
- §
- Postpaid Average Billings per User (Postpaid
ABPU) – non-GAAP metric which is calculated by dividing total postpaid service revenues plus equipment installment plan billings by the average number of
postpaid connections and by the number of months in the period.
- §
- Postpaid Average Revenue per Account (Postpaid
ARPA) – metric which is calculated by dividing total postpaid service revenues by the average number of postpaid accounts and by the number of months in the
period.
- §
- Postpaid Average Revenue per User (Postpaid
ARPU) – metric which is calculated by dividing total postpaid service revenues by the average number of postpaid connections and by the number of months in
the period.
- §
- Retail Connections – the
sum of U.S. Cellular postpaid connections and U.S. Cellular prepaid connections.
- §
- Tax Act – refers to
comprehensive federal tax legislation enacted on December 22, 2017, which made broad and complex changes to the U.S. tax code. Now titled H.R.1, the Tax Act was originally identified as the Tax
Cuts and Jobs Act of 2017.
- §
- Universal Service Fund (USF) – a system of telecommunications collected fees and support payments managed by the FCC
intended to promote universal access to telecommunications services in the United States.
- §
- U.S. Cellular Connections – individual lines of service associated with each device activated by a customer. This includes
smartphones, feature phones, tablets, modems, hotspots and machine-to-machine
devices.
- §
- 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.
- §
- Voice Connections –
refers to the individual circuits connecting a customer to Wireline's central office facilities or the Cable billable number of lines into a building for voice services.
- §
- VoLTE – Voice over
Long-Term Evolution is a technology specification that defines the standards and procedures for delivering voice communications and related services over 4G LTE networks.
- §
- Wireline Residential Revenue per Connection – is calculated by dividing total Wireline residential revenue by the average number of Wireline residential connections and by the number of months in the period.
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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, |
2017 | 2016 | 2015 | 2017 vs. 2016 |
2016 vs. 2015 |
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(Dollars in millions) |
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Operating revenues |
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U.S. Cellular |
$ | 3,890 | $ | 3,990 | $ | 4,031 | (3)% | (1)% | |||||||
TDS Telecom |
1,140 | 1,151 | 1,158 | (1)% | (1)% | ||||||||||
All other1 |
14 | 14 | 21 | 1% | (35)% | ||||||||||
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Total operating revenues |
5,044 | 5,155 | 5,210 | (2)% | (1)% | ||||||||||
Operating expenses |
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U.S. Cellular |
4,194 | 3,942 | 3,684 | 6% | 7% | ||||||||||
TDS Telecom |
1,077 | 1,084 | 1,079 | (1)% | 1% | ||||||||||
All other1 2 3 |
(122 | ) | 18 | 16 | >(100)% | 9% | |||||||||
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Total operating expenses |
5,149 | 5,044 | 4,779 | 2% | 6% | ||||||||||
Operating income (loss) |
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U.S. Cellular |
(304 | ) | 48 | 347 | >(100)% | (86)% | |||||||||
TDS Telecom |
63 | 67 | 79 | (7)% | (15)% | ||||||||||
All other1 2 3 |
136 | (4 | ) | 5 | >100% | >(100)% | |||||||||
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Operating income (loss) |
(105 | ) | 111 | 431 | >(100)% | (74)% | |||||||||
Investment and other income (expense) |
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Equity in earnings of unconsolidated entities |
137 | 140 | 140 | (2)% | — | ||||||||||
Interest and dividend income |
15 | 11 | 5 | 42% | >100% | ||||||||||
Interest expense |
(170 | ) | (170 | ) | (142 | ) | — | (20)% | |||||||
Other, net |
1 | — | 1 | >100% | (98)% | ||||||||||
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Total investment and other income (expense) |
(17 | ) | (19 | ) | 4 | 12% | >(100)% | ||||||||
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Income (loss) before income taxes |
(122 | ) | 92 | 435 | >(100)% | (79)% | |||||||||
Income tax expense (benefit) |
(279 | ) | 40 | 172 | >(100)% | (77)% | |||||||||
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Net income |
157 | 52 | 263 | >100% | (80)% | ||||||||||
Less: Net income attributable to noncontrolling interests, net of tax |
4 | 9 | 44 | (55)% | (79)% | ||||||||||
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Net income attributable to TDS shareholders |
$ | 153 | $ | 43 | $ | 219 | >100% | (80)% | |||||||
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Adjusted OIBDA (Non-GAAP)4 |
$ | 999 | $ | 967 | $ | 1,014 | 3% | (5)% | |||||||
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Adjusted EBITDA (Non-GAAP)4 |
$ | 1,152 | $ | 1,118 | $ | 1,160 | 3% | (4)% | |||||||
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Capital expenditures |
$ | 694 | $ | 630 | $ | 759 | 10% | (17)% | |||||||
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- 1
- Consists
of corporate and other operations and intercompany eliminations.
- 2
- In
2015, TDS recognized an incremental gain compared to U.S. Cellular of $12 million on the Tower Sale as a result of lower asset basis in the
assets disposed. See Note 6 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to these
transactions.
- 3
- During
the third quarter of 2017, U.S. Cellular recorded a goodwill impairment of $370 million while TDS recorded a goodwill impairment of the
U.S. Cellular reporting unit of $227 million. Prior to 2009, TDS accounted for U.S. Cellular's share repurchases as step acquisitions, allocating a portion of the share repurchase value to TDS'
Goodwill. Further, goodwill of the U.S. Cellular reporting unit was impaired at the TDS level in 2003 but not at U.S. Cellular. Consequently, U.S. Cellular's goodwill on a stand-alone basis and any
resulting impairments of goodwill does not equal the TDS consolidated goodwill related to U.S. Cellular. For further information on the goodwill impairment see Note 7 —
Intangible Assets in the Notes to Consolidated Financial Statements for additional information.
- 4
- Represents a non-GAAP financial measure. Refer to Supplemental Information Relating to Non-GAAP Financial Measures 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 | ||
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Operating Revenues |
Operating Expenses |
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TDS' 2% decrease in operating revenues is due primarily to decreases in U.S. Cellular retail service, inbound roaming, and equipment sales revenues primarily driven by industry-wide competition.
TDS' 1% decrease in operating revenues is due primarily to decreased Postpaid ARPU, the impact of $58 million in revenue recognized by U.S. Cellular from expired rewards points in 2015 and a decrease in inbound roaming revenue driven by lower roaming rates. This was partially offset by increased Equipment sales revenues at U.S. Cellular due primarily to an increasing number of customers choosing equipment installment plans.
TDS' 2% increase in operating expenses was primarily driven by a loss on impairment of goodwill of $262 million recognized in the third quarter of 2017. See Note 7 — Intangible Assets in the Notes to Consolidated Financial Statements for additional information. This loss was partially offset by decreases in system operations and selling, general and administrative expenses due to cost savings initiatives at TDS Telecom and U.S. Cellular.
TDS' 6% increase in operating expenses was driven by decreased gains on divestiture and exchange transactions. Such gains were $21 million in 2016 compared to $283 million in 2015. See Note 6 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to these gains.
Refer to individual segment discussions in this MD&A for additional details on operating revenues and 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 $66 million, $71 million and $74 million to Equity in earnings of unconsolidated entities in 2017, 2016 and 2015, respectively.
Interest expense increased in 2016 as a result of U.S. Cellular's issuance of $300 million of 7.25% Senior Notes due 2064 in November 2015 and borrowing of $225 million on its senior term loan facility that was drawn in July 2015. See Note 11 — Debt in the Notes to Consolidated Financial Statements for further information on TDS' long-term debt.
TDS' effective tax rate on Income (loss) before income taxes for 2017 was not meaningful as discussed below. The rates for 2016 and 2015 were 43.2% and 39.6%, respectively. In December 2017, the Tax Act was signed into law. TDS adjusts for the effects of changes in tax laws and rates in the period of enactment. The major provisions of the Tax Act
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
impacting TDS are the reduction of the U.S. federal corporate tax rate from 35% to 21% and the bonus depreciation deduction allowing for full expensing of qualified property additions. Income tax expense decreased in 2017 due primarily to a reduction in the Net deferred income tax liability of $327 million as a result of the impact of the rate decrease on TDS' federal taxable temporary differences.
The disclosed amounts within include provisional estimates, pursuant to SEC Staff Accounting Bulletin No. 118, for current and deferred taxes related to tax depreciation of fixed assets. For property acquired and placed in service after September 27, 2017, the Tax Act provides for full expensing if such property was not subject to a written binding agreement in existence as of September 27, 2017. As of December 31, 2017, TDS has not completed a full analysis of all contracts and agreements related to fixed assets placed in service during 2017, but was able to record a reasonable estimate of the effects of these changes based on capital expenditures made during 2017. TDS expects any final adjustments to the provisional amounts to be recorded by the third quarter of 2018, which could be material to TDS' financial statements. The accounting for all other applicable provisions of the Tax Act was performed based on TDS' current interpretation of the provisions of the law as enacted as of December 31, 2017.
The overall effective tax rate for 2017 is not meaningful due to the effect of the Tax Act combined with the impaired goodwill of the U.S. Cellular and HMS reporting units, since portions of the goodwill balance are not amortizable for income tax purposes. The effective income tax rates for 2016 and 2015 are consistent with a normalized tax rate inclusive of federal and state tax during the periods. Discrete items in these years did not have a significant impact on the effective tax rate. For 2018 and future years, TDS expects its effective tax rate will decrease consistent with the statutory federal rate reduction provided in the Tax Act. However, the effective rate in future years also may be impacted by discrete items and permanent tax adjustments. After considering the bonus depreciation provision of the Tax Act, TDS does not expect to incur a significant current federal income tax liability in 2018. See Note 4 — Income Taxes in the Notes to Consolidated Financial Statements for additional information.
Net income attributable to noncontrolling interests, net of tax
Net income attributable to noncontrolling interests, net of tax includes the noncontrolling public shareholders' share of U.S. Cellular's net income, the noncontrolling shareholders' or partners' share of certain U.S. Cellular subsidiaries' net income and other TDS noncontrolling interests.
Year Ended December 31, |
2017 | 2016 | 2015 |
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(Dollars in millions) |
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Net income attributable to noncontrolling interests, net of tax |
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U.S. Cellular noncontrolling public shareholders' |
$ | 2 | $ | 8 | $ | 38 | |||
Noncontrolling shareholders' or partners' |
2 | 1 | 6 | ||||||
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$ | 4 | $ | 9 | $ | 44 | |||
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
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Earnings (Dollars in millions)
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2017-2016 Commentary Net income increased from 2016 to 2017 due primarily to the reduction of income tax expense as result of the Tax Act partially offset by a loss on impairment of goodwill at the U.S. Cellular and HMS reporting units. Income tax expense and the loss on impairment of goodwill are added back into Adjusted EBITDA. The increase in Adjusted EBITDA was due primarily to a combination of improved operating results at TDS Telecom driven by the Wireline and Cable segments and cost savings initiatives at U.S. Cellular. 2016-2015 Commentary Net income (loss) and Adjusted EBITDA decreased due to lower revenues, partially offset by increased Interest and dividend income related to imputed interest income recognized on equipment installment plans. Net income (loss) also decreased due to lower gains from sales and exchanges of businesses and licenses and increased Interest expense in 2016. Such gains and Interest expense are not included as a component of Adjusted EBITDA and, as a result, Adjusted EBITDA did not decrease as much as Net income (loss). |
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* Represents a non-GAAP financial measure. Refer to Supplemental Information Relating to Non-GAAP Financial Measures 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 | ||
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U.S. CELLULAR OPERATIONS |
U.S. Cellular owns, operates, and invests in wireless markets throughout the United States. U.S. Cellular is an 83%-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.
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OPERATIONS |
- §
- Serves customers with approximately 5.1 million connections including
4.5 million postpaid, 0.5 million prepaid and 0.1 million reseller and other connections
- §
- Operates in 22 states
- §
- Employs approximately 5,900 associates
- §
- 6,460 cell sites including 4,080 owned towers in service
| |
U.S. Cellular's mission is 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 served.
Network and Technology:
- §
- U.S. Cellular continues to devote efforts to enhance its network capabilities. In 2017, U.S. Cellular commercially deployed VoLTE technology for the first time in one key market and will continue to build out VoLTE services over the next few years. The next commercial launch is expected to occur in several additional operating markets starting in early 2018. VoLTE technology allows customers to utilize a 4G LTE network for both voice and data services, and enables enhanced services such as high definition voice, video calling and simultaneous voice and data sessions. In addition, the deployment of VoLTE technology expands U.S. Cellular's ability to offer roaming services to other carriers.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
- §
- U.S. Cellular is committed to continuous innovation to provide customers in the markets it serves with the latest technology that can enhance their lives or businesses. U.S. Cellular successfully tested 5G technology for the first time in 2016 in both indoor and outdoor environments and performed additional tests in 2017. U.S. Cellular remains committed to ongoing tests geared towards understanding the propagation characteristics of the new technology and contributing to the development of 5G standards. When deployed commercially, 5G technology is expected to help address customers' growing demand for data services as well as create opportunities for new services requiring high speed and reliability as well as low latency.
Asset Management:
- §
- U.S. Cellular continues to enhance its spectrum position and monetize non-strategic assets by participating in auctions and entering into agreements with third parties. In 2017, the FCC announced by way of public notice that U.S. Cellular was the winning bidder for 188 licenses for an aggregate purchase price of $329 million in the Auction 1002. In addition, U.S. Cellular closed on certain license exchange agreements and received $15 million of cash and recognized gains of $22 million. See Note 6 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to these transactions.
Services and Products:
- §
- U.S. Cellular's customers are able to choose from a variety of national plans with voice,
messaging and data usage options and pricing that are designed to fit different customer needs, usage patterns and budgets. In early 2017, U.S. Cellular introduced new Total Plans to postpaid
customers that include unlimited offerings and no hidden fees such as overage charges and activation fees.
- §
- U.S. Cellular offers a wide range of accessories, including wireless basics such as cases, screen protectors, chargers, and memory cards as well as an assortment of consumer electronics such as headphones, smart speakers, wearables and home automation products (e.g. cameras, sensors, and thermostats). During the fourth quarter of 2017, U.S. Cellular began to offer accessories for purchase on installment plans. These plans allow new and existing postpaid customers to purchase certain accessories payable over a specified time period.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
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Retail Connection Composition |
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Postpaid Gross Additions |
Postpaid Net Additions (Losses) |
Postpaid net additions decreased in 2017 mainly due to lower connected devices net additions which reflected both lower tablet gross additions and an increase in tablet churn. The decline in tablet gross additions reflects industry-wide trends including (i) reduced consumer demand for network-connected tablets, and (ii) carriers including U.S. Cellular have curtailed promotions of heavily discounted tablets designed to stimulate demand due to poor economics. The decrease in connected devices net additions was partially offset by an improvement in handsets net additions driven by both higher gross additions and a decrease in churn.
Postpaid net additions decreased in 2016 mainly due to lower handsets gross additions, partially offset by an improvement in postpaid churn.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
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Postpaid Churn Rates |
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Postpaid Revenue |
Year Ended December 31, |
2017 | 2016 | 2015 |
|||||||
| | | | | | | | | | | |
Average Revenue Per User (ARPU)1 |
$ | 44.38 | $ | 46.96 | $ | 54.50 | ||||
Average Billings Per User (ABPU)1 2 |
$ | 55.60 | $ | 56.12 | $ | 59.74 | ||||
Average Revenue Per Account (ARPA)1 |
$ | 118.96 | $ | 124.09 | $ | 136.90 | ||||
Average Billings Per Account (ABPA)1 2 |
$ | 149.02 | $ | 148.29 | $ | 150.07 | ||||
| | | | | | | | | | | |
- 1
- The
discontinuation of the loyalty rewards points program had the effect of increasing Postpaid ARPU/ABPU and Postpaid ARPA/ABPA by $1.12 and $2.82,
respectively, in 2015.
- 2
- Postpaid ABPU and Postpaid ABPA are non-GAAP financial measures. Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of these measures.
Postpaid ARPU and Postpaid ARPA decreased in 2017 due primarily to industry-wide price competition resulting in overall price reductions on plan offerings.
Equipment installment 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 certain plan offerings provide for reduced monthly access charges. In order to show the trends in total service and equipment revenues received, U.S. Cellular has presented Postpaid ABPU and Postpaid ABPA, which are calculated as Postpaid ARPU and Postpaid ARPA plus average monthly equipment installment plan billings per connection and account, respectively.
Equipment installment plan billings increased in 2017 due to increased penetration of equipment installment plans. Postpaid ABPU decreased in 2017 as the increase in equipment installment plan billings was more than offset by the decline in Postpaid ARPU discussed above. Postpaid ABPA, however, increased slightly in 2017 as the increase in equipment installment plan billings more than offset the decline in Postpaid ARPA discussed above.
Postpaid ARPU and Postpaid ARPA decreased in 2016 due primarily to industry-wide price competition, 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 the $58 million impact of the discontinuation of the loyalty rewards points program in 2015. These factors were partially offset by the impact of increased adoption of smartphones and the related increase in service revenues from data usage.
Equipment installment plan billings increased in 2016 due to increased adoption of equipment installment plans by postpaid customers. Postpaid ABPU and ABPA decreased in 2016 as the increase in equipment installment plan billings was more than offset by the decline in Postpaid ARPU and ARPA discussed above.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
FINANCIAL OVERVIEW — U.S. CELLULAR
Components of Operating Income (Loss)
Year Ended December 31, |
2017 | 2016 | 2015 | 2017 vs. 2016 |
2016 vs. 2015 |
||||||||||
| | | | | | | | | | | | | | | | |
(Dollars in millions) |
|||||||||||||||
Retail service |
$ | 2,589 | $ | 2,700 | $ | 2,994 | (4)% | (10)% | |||||||
Inbound roaming |
129 | 152 | 192 | (15)% | (21)% | ||||||||||
Other |
260 | 229 | 198 | 13% | 16% | ||||||||||
| | | | | | | | | | | | | | | | |
Service revenues |
2,978 | 3,081 | 3,384 | (3)% | (9)% | ||||||||||
Equipment sales |
912 | 909 | 647 | – | 41% | ||||||||||
| | | | | | | | | | | | | | | | |
Total operating revenues |
3,890 | 3,990 | 4,031 | (3)% | (1)% | ||||||||||
System operations (excluding Depreciation, amortization and accretion reported below) |
732 |
760 |
775 |
(4)% |
(2)% |
||||||||||
Cost of equipment sold |
1,071 | 1,081 | 1,053 | (1)% | 3% | ||||||||||
Selling, general and administrative |
1,412 | 1,480 | 1,494 | (4)% | (1)% | ||||||||||
Depreciation, amortization and accretion |
615 | 618 | 607 | – | 2% | ||||||||||
Loss on impairment of goodwill |
370 | – | – | N/M | N/M | ||||||||||
(Gain) loss on asset disposals, net |
17 | 22 | 16 | (22)% | 36% | ||||||||||
(Gain) loss on sale of business and other exit costs, net |
(1 | ) | – | (114 | ) | >(100)% | 100% | ||||||||
(Gain) loss on license sales and exchanges, net |
(22 | ) | (19 | ) | (147 | ) | (17)% | 87% | |||||||
| | | | | | | | | | | | | | | | |
Total operating expenses |
4,194 | 3,942 | 3,684 | 6% | 7% | ||||||||||
| | | | | | | | | | | | | | | | |
Operating income (loss) |
$ | (304 | ) | $ | 48 | $ | 347 | >(100)% | (86)% | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net income |
$ | 15 | $ | 49 | $ | 247 | (70)% | (80)% | |||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Adjusted OIBDA (Non-GAAP)1 |
$ | 675 | $ | 669 | $ | 709 | 1% | (6)% | |||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Adjusted EBITDA (Non-GAAP)1 |
$ | 820 | $ | 816 | $ | 852 | 1% | (4)% | |||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Capital expenditures |
$ | 469 | $ | 446 | $ | 533 | 5% | (16)% | |||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
N/M - Percentage change not meaningful
- 1
- Refer to Supplemental Information Relating to Non-GAAP Financial Measures 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 | ||
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Operating Revenues (Dollars in millions) |
||
|
Service revenues consist of: § Retail Service — Charges for access, airtime, roaming, recovery of regulatory costs and value added services, including data services and products § Inbound Roaming — Charges to other wireless carriers whose customers use U.S. Cellular's wireless systems when roaming § Other Service — Primarily amounts received from the Federal USF, imputed interest recognized on equipment installment plan contracts and tower rental revenues Equipment revenues consist of: § Sales of wireless devices and related accessories to new and existing customers, agents, and third-party distributors |
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| | | |
Key components of changes in the statement of operations line items were as follows:
Service revenues decreased as a result of (i) a decrease in retail service revenues driven by industry-wide price competition resulting in overall price reductions on plan offerings; and (ii) a decrease in inbound roaming revenue mainly due to lower roaming rates. Such reductions were partially offset by an increase in imputed interest income due to an increase in the total number of active equipment installment plans.
U.S. Cellular offers certain promotions that provide the customer with future credits for a fixed period of time as long as service is maintained. Such credits are applied against the customer's monthly bill and recognized as a reduction to Retail service revenues when earned by the customer.
Federal USF revenue remained flat year over year at $92 million. See the Regulatory Matters section in this MD&A for a description of the FCC Mobility Fund Phase II Order (MF2 Order) and its expected impacts on U.S. Cellular's current Federal USF support.
Equipment sales revenues increased by a modest amount year over year reflecting an increase in average revenue per device sold, a mix shift to higher end smartphone devices and, to a lesser extent, an increase in accessories revenues. Such increases were almost entirely offset by a decrease in the number of devices sold, a reduction in guarantee liability amortization for equipment installment contracts as a result of changes in plan offerings, and lower device activation fees.
System operations expenses decreased in 2017 as a result of (i) a decrease in customer usage expenses driven mainly by decreased circuit costs; and (ii) a decrease in roaming expenses driven primarily by lower roaming rates, partially offset by increased data roaming usage.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
Cost of equipment sold decreased mainly due to a reduction in the number of devices sold partially offset by a mix shift from feature phones and connected devices to higher cost smartphones. Loss on equipment, defined as Equipment sales revenues less Cost of equipment sold, was $159 million and $172 million for 2017 and 2016, respectively.
Selling, general and administrative expenses
Selling expenses decreased by $26 million due to lower advertising expenses, including a decrease in sponsorship expenses related to the termination of a naming rights agreement in 2016. Such reductions were partially offset by an increase in commissions expenses.
General and administrative expenses decreased by $42 million mainly due to lower expenses for bad debts and phone programs, along with reductions in numerous other general and administrative expense categories.
Loss on impairment of goodwill
In 2017, U.S. Cellular recorded a $370 million loss on impairment related to goodwill. See Note 7 — Intangible Assets in the Notes to Consolidated Financial Statements for additional information.
(Gain) loss on asset disposals, net
Loss on asset disposals, net decreased primarily as a result of fewer disposals of certain network assets.
(Gain) loss on license sales and exchanges, net
The net gains in 2017 and 2016 were due to license exchange transactions with third parties. See Note 6 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.
Service revenues decreased as a result of (i) a decrease in retail service revenues and resulting ARPU and ARPA primarily driven by industry-wide price competition and 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; (ii) the $58 million of revenue recognized in 2015 from unredeemed rewards points upon termination of U.S. Cellular's rewards program; and (iii) a decrease in inbound roaming revenue driven by lower roaming rates. Such reductions were partially offset by an increase in average connections base and increased adoption of smartphones as well as an increase in imputed interest income recognized on equipment installment plans.
Federal USF revenue remained flat year over year at $92 million.
Equipment sales revenues increased year over year due primarily to an increase in average revenue per device sold driven by the increase in sales under equipment installment plans, an overall increase in the number of devices sold, and a shift to smartphones. Equipment installment plan sales contributed $710 million and $351 million in 2016 and 2015, respectively. Equipment installment plan connections represented 44% and 27% of total postpaid connections as of December 31, 2016 and 2015, respectively.
Cost of equipment sold increased primarily as the result of a shift to smartphone sales and an overall increase in the number of devices sold, partially offset by a decrease in the average cost per device sold driven by lower cost smartphones and connected devices. Cost of equipment sold in 2016 included $758 million related to equipment installment plan sales compared to $449 million in 2015. Loss on equipment was $172 million and $406 million for 2016 and 2015, respectively.
(Gain) loss on asset disposals, net
Loss on asset disposals, net increased primarily as a result of more disposals of certain network assets.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
(Gain) loss on sale of business and other exit costs, net
The net gain in 2015 was due primarily to a $108 million gain recognized on the sale of towers and certain related contracts, assets and liabilities. 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 2016 and 2015 were due to license exchange transactions 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 |
Through December 31, 2017, TDS Telecom operated in three segments: Wireline, Cable and HMS. The overall strategy for the Wireline and Cable businesses is to offer the best broadband connection in the market in order to capitalize on data growth and customers' needs for higher broadband speeds and leverage that growth by bundling services with video and voice. In addition, HMS provides a wide range of Information Technology (IT) services including colocation, cloud and hosting solutions, managed services, application management, and sales of IT-hardware and related maintenance and professional services.
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OPERATIONS |
- §
- TDS Telecom operates in 34 states and through its Wireline and Cable operations provides
broadband, video and voice services to approximately 1.2 million connections.
- §
- Employs approximately 3,300 employees
- §
- Wireline operates incumbent local exchange carriers (ILEC) and competitive local exchange
carriers (CLEC) in 27 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.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
Acquisition/ Divestiture:
- §
- In 2017 and 2016, TDS Telecom acquired certain cable companies to further grow its
markets. These acquisitions collectively represented less than 1% of TDS Telecom's 2017 Total operating revenues. 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.
- §
- In 2017, TDS Telecom acquired the fiber assets of Sun Prairie Utilities which supports its fiber deployment strategy for growth both inside and outside the current footprint of the Wireline business in 2018.
Technology & Support Systems:
- §
- TDS Telecom's Wireline segment continues to upgrade and expand its network to respond to
the needs of its customers for greater bandwidth and advanced technologies. At December 31, 2017, fiber has been deployed to approximately 24% of ILEC service addresses. Fiber technology allows
broadband speeds of up to 1 Gigabit per second (Gbps). In non-fiber markets, TDS Telecom has deployed copper bonding technology to increase data speeds up to 50 Megabits per second (Mbps) to reach
approximately 26% of ILEC service addresses. TDS Telecom continues to utilize federal and state funding mechanisms in order to extend broadband service to unserved and underserved markets.
- §
- TDS Telecom's Cable segment continues to make capacity investments in line with its
strategy to increase broadband penetration in its markets. DOCSIS 3.0 technology is deployed to nearly all of Cable's service addresses which allows it to offer enhanced transmission speeds and in
2017 TDS Telecom began enabling a next generation DOCSIS 3.1 broadband network. TDS Telecom's Cable segment is offering 600 Mbps service in its largest markets.
- §
- The HMS segment continues to invest in data center facilities based on customer demand.
Services and Products:
- §
- TDS Telecom's Wireline segment strives to be the preferred broadband provider in its ILEC
markets. As such, TDS Telecom continues to invest in its network to offer higher speed data service. As of December 31, 2017, TDS Telecom was able to provide broadband service to 96% of its
ILEC physical access lines. At December 31, 2017, 68% of the service addresses in its ILEC markets had 10 Mbps or faster service available and 45% of the service addresses in its ILEC markets
had 25 Mbps or faster service available.
- §
- TDS Telecom's Wireline segment offers IPTV, branded as TDS TV, 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 offers TDS TV in 29 markets, enabling 210,000 or roughly 28% 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 plans additional fiber expansion in 2018.
- §
- TDS Telecom continues to focus its commercial sales on managedIP. TDS managedIP is
available in wireline markets that cover 83% of all commercial customers at December 31, 2017, and is also available in certain cable markets.
- §
- TDS Telecom's Cable segment seeks to expand broadband services and leverage that growth
by bundling with video and voice services. In addition to providing enhanced broadband speeds through DOCSIS 3.0 technology, TDS Telecom also provides customers with the most up-to-date TV
technology through a whole home entertainment solution branded as CatchTV.
- §
- HMS continues to enhance its suite of hybrid-IT solutions including managed services on public clouds, hosted private clouds (its enterprise-class ReliaCloud platform) and customer-owned private clouds in addition to colocation services.
TDS has re-evaluated internal reporting roles with regard to its HMS business unit and, as a result, will be changing its reportable segments. Effective January 1, 2018, HMS will be considered a non-reportable segment and will no longer be reported under TDS Telecom. This change will enable TDS Telecom to continue to successfully execute on the Wireline and Cable segments' shared strategy to be the preferred service provider in its markets. Additionally, HMS will be able to leverage TDS' corporate IT resources, to improve operations and customer service, and better position itself for growth.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
FINANCIAL OVERVIEW — TDS TELECOM
Components of Operating Income
Year Ended December 31, |
2017 | 2016 | 2015 | 2017 vs. 2016 |
2016 vs. 2015 |
||||||||||
| | | | | | | | | | | | | | | | |
(Dollars in millions) |
|||||||||||||||
Operating revenues |
|||||||||||||||
Wireline |
$ | 714 | $ | 698 | $ | 701 | 2% | – | |||||||
Cable |
206 | 185 | 175 | 11% | 6% | ||||||||||
HMS |
225 | 273 | 287 | (18)% | (5)% | ||||||||||
Intra-company elimination |
(5 | ) | (5 | ) | (5 | ) | (9)% | (1)% | |||||||
| | | | | | | | | | | | | | | | |
TDS Telecom operating |
|||||||||||||||
revenues |
1,140 | 1,151 | 1,158 | (1)% | (1)% | ||||||||||
Operating expenses |
|||||||||||||||
Wireline |
603 | 618 | 612 | (2)% | 1% | ||||||||||
Cable |
198 | 183 | 169 | 8% | 9% | ||||||||||
HMS |
282 | 288 | 302 | (2)% | (5)% | ||||||||||
Intra-company elimination |
(5 | ) | (5 | ) | (5 | ) | (9)% | (1)% | |||||||
| | | | | | | | | | | | | | | | |
TDS Telecom operating expenses |
1,077 | 1,084 | 1,079 | (1)% | 1% | ||||||||||
| | | | | | | | | | | | | | | | |
TDS Telecom operating income |
$ | 63 | $ | 67 | $ | 79 | (7)% | (15)% | |||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net income |
$ | 88 | $ | 42 | $ | 46 | >100% | (9)% | |||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Adjusted OIBDA (Non-GAAP)1 |
$ | 323 | $ | 295 | $ | 304 | 9% | (3)% | |||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Adjusted EBITDA (Non-GAAP)1 |
$ | 329 | $ | 298 | $ | 306 | 10% | (3)% | |||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Capital expenditures |
$ | 215 | $ | 173 | $ | 219 | 25% | (21)% | |||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Numbers may not foot due to rounding.
- 1
- Refer to supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.
| | | |
Operating Revenues (Dollars in millions)
|
2017-2016 Commentary Operating revenues decreased in 2017 due primarily to a decrease in HMS Equipment and product sales revenues. Increases in Wireline support revenue provided through the A-CAM program and from broadband and IPTV were partially offset by decreases in Commercial revenues. Cable revenues increased due to broadband connection growth and price increases for video and broadband services. 2016-2015 Commentary Operating revenues decreased in 2016 due to a decrease in HMS equipment and product sales revenues and a decrease in Wireline Commercial and Wholesale revenues. The decreases were partially offset by increases in Wireline revenues from broadband and IPTV and revenues from Cable operations. |
|
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20
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
Operating expenses decreased in 2017 due primarily to a decrease in HMS Equipment cost of goods sold on reduced equipment revenues as well as lower Wireline employee costs and depreciation expense. Partially offsetting the expense decline was a $35 million Loss on impairment of goodwill related to the HMS segment during the third quarter of 2017 and the growth in Cable operations.
Operating expenses increased in 2016 due to higher video programming costs and employee expenses. HMS equipment cost of goods sold decreased on reduced equipment revenues.
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 Broadband Connections by Speeds | Wireline Residential Revenue per Connection | |
| | | |
|
|
|
| Residential broadband customers are increasingly choosing higher speeds in ILEC markets with 57% choosing speeds of 10 Mbps or greater and 25% choosing speeds of 50 Mbps or greater, driving increases in ARPU. | Wireline residential revenue per connection increased in 2017 due primarily to higher broadband speeds, IPTV connection growth, and price increases. |
| | | |
| Residential Connections | Commercial Connections | |
| | | |
|
|
|
| Total residential connections decreased by 3% as declines in voice and broadband connections outpaced the growth in IPTV connections. | Total commercial connections decreased by 6% due primarily to a 9% decrease in voice connections, mostly in CLEC markets. | |
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22
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
Components of Operating Income
Year Ended December 31, |
2017 | 2016 | 2015 | 2017 vs. 2016 | 2016 vs. 2015 |
||||||||||
| | | | | | | | | | | | | | | | |
(Dollars in millions) |
|||||||||||||||
Residential |
$ | 319 | $ | 309 | $ | 297 | 3% | 4% | |||||||
Commercial |
199 | 212 | 221 | (6)% | (4)% | ||||||||||
Wholesale |
195 | 175 | 181 | 12% | (4)% | ||||||||||
| | | | | | | | | | | | | | | | |
Service revenues |
713 | 696 | 699 | 2% | – | ||||||||||
Equipment and product sales |
1 | 2 | 2 | (33)% | (9)% | ||||||||||
| | | | | | | | | | | | | | | | |
Total operating revenues |
714 | 698 | 701 | 2% | – | ||||||||||
Cost of services (excluding Depreciation, amortization and accretion reported below) |
258 | 258 | 255 | – | 1% | ||||||||||
Cost of equipment and products |
2 | 2 | 2 | (16)% | 1% | ||||||||||
Selling, general and administrative |
191 | 197 | 194 | (3)% | 2% | ||||||||||
Depreciation, amortization and accretion |
151 | 159 | 166 | (5)% | (4)% | ||||||||||
(Gain) loss on asset disposals, net |
1 | 2 | 5 | (35)% | (62)% | ||||||||||
(Gain) loss on sale of business and other exit costs, net |
– | – | (10 | ) | N/M | >100% | |||||||||
(Gain) loss on license sales and exchanges, net |
– | (1 | ) | – | N/M | N/M | |||||||||
| | | | | | | | | | | | | | | | |
Total operating expenses |
603 | 618 | 612 | (2)% | 1% | ||||||||||
| | | | | | | | | | | | | | | | |
Operating income |
$ | 111 | $ | 80 | $ | 89 | 40% | (10)% | |||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Income before income taxes |
$ | 117 | $ | 83 | $ | 92 | 41% | (9)% | |||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Adjusted OIBDA (Non-GAAP)1 |
$ | 263 | $ | 240 | $ | 250 | 10% | (4)% | |||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Adjusted EBITDA (Non-GAAP)1 |
$ | 269 | $ | 242 | $ | 252 | 11% | (4)% | |||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Capital expenditures |
$ | 146 | $ | 108 | $ | 140 | 35% | (23)% | |||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Numbers may not foot due to rounding.
N/M - Percentage change not meaningful
- 1
- Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.
23
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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 other digital, 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 § Federal and State USF support |
|
| | | |
Key components of changes in the statement of operations items were as follows:
Residential revenues increased in 2017, due primarily to growth in broadband revenues. Sales of higher tiered services and price increases for broadband increased revenues $9 million. IPTV average connections grew 13% increasing revenues $5 million, while average voice connections declined by 4% decreasing revenues by $6 million.
Commercial revenues decreased in 2017, due to declining connections mostly in CLEC markets.
Wholesale revenues increased in 2017, due primarily to increased support received from the A-CAM program.
In January 2017, the FCC finalized its modification of the USF high cost support program. Under this program, known as A-CAM, TDS is to receive approximately $75 million in annual support which replaces approximately $50 million in annual USF support received in 2016. In addition, TDS is to receive additional transition support payments in certain states. In 2017, TDS Telecom received $82 million in support payments. The A-CAM support comes with an obligation to build defined broadband speeds to reach approximately 160,000 locations.
Cost of services decreased in 2017, due to reduced costs of provisioning circuits, purchasing unbundled network elements and providing long-distance services, offset by increased charges related to growth in IPTV.
Selling, general and administrative
Selling, general and administrative decreased in 2017, due to decreases in employee related expense and in contributions to the Federal Universal Service Fund.
Depreciation, amortization and accretion
Depreciation, amortization and accretion decreased in 2017 as certain assets became fully depreciated.
Residential revenues increased in 2016 as growth in data and IPTV connections more than offset the decline in legacy voice connections. IPTV average connections grew 44% increasing revenues $13 million, while average voice connections declined by 3% decreasing revenues by $3 million. In addition, revenues increased due to 4% growth in
24
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
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.
Commercial revenues decreased in 2016 due to declining legacy voice and data connections offset by increases from 3% growth in average managedIP connections.
Wholesale revenues decreased in 2016 due primarily to the effect of divestitures and a 14% reduction in intra-state minutes-of-use and lower special access revenues.
Cost of services increased in 2016 due to increased charges related to growth in IPTV and increased employee expenses, offset by reduced costs of provisioning circuits, purchasing unbundled network elements and providing long-distance services.
Selling, general and administrative expenses
Selling, general and administrative expenses increased in 2016 due primarily to an increase in employee-related expenses.
Depreciation, amortization and accretion
Depreciation, amortization and accretion decreased in 2016 due primarily to an adjustment recorded in the second quarter of 2016 for excess depreciation attributable to prior periods.
25
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
|
CABLE OPERATIONS |
TDS Telecom's cable strategy is to expand its broadband services and leverage that growth by bundling with video and voice services. TDS Telecom seeks to be the leading provider of broadband services in its targeted markets by leveraging its core competencies in network management and customer focus.
| | | |
Cable Connections |
||
|
Cable connections grew 8% in 2017, including 12,800 connections from acquisitions. Broadband connections grew 15%, including 7,400 connections from acquisitions. |
|
| | | |
26
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
Components of Operating Income
Year Ended December 31, |
2017 | 2016 | 2015 | 2017 vs. 2016 |
2016 vs. 2015 |
||||||||||
| | | | | | | | | | | | | | | | |
(Dollars in millions) |
|||||||||||||||
Residential |
$ | 169 | $ | 147 | $ | 138 | 15% | 6% | |||||||
Commercial |
37 | 38 | 36 | (4)% | 6% | ||||||||||
| | | | | | | | | | | | | | | | |
Total operating revenues |
206 | 185 | 175 | 11% | 6% | ||||||||||
Cost of services (excluding Depreciation, amortization and accretion reported below) |
98 | 94 | 79 | 4% | 19% | ||||||||||
Selling, general and administrative |
54 | 51 | 54 | 6% | (6)% | ||||||||||
Depreciation, amortization and accretion |
44 | 37 | 35 | 21% | 4% | ||||||||||
(Gain) loss on asset disposals, net |
2 | 2 | 1 | (7)% | >100% | ||||||||||
| | | | | | | | | | | | | | | | |
Total operating expenses |
198 | 183 | 169 | 8% | 9% | ||||||||||
| | | | | | | | | | | | | | | | |
Operating income |
$ | 8 | $ | 2 | $ | 6 | >100% | (71)% | |||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Income before income taxes |
$ | 8 | $ | 2 | $ | 7 | >100% | (66)% | |||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Adjusted OIBDA (Non-GAAP)1 |
$ | 54 | $ | 41 | $ | 42 | 33% | (4)% | |||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Adjusted EBITDA (Non-GAAP)1 |
$ | 54 | $ | 41 | $ | 42 | 33% | (3)% | |||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Capital expenditures |
$ | 55 | $ | 54 | $ | 52 | 2% | 5% | |||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Numbers may not foot due to rounding.
- 1
- Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.
| | | |
Operating Revenues (Dollars in millions) |
||
|
Residential and Commercial revenues consist of: § Broadband services, including high-speed internet, security and support services § Video services including premium programming in HD, multi-room and TV Everywhere offerings § Voice services |
|
| | | |
Key components of changes in the statement of operations items were as follows:
Revenues increased in 2017, due primarily to growth in broadband connections and price increases. A change in classification of certain bulk broadband and video connections increased residential revenues and reduced commercial revenues by $6 million in 2017. Cost of services increased in 2017, due primarily to increases in programming fees. Selling, general and administrative expenses increased in 2017 due to increased IT-related expenses and acquisition expense.
27
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
Residential revenues increased in 2016 due primarily to an 8% increase in average residential connections partially offset by the impact of promotional pricing. Commercial revenues increased in 2016 due primarily to increases in advertising revenues and high-speed data customers. Cost of services increased in 2016 due primarily to increases in employee expenses and programming content costs. Selling, general and administrative expenses decreased in 2016 due to lower employee and customer service costs.
28
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| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
|
HMS OPERATIONS |
Under the OneNeck IT Solutions brand, HMS 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.
Year Ended December 31, |
2017 | 2016 | 2015 | 2017 vs. 2016 |
2016 vs. 2015 |
||||||||||
| | | | | | | | | | | | | | | | |
(Dollars in millions) |
|||||||||||||||
Service revenues |
$ | 111 | $ | 119 | $ | 117 | (6)% | 1% | |||||||
Equipment and product sales |
114 | 155 | 170 | (26)% | (9)% | ||||||||||
| | | | | | | | | | | | | | | | |
Total operating revenues |
225 | 273 | 287 | (18)% | (5)% | ||||||||||
Cost of services (excluding Depreciation, amortization and accretion reported below) |
83 |
82 |
85 |
1% |
(4)% |
||||||||||
Cost of equipment and products |
95 | 128 | 143 | (26)% | (10)% | ||||||||||
Selling, general and administrative |
42 | 48 | 47 | (13)% | 3% | ||||||||||
Depreciation, amortization and accretion |
28 | 29 | 27 | (4)% | 6% | ||||||||||
Loss on impairment of goodwill |
35 | — | — | N/M | N/M | ||||||||||
| | | | | | | | | | | | | | | | |
Total operating expenses |
282 | 288 | 302 | (2)% | (5)% | ||||||||||
| | | | | | | | | | | | | | | | |
Operating loss |
$ | (57 | ) | $ | (14 | ) | $ | (15 | ) | >(100)% | 7% | ||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Loss before income taxes |
$ | (60 | ) | $ | (18 | ) | $ | (18 | ) | >(100)% | (2)% | ||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Adjusted OIBDA (Non-GAAP)1 |
$ | 6 | $ | 14 | $ | 12 | (61)% | 24% | |||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | |