EX-13 4 exhibit13.htm EX-13  

 

 

Exhibit 13

 

 

Telephone and Data Systems, Inc.

 

 

Financial Reports Contents

 

 

 

Management’s Discussion and Analysis of Results of Operations and Financial Condition

1

Overview

1

Regulatory Matters

5

Results of Operations—Consolidated

8

Results of Operations—U.S. Cellular  

11

Results of Operations—TDS Telecom  

17

Inflation  

24

Recently Issued Accounting Pronouncements  

24

Liquidity and Capital Resources  

24

Application of Critical Accounting Policies and Estimates  

31

Certain Relationships and Related Transactions  

37

Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement  

38

Market Risk  

41

Consolidated Statement of Operations  

42

Consolidated Statement of Comprehensive Income (Loss)

43

Consolidated Statement of Cash Flows  

44

Consolidated Balance Sheet—Assets  

45

Consolidated Balance Sheet—Liabilities and Equity  

46

Consolidated Statement of Changes in Equity  

47

Notes to Consolidated Financial Statements  

50

Reports of Management  

97

Report of Independent Registered Public Accounting Firm  

99

Selected Consolidated Financial Data  

100

Consolidated Quarterly Information (Unaudited)  

101

Shareholder Information  

103

 


 

Telephone and Data Systems, Inc.

 

Management’s Discussion and Analysis of Financial Condition

and Results of Operations

 

Telephone and Data Systems, Inc. (“TDS”) is a diversified telecommunications company providing high-quality telecommunications services to approximately 4.8 million wireless customers and 1.2 million wireline and cable connections at December 31, 2014. TDS conducts all of its wireless operations through its 84%-owned subsidiary, United States Cellular Corporation (“U.S. Cellular”).  TDS provides wireline services, cable services and hosted and managed services (“HMS”), through its wholly-owned subsidiary, TDS Telecommunications Corporation (“TDS Telecom”).

 

The following discussion and analysis should be read in conjunction with TDS’ audited consolidated financial statements and the description of TDS’ business included in Item 1 of the TDS Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2014. The discussion and analysis contained herein refers to consolidated data and results of operations, unless otherwise noted.

 

OVERVIEW

 

The following is a summary of certain selected information contained in the comprehensive Management’s Discussion and Analysis of Financial Condition and Results of Operations that follows. The overview does not contain all of the information that may be important. You should carefully read the entire Management’s Discussion and Analysis of Financial Condition and Results of Operations and not rely solely on the overview.

 

TDS’ business segments reflected in this Annual Report on Form 10-K for the year ended December 31, 2014 are U.S. Cellular, TDS Telecom’s Wireline, Cable and HMS operations.  TDS operations also include the majority-owned printing and distribution company, Suttle-Straus, Inc. (“Suttle-Straus”) and TDS’ wholly-owned subsidiary, Airadigm Communications, Inc. (“Airadigm”).  Suttle-Straus and Airadigm’s financial results were not significant to TDS’ operations.  All of TDS’ segments operate only in the United States, except for HMS, which includes an insignificant foreign operation.  See Note 18 — Business Segment Information for summary financial information on each business segment.

 

U.S. Cellular

 

In its consolidated operating markets, U.S. Cellular serves approximately 4.8 million customers in 23 states. As of December 31, 2014, U.S. Cellular’s average penetration rate in its consolidated operating markets was 15.0%. U.S. Cellular operates on a customer satisfaction strategy, striving to meet or exceed customer needs by providing a comprehensive range of wireless products and services, excellent customer support, and a high-quality network. U.S. Cellular’s business development strategy is to obtain interests in and access to wireless licenses in its current operating markets and in areas that are adjacent to or in close proximity to its other wireless licenses, thereby building contiguous operating market areas with strong spectrum positions.  U.S. Cellular believes that the acquisition of additional licenses within its current operating markets will enhance its network capacity to meet its customers’ increased demand for data services.  In addition, U.S. Cellular anticipates that grouping its operations into market areas will continue to provide it with certain economies in its capital and operating costs.

 

Financial and operating highlights in 2014 included the following:

 

·         Total customers were 4,760,000 at December 31, 2014, including 4,646,000 retail customers (98% of total).

 

·         Beginning in the second quarter of 2014, U.S. Cellular expanded its offerings for equipment installment plans.  In 2014, 24% of total device sales to postpaid customers were made under equipment installment plans.

 

·         In December 2014, U.S. Cellular sold $275 million of 7.25% Unsecured Senior Notes due 2063 and will use the proceeds for general corporate purposes, including spectrum purchases and capital expenditures.  See Note 11 — Debt for additional details.

 

·         In December 2014, U.S. Cellular entered into an agreement to sell 595 towers outside of its Core Markets for approximately $159 million.  Concurrently, U.S. Cellular closed on the sale of 236 towers, without tenants, for $10.0 million, recorded a gain of $4.7 million to (Gain) loss on sale of business and other exit costs, net and received $7.5 million in earnest money.  The closing for the remaining 359 towers, primarily with tenants, occurred in January 2015, at which time U.S. Cellular received $141.5 million in additional cash proceeds.  TDS recorded a gain of approximately $119 million related to this transaction.

 

 

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·         In December 2014, U.S. Cellular completed a license exchange primarily in Oklahoma, North Carolina and Tennessee.  As a result of this transaction, a gain of $21.7 million was recorded in (Gain) loss on license sales and exchanges in the Consolidated Statement of Operations.

 

·         In March 2014, U.S. Cellular sold the majority of its St. Louis area non-operating market license for $92.3 million.  As a result of this sale, a gain of $75.8 million was recorded in (Gain) loss on license sales and exchanges in the Consolidated Statement of Operations.

 

·         In February 2014, U.S. Cellular completed a license exchange in Wisconsin.  As a result of this transaction, a gain of $15.7 million was recorded in (Gain) loss on license sales and exchanges in the Consolidated Statement of Operations.

 

In 2014, Core Markets information is the same as Consolidated Markets information.  However, because the Divestiture Transaction and the NY1 & NY2 Deconsolidation were consummated in the second quarter of 2013, the Consolidated Markets in the first six months of 2013 include information with respect to the Divestiture Markets and the NY1 & NY2 Partnerships.  Accordingly, the following operating information is presented for Core Markets to permit a comparison of 2014 to 2013 excluding the Divestiture Markets and the NY1 & NY2 Partnerships.  As used here, Core Markets is defined as all consolidated markets in which U.S. Cellular currently conducts business and, therefore, excludes the Divestiture Markets and the NY1 & NY2 Partnerships.  Core Markets as defined also includes any other income or expenses due to U.S. Cellular’s direct or indirect ownership interests in other spectrum in the Divestiture Markets which was not included in the Divestiture Transaction and other retained assets from the Divestiture Markets.  See Note 6 — Acquisitions, Divestitures and Exchanges and Note 8 — Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.

 

Highlights in the twelve months ended December 31, 2014 for Core Markets included the following:

 

·         Retail customer net additions were 36,000 in 2014 compared to net losses of 215,000 in 2013. In the postpaid category, there were net additions of 31,000 in 2014, compared to net losses of 217,000 in 2013.  Prepaid net additions were 5,000 in 2014 compared to net additions of 2,000 in 2013.

 

·         Postpaid customers comprised approximately 93% of U.S. Cellular’s retail customers as of both December 31, 2014 and December 31, 2013, respectively. The postpaid churn rate was 1.8% in 2014 and 1.7% in 2013.  Postpaid churn in the first half of 2014 was adversely affected by the billing system conversion in 2013; however, it steadily improved over the course of the year and was 1.6% for the three months ended December 31, 2014The prepaid churn rate was 6.4% in 2014 and 6.7% in 2013.

 

·         Billed average revenue per user (“ARPU”) increased to $53.49 in 2014 from $50.82 in 2013 reflecting an increase in postpaid ARPU due to increases in smartphone adoption and corresponding revenues from data products and services. Service revenue ARPU increased to $60.32 in 2014 from $57.66 in 2013 due primarily to an increase in postpaid and prepaid ARPU.

 

·         Postpaid customers on smartphone service plans increased to 60% as of December 31, 2014 compared to 51% as of December 31, 2013. In addition, smartphones represented 81% of all handsets sold in 2014 compared to 73% in 2013. 

 

The following financial information is presented for U.S. Cellular consolidated results:

 

·         Retail service revenues of $3,013.0 million decreased $152.5 million year-over-year, due to a decrease of 456,000 in the average number of retail customers (including approximately 250,000 due to the reductions caused by the Divestiture Transaction and NY1 & NY2 Deconsolidation) partially offset by an increase in billed ARPU.

 

·         Total additions to Property, plant and equipment were $557.6 million, including expenditures to deploy fourth generation Long-term Evolution (“4G LTE”) equipment, construct cell sites, increase capacity in existing cell sites and switches, outfit new and remodel existing retail stores, and enhance billing and other customer management related systems and platforms. Total cell sites in service decreased 11% year-over-year to 6,220 primarily as a result of the deactivation of certain cell sites in the Divestiture Markets.

 

·         Operating income (loss) decreased $290.3 million to a loss of $143.4 million in 2014 from income of $146.9 million in 2013. The gain on license sales and exchanges and the gain on sale of business and other exit costs contributed $145.8 million and $502.2 million to operating income in 2014 and 2013, respectively.  Without these items, operating income (loss) improved by $66.2 million due to higher equipment revenue and lower selling, general and administrative, and depreciation, amortization and accretion expenses, which were partially offset by lower service revenues and higher cost of equipment sold.

 

U.S. Cellular anticipates that its future results may be affected by the following factors:

 

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·         Effects of industry competition on service and equipment pricing;

 

·         U.S. Cellular completed the migration of its customers to a new Billing and Operational Support System (“B/OSS”) in the third quarter of 2013.  Intermittent system outages and delayed system response times negatively impacted customer service and sales operations at certain times.  System enhancements and other measures were implemented to address these issues, and customer service and sales operations response times have improved to expected levels.  In addition, in the fourth quarter of 2014, U.S. Cellular entered into certain arrangements pursuant to which U.S. Cellular now outsources certain support functions for its B/OSS to a third-party vendor.  B/OSS is a complex system and any future operational problems with the system, including any failure by the vendor to provide the required level of service under the outsourcing arrangements, could have adverse effects on U.S. Cellular’s results of operations or cash flows;

 

·         Impacts of selling Apple products;

 

·         Impacts of selling devices under equipment installment plans;

 

·         Relative ability to attract and retain customers in a competitive marketplace in a cost effective manner;

 

·         Expanded distribution of products and services in third-party national retailers;

 

·         The nature and rate of growth in the wireless industry, requiring U.S. Cellular to grow revenues primarily from selling additional products and services to its existing customers, increasing the number of multi-device users among its existing customers, increasing data products and services and attracting wireless customers switching from other wireless carriers;

 

·         Continued growth in revenues and costs related to data products and services and declines in revenues from voice services;

 

·         Rapid growth in the demand for new data devices and services which may result in increased cost of equipment sold and other operating expenses and the need for additional investment in spectrum, network capacity and enhancements;

 

·         Further consolidation among carriers in the wireless industry, which could result in increased competition for customers and/or cause roaming revenues to decline;

 

·         Uncertainty related to various rulemaking proceedings underway at the Federal Communications Commission (“FCC”);

 

·         The ability to negotiate satisfactory 4G LTE data roaming agreements with other wireless operators;

 

·         In September 2014, U.S. Cellular entered into agreements to sell certain non-operating licenses (“unbuilt licenses”) in exchange for receiving licenses in its operating markets and cash.  These transactions are subject to regulatory approval and are expected to close in 2015.  See Note 6 — Acquisitions, Divestitures and Exchanges in the Notes to the Consolidated Financial Statements for additional information related to these transactions;

 

·         In January 2015, U.S. Cellular entered into a term loan credit agreement providing a $225.0 million senior term loan credit facility which will be used for general corporate purposes, including spectrum purchases and capital expenditures; and

 

·         In January 2015, the FCC released the results of Auction 97. U.S. Cellular participated in Auction 97 indirectly through its limited partnership in Advantage Spectrum, L.P.  See Note 14 — Variable Interest Entities in the Notes to Consolidated Financial Statements for additional information.

 

See “Results of Operations — U.S. Cellular.”

 

 

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TDS Telecom

 

The Wireline and Cable segments seek to be the preferred telecommunications solutions providers in their chosen markets serving both residential and commercial customers by developing and delivering high-quality products that meet or exceed customers’ needs and to outperform the competition by maintaining superior customer service. TDS Telecom provides broadband, video and voice services to residential customers through value-added bundling of products.  The commercial focus is to provide advanced IP-based voice and data services to small to medium sized businesses.  The HMS segment offers a full suite of Information Technology (“IT”) solutions including cloud and hosting solutions, managed services, enterprise resource planning (“ERP”) application management, professional services, and IT hardware. 

 

On September 1, 2014, TDS acquired substantially all of the assets of a group of companies operating as BendBroadband (“Bend”), headquartered in Bend, Oregon for $260.7 million in cash.  Bend is a full-service communications company, offering an extensive range of broadband, fiber connectivity, cable television and telephone services for commercial and residential customers in Central Oregon.  As part of the agreement, TDS also acquired a Tier III data center providing colocation and managed services and a cable advertising and broadcast business.  The operations of the cable and advertising and broadcast businesses are included in the Cable segment.  The data center services are included in the HMS segment.

 

On October 4, 2013, TDS acquired 100% of the outstanding shares of MSN Communications, Inc. (“MSN”) for $43.6 million in cash.  The operations of MSN are included in the HMS segment since the date of acquisition.

 

On August 1, 2013, TDS Telecom acquired substantially all of the assets of Baja Broadband, LLC (“Baja”) for $264.1 million in cash.  The operations of Baja are included in the Cable segment since the date of acquisition.

 

TDS Telecom acquired Vital Support Systems, LLC (“Vital”) in June 2012 for $46.1 million in cash.  The operations of Vital are included in the HMS segment since the date of acquisition. 

 

All of these acquisitions impact the comparability of TDS Telecom operating results.

 

Financial and operating highlights in 2014 included the following:

 

·         Operating revenues increased $141.3 million or 15% to $1,088.3 million in 2014.  The increase was due primarily to $164.5 million from acquisitions.

  

·         Operating expenses increased $196.5 million or 22% to $1,098.7 million in 2014 due primarily to $160.6 million from acquisitions and an $84.0 million non-cash goodwill impairment loss, partially offset by a $43.6 million decrease in Wireline expenses.

 

·         Additions to Property, plant and equipment totaled $208.1 million in 2014 including strategic investment in increased network capabilities for broadband services, HMS expansion, IPTV expansion, and software tools that improve management of the network and support sales and customer service processes.

 

·         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.

 

·         Operating income declined $55.2 million to a $10.4 million loss in 2014.  Without the impairment loss of $84.0 million, operating income was higher by $28.8 million or 64%.

 

TDS anticipates that TDS Telecom’s future results will be affected by the following factors:

 

·         Continued increases in competition from wireless and other wireline providers, cable providers, satellite video providers, and technologies such as Voice over Internet Protocol (“VoIP”), DOCSIS 3.0 and further upgrades, and fourth generation (“4G”) mobile technology;

 

·         Continued increases in consumer data usage and demand for high-speed data services;

 

·         Continued declines in Wireline voice connections;

 

·         Continued focus on customer retention programs, including discounting for “triple-play” bundles including broadband, video or satellite video and voice;

 

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·         The expansion of Internet Protocol television (“IPTV”) into additional market areas;

 

·         Continued growth in hosted and managed services which may result in the need for additional investment in data centers;

 

·         Continued focus on cost-reduction initiatives through product and service cost improvements and process efficiencies;

 

·         The Federal government’s disbursement of Broadband Stimulus Funds to bring broadband to rural customers;

 

·         The National Broadband Plan and other rulemaking by the FCC, including uncertainty related to future funding from the Universal Service Fund (“USF”), broadband requirements, intercarrier compensation  and changes in access reform;

 

·         Impacts of the Bend, Baja and MSN transactions, including, but not limited to, the ability to successfully integrate and operate these businesses and the financial impacts of such transactions; and

 

·         Potential acquisitions or divestitures by TDS and/or TDS Telecom of wireline, cable, HMS, or other businesses.

 

See “Results of Operations—TDS Telecom.”

 

Pro Forma Financial Information

 

Refer to TDS’ Form 8-K filed on February 26, 2014 for pro forma financial information related to the Divestiture Transaction and the NY1 & NY2 Deconsolidation for the three and twelve months ended December 31, 2013, as if the transactions had occurred at the beginning of the respective periods. 

 

REGULATORY MATTERS

 

FCC Interoperability Order

 

On October 25, 2013, the FCC adopted a Report and Order and Order of Proposed Modification confirming a voluntary industry agreement on interoperability in the Lower 700 MHz spectrum band.   The FCC's Report and Order laid out a roadmap for the voluntary commitments of AT&T and DISH Network Corporation ("DISH") to become fully binding. The FCC implemented the AT&T commitments in an Order adopted in the first quarter of 2014 that modified AT&T’s Lower 700 MHz licenses.  Pursuant to these commitments, AT&T will begin incorporating changes in its network and devices that will foster interoperability across all paired spectrum blocks in the Lower 700 MHz Band and support LTE roaming on AT&T networks for carriers with compatible Band 12 devices, consistent with the FCC’s rules on roaming.  AT&T will be implementing the foregoing changes in phases starting with network software enhancement taking place possibly through the third quarter of 2015 with the AT&T Band 12 device roll-out to follow.  In late 2014, AT&T made filings with and reaffirmed to the FCC its commitment under this Order.  In addition, the FCC has adopted changes in its technical rules for certain unpaired spectrum licensed to AT&T and DISH in the Lower 700 MHz band to enhance prospects for Lower 700 MHz interoperability.  AT&T’s network and devices currently interoperate across only two of the three paired blocks in the Lower 700 MHz band.   U.S. Cellular’s LTE deployment, carried out in conjunction with its partner, King Street Wireless, utilizes spectrum in all three of these blocks and, consequently, was not interoperable with the AT&T configuration.  U.S. Cellular believes that the FCC action will broaden the ecosystem of devices available to U.S. Cellular’s customers over time.

 

FCC Net Neutrality Proposal

 

Currently, internet services are subject to substantially less regulation than traditional common carrier telecommunications services under federal law and generally are not subject to state or local government regulation because they are currently classified as an “information service” by the FCC under the Communications Act.  Internet services provided by wireless carriers may also be subject to less regulation than by other telecommunications companies.  However, in 2009, the FCC initiated a rulemaking proceeding designed to codify its existing “Net Neutrality” principles to regulate how internet service providers manage applications and content that traverse their networks.  In December 2010, the FCC adopted a net neutrality rule based on its Title I “ancillary” authority under the Communications Act.  Among other things, these rules prohibited all internet providers from blocking consumers’ access to lawful websites or applications that compete with the provider’s voice or video telephony services, subject to reasonable network management.  The rules subjected the providers of fixed but not wireless broadband internet access to a prohibition on “unreasonable discrimination” in transmitting internet traffic over their networks, subject to reasonable network management.  On January 14, 2014, the U.S. Court of Appeals for the District of Columbia Circuit vacated the foregoing “anti-blocking” and “anti-discrimination” portions of the FCC’s net neutrality rules.  In May 2014, the FCC proposed revised rules, substantially similar to the vacated rules, except that the revised proposed rules would replace the prohibition of “unreasonable discrimination” with a prohibition on

 

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“commercially unreasonable practices.”  Following public comments on such rules and the urging of President Obama, in February 2015 the FCC chairman instead proposed applying “Title II” or telecommunications common carrier regulation to both fixed and wireless internet service providers to prevent “paid prioritization” of internet traffic to end users and to restrict wireless carriers from limiting the capacity of certain high volume data users to use the data network.  If the FCC adopts such proposed rules, it is expected that they will be challenged in litigation.  TDS cannot predict the outcome of these proceedings.

 

FCC Spectrum Auction 97

 

In January 2015, the FCC released the results of Auction 97.  U.S. Cellular participated in Auction 97 indirectly through its limited partnership interest in Advantage Spectrum L.P.  See Note 14 — Variable Interest Entities in the Notes to Consolidated Financial Statements for additional information. 

FCC Reform Order

The Telecommunications Act authorizes and directs the FCC to establish a Universal Service Fund (“USF”), to preserve and advance universal access to telecommunications services in rural and high-cost areas of the country.  All carriers with interstate and international revenues must contribute to the USF.  Carriers are free to pass on the cost of such contributions to their customers.  In 2014, U.S. Cellular contributed $78.9 million into the federal USF and passed on the cost of such contributions to its customers.  In 2014, TDS Telecom contributed $12.4 million into the federal USF and passed on the cost of such contributions to its customers.    

 

Telecommunications companies may be designated by states, or in some cases by the FCC, as an Eligible Telecommunications Carrier (“ETC”) to receive universal service support payments if they provide specified services in “high cost” areas.   U.S. Cellular has been designated as an ETC in certain states and received approximately $92.1 million in high cost support for service to high cost areas in 2014.  TDS Telecom also received support under USF support programs.  In 2014, TDS Telecom received $82.2 million under all the federal USF support programs. 

 

In 2011, the FCC released an order (“Reform Order”) to: reform its universal service and intercarrier compensation mechanisms; establish a new, broadband-focused support mechanism; and propose further rules to advance reform.  Pursuant to the FCC's Reform Order, U.S. Cellular’s ETC support has been phased down by 40% since July 1, 2012.  As provided by the Reform Order, the phase down is currently suspended and U.S. Cellular will continue to receive 60% of its baseline support until a new fund provided in the Reform Order is operational.  With respect to TDS Telecom, it remains unclear whether the new mechanism will provide TDS Telecom with the same level of support over time that TDS Telecom receives today.  Further proceedings including litigation may also be possible.  At this time, TDS cannot predict the net effect of further changes to the USF high cost support program under the Reform Order.

 

Multiple appeals of the Reform Order were consolidated and argued in the U.S. Court of Appeals for the 10th Circuit on November 19, 2013.  The court ruled in favor of the FCC and U.S. Cellular filed a Petition of Certiorari on November 25, 2014 with the United States Supreme Court. At this time, U.S. Cellular cannot predict whether the Supreme Court will accept the case or the timing or outcome of any such decision should the Court permit the appeal.

 

With respect to intercarrier compensation, the Reform Order provides for a reduction in the charges that U.S. Cellular pays to wireline phone companies to transport and terminate calls that originate on their networks, which will reduce U.S. Cellular's operating expenses. The reductions in intercarrier charges are to increase over the next five to ten years, further reducing U.S. Cellular's operating expenses.  With respect to TDS Telecom, the Reform Order provides for a reduction in the charges that TDS Telecom pays to wireline phone companies to transport and terminate calls that originate on TDS Telecom’s network, which will reduce TDS Telecom’s operating expenses.  However, TDS Telecom also receives revenue from other carriers to transport and terminate calls that originate on those carriers’ networks.  As reductions in intercarrier charges are to increase over the next five to ten years, TDS Telecom’s related revenues and operating expenses are expected to decline. The net effect of these changes is not known. Further proceedings including litigation may also be possible. TDS cannot predict whether such changes will have a material adverse effect on TDS’ business, financial condition or results of operations.

 

 

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FCC Definition of Broadband Benchmark

 

In January 2015, the FCC redefined its "broadband" benchmark speeds as delivering at least 25 Mbps (previously 4 Mbps) for downloads and 3 Mbps (previously 1 Mbps) for uploads.  These benchmarks may be used by the FCC in connection with certain FCC rules, determining eligibility for support payments, the consideration and approval by the FCC of certain transactions and other regulatory and related purposes.  TDS does not use the new FCC benchmark to define broadband for purposes of disclosure of operating metrics or financial results.  With respect to the Wireline segment, broadband connections represent the number of customers that are provided with high-capacity data circuits via various technologies, including fiber, DSL and dedicated internet circuit technologies.  With respect to the Cable segment, broadband connections represent the billable number of lines into a building for high speed data services.  See “Results of Operations – TDS Telecom” below.

 

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RESULTS OF OPERATIONS—CONSOLIDATED

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Year Ended December 31,

2014 

  

Increase/ (Decrease)

  

Percentage

Change

  

2013 

  

Increase/ (Decrease)

  

Percentage

Change

  

2012 

(Dollars in thousands, except per share amounts)

Operating revenues

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

U.S. Cellular

$

 3,892,747 

  

$

 (26,089) 

  

 (1)% 

  

$

 3,918,836 

  

$

 (533,248) 

  

 (12)% 

  

$

 4,452,084 

  

TDS Telecom

  

 1,088,312 

  

  

 141,309 

  

15%

  

  

 947,003 

  

  

 92,497 

  

11%

  

  

 854,506 

  

All other

  

 28,379 

  

  

 (7,018) 

  

 (20)% 

  

  

 35,397 

  

  

 (3,290) 

  

 (9)% 

  

  

 38,687 

  

  

Total operating revenues

  

 5,009,438 

  

  

 108,202 

  

2%

  

  

 4,901,236 

  

  

 (444,041) 

  

 (8)% 

  

  

 5,345,277 

Operating expenses

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

U.S. Cellular

  

 4,036,137 

  

  

 264,166 

  

7%

  

  

 3,771,971 

  

  

 (523,457) 

  

 (12)% 

  

  

 4,295,428 

  

TDS Telecom

  

 1,098,683 

  

  

 196,512 

  

22%

  

  

 902,171 

  

  

 88,407 

  

11%

  

  

 813,764 

  

All other (1)

  

 64,482 

  

  

 72,747 

  

>100%

  

  

 (8,265) 

  

  

 (60,487) 

  

>(100)

  

  

 52,222 

  

  

Total operating expenses

  

 5,199,302 

  

  

 533,425 

  

11%

  

  

 4,665,877 

  

  

 (495,537) 

  

 (10)% 

  

  

 5,161,414 

Operating income (loss)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

U.S. Cellular

  

 (143,390) 

  

  

 (290,255) 

  

>(100)%

  

  

 146,865 

  

  

 (9,791) 

  

 (6)% 

  

  

 156,656 

  

TDS Telecom

  

 (10,371) 

  

  

 (55,203) 

  

>(100)%

  

  

 44,832 

  

  

 4,090 

  

10%

  

  

 40,742 

  

All other (1)

  

 (36,103) 

  

  

 (79,765) 

  

>(100)%

  

  

 43,662 

  

  

 57,197 

  

>100

  

  

 (13,535) 

  

  

Total operating income (loss)

  

 (189,864) 

  

  

 (425,223) 

  

>(100)%

  

  

 235,359 

  

  

 51,496 

  

28%

  

  

 183,863 

Other income (expenses)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Equity in earnings of

  unconsolidated entities

  

 131,965 

  

  

 (749) 

  

 (1)% 

  

  

 132,714 

  

  

 39,847 

  

43%

  

  

 92,867 

  

Interest and dividend income

  

 16,957 

  

  

 7,865 

  

87%

  

  

 9,092 

  

  

 (156) 

  

 (2)% 

  

  

 9,248 

  

Gain (loss) on investments

  

 - 

  

  

 (14,547) 

  

N/M

  

  

 14,547 

  

  

 18,265 

  

>100

  

  

 (3,718) 

  

Interest expense

  

 (111,397) 

  

  

 12,586 

  

13%

  

  

 (98,811) 

  

  

 12,066 

  

 (14)% 

  

  

 (86,745) 

  

Other, net

  

 115 

  

  

 152 

  

>100%

  

  

 (37) 

  

  

 (757) 

  

>(100)

  

  

 720 

  

  

Total other income

  (expenses)

  

 37,640 

  

  

 (19,865) 

  

 (35)% 

  

  

 57,505 

  

  

 45,133 

  

>100%

  

  

 12,372 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Income (loss) before income taxes

  

 (152,224) 

  

  

 (445,088) 

  

>(100)%

  

  

 292,864 

  

  

 96,629 

  

49%

  

  

 196,235 

  

Income tax expense (benefit)

  

 (4,932) 

  

  

 (130,975) 

  

>(100)%

  

  

 126,043 

  

  

 52,461 

  

71%

  

  

 73,582 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Net income (loss)

  

 (147,292) 

  

  

 (314,113) 

  

>(100)%

  

  

 166,821 

  

  

 44,168 

  

36%

  

  

 122,653 

  

Less: Net income (loss) attributable to noncontrolling interests, net of tax

  

 (10,937) 

  

  

 (35,831) 

  

>(100)%

  

  

 24,894 

  

  

 (15,898) 

  

 (39)% 

  

  

 40,792 

Net income (loss) attributable to

  TDS shareholders

  

 (136,355) 

  

  

 (278,282) 

  

>(100)%

  

  

 141,927 

  

  

 60,066 

  

73%

  

  

 81,861 

  

Preferred dividend requirement

  

 (49) 

  

  

 - 

  

-

  

  

 (49) 

  

  

 1 

  

2%

  

  

 (50) 

Net income (loss) available to

  common shareholders

$

 (136,404) 

  

$

 (278,282) 

  

>(100)%

  

$

 141,878 

  

$

 60,067 

  

73%

  

$

 81,811 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Basic earnings (loss) per share

  attributable to

  TDS shareholders

$

(1.26)

  

$

(2.57)

  

>(100)%

  

$

1.31 

  

$

0.56 

  

75%

  

$

0.75 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Diluted earnings (loss) per share

  attributable to

  TDS shareholders

$

(1.26)

  

$

(2.55)

  

>(100)%

  

$

1.29 

  

$

0.54 

  

72%

  

$

0.75 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

N/M - Percentage change not meaningful

 

 

8

 


 

(1)     Consists of corporate and other operations and intercompany eliminations. In 2013, TDS recognized an incremental gain of $53.5 million compared to U.S. Cellular upon closing of the Divestiture Transaction as a result of lower asset basis in the assets disposed.

 

Operating Revenues and Expenses

 

See “Results of Operations — U.S. Cellular” and “Results of Operations — TDS Telecom” below for factors that affected Operating revenues and expenses.

 

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 $71.8 million, $78.4 million and $67.2 million to Equity in earnings of unconsolidated entities in 2014, 2013 and 2012, respectively. TDS received cash distributions from the LA Partnership of $60.5 million $71.5 million and $66.0 million in 2014, 2013 and 2012, respectively.

 

On April 3, 2013, TDS deconsolidated the NY1 & NY2 Partnerships and began reporting them as equity method investments in its consolidated financial statements as of that date.  In 2014, TDS’ investment in the NY1 & NY2 Partnerships contributed $29.0 million and in 2013, subsequent to their deconsolidation, NY1 & NY2 Partnerships contributed $24.7 million to Equity in earnings of unconsolidated entities.  No amounts were included in 2012 because the NY1 & NY2 Partnerships were consolidated in that year. Distributions from the NY1 & NY2 Partnerships of $26.8 million in 2014, and $29.4 in 2013, are included in Distributions from unconsolidated entities on the Consolidated Statement of Cash Flows.

 

Interest and dividend income

 

In 2014, Interest and dividend income increased by $7.9 million due primarily to imputed interest income recognized on Equipment Installment Plans. See Note 3 — Equipment Installment Plans in the Notes to Consolidated Financial Statements for additional information.

 

Gain (loss) on investments

 

In connection with the deconsolidation of the NY1 & NY2 Partnerships, 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.

 

Loss on investment in 2012 includes a provision for loss of $3.7 million related to a note receivable and preferred stock acquired by U.S. Cellular in connection with an acquisition in 1998.

 

Interest expense

 

In 2014, Interest expense increased $12.6 million from 2013 due primarily to a decrease in capitalized interest related to network and systems projects. In 2013, interest expense increased $12.1 million due primarily to the issuance of TDS’ 5.875% Senior Notes in November 2012 for $195.0 million. This amount was partially offset by an increase in capitalized interest during 2013.

 

Income tax expense

 

The effective tax rates on Income before income taxes and extraordinary items (“pre-tax income”) for 2014, 2013 and 2012 were 3.2%, 43.0% and 37.5%, respectively.  The following significant discrete and other items impacted income tax expense for these years:

 

2014 — Includes tax expense of $38.5 million related to valuation allowances recorded against certain state deferred tax assets, an increase to tax expense of $18.3 million due to 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 effective tax rate in 2014 is lower due to the effect of these items combined with the loss in 2014 in Income (loss) before income taxes.

 

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.

 

 

9

 


 

2012 — Includes tax benefits of $11.3 million resulting from statute of limitation expirations and $6.1 million resulting from corrections relating to prior periods, offset by tax expense of $1.3 million related to state income tax audits and tax expense associated with increases to state deferred tax asset valuation allowances of $5.2 million.

 

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,

2014 

  

2013 

  

2012 

(Dollars in thousands)

  

  

  

  

  

  

  

  

Net income (loss) attributable to noncontrolling interests, net of tax

  U.S. Cellular

  

  

  

  

  

  

  

  

  

Noncontrolling public shareholders’ (1)

$

 (6,826) 

  

$

 21,775 

  

$

 18,431 

  

Noncontrolling shareholders’ or partners’ (1) (2)

  

 (4,111) 

  

  

 3,119 

  

  

 22,361 

  

  

$

 (10,937) 

  

$

 24,894 

  

$

 40,792 

  

  

(1)

The decrease in 2014 is due primarily to decreased income from certain partnerships and U.S. Cellular.

(2)

The decrease in 2013 is due primarily to the elimination of the noncontrolling interest as a result of the NY1 & NY2 Deconsolidation on April 3, 2013.

 

10

 


 

RESULTS OF OPERATIONSU.S. CELLULAR

 

TDS provides wireless telephone service through U.S. Cellular, an 84%-owned subsidiary.  U.S. Cellular owns, manages and invests in wireless markets throughout the United States.

 

Summary Operating Data for U.S. Cellular Consolidated Markets

 

Following is a table of summarized operating data for U.S. Cellular’s Consolidated Markets. Consolidated Markets herein refers to markets which U.S. Cellular currently consolidates, or previously consolidated in the periods presented, and is not adjusted in prior periods presented for subsequent divestitures or deconsolidations. Unless otherwise noted, figures reported in Results of Operations are representative of consolidated results.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

As of or for the Year Ended December 31,

2014 

  

  

2013 

  

  

2012 

  

Retail Customers

  

  

  

  

  

  

  

  

  

  

  

  

Postpaid

  

  

  

  

  

  

  

  

  

  

  

  

  

Total at end of period

  

 4,298,000 

  

  

  

 4,267,000 

  

  

  

 5,134,000 

  

  

  

Gross additions

  

 940,000 

  

  

  

 697,000 

  

  

  

 880,000 

  

  

  

Net additions (losses)

  

 31,000 

  

  

  

 (325,000) 

  

  

  

 (165,000) 

  

  

  

ARPU(1)

$

 56.75 

  

  

$

 54.31 

  

  

$

 54.32 

  

  

  

ARPA(2)

$

 133.19 

  

  

$

 120.92 

  

  

$

 123.27 

  

  

  

Churn rate(3)

  

1.8 

%

  

  

1.8 

%

  

  

1.7 

%

  

  

Smartphone penetration(4)

  

 59.8 

%

  

  

 50.8 

%

  

  

 41.8 

%

  

Prepaid

  

  

  

  

  

  

  

  

  

  

  

  

  

Total at end of period

  

 348,000 

  

  

  

 343,000 

  

  

  

 423,000 

  

  

  

Gross additions

  

 274,000 

  

  

  

 309,000 

  

  

  

 368,000 

  

  

  

Net additions (losses)

  

 5,000 

  

  

  

 (21,000) 

  

  

  

 118,000 

  

  

  

ARPU(1)

$

 34.07 

  

  

$

 31.44 

  

  

$

 33.26 

  

  

  

Churn rate(3)

  

 6.4 

%

  

  

 7.0 

%

  

  

 6.0 

%

Total customers at end of period

  

 4,760,000 

  

  

  

 4,774,000 

  

  

  

 5,798,000 

  

Billed ARPU(1)

$

 53.49 

  

  

$

 50.73 

  

  

$

 50.81 

  

Service revenue ARPU(1)

$

 60.32 

  

  

$

 57.61 

  

  

$

 58.70 

  

Smartphones sold as a percent of total handsets sold

  

 81.3 

%

  

  

 72.8 

%

  

  

 58.7 

%

Total Population

  

  

  

  

  

  

  

  

  

  

  

  

Consolidated markets(5)

  

 50,906,000 

 

  

  

 58,013,000 

 

  

  

 93,244,000 

  

  

Consolidated operating markets(5)

  

 31,729,000 

 

  

  

 31,759,000 

 

  

  

 46,966,000 

  

Market penetration at end of period

  

  

  

  

  

  

  

  

  

  

  

  

Consolidated markets(6)

  

 9.4 

%

  

  

 8.2 

%

  

  

 6.2 

%

  

Consolidated operating markets(6)

  

 15.0 

%

  

  

 15.0 

%

  

  

 12.3 

%

Capital expenditures (000s)

$

 557,615 

  

  

$

 737,501 

  

  

$

 836,748 

  

Total cell sites in service

  

 6,220 

 

  

  

 6,975 

 

  

  

 8,028 

  

Owned towers in service

  

 4,281 

  

  

  

 4,448 

  

  

  

 4,408 

  

 

Summary Operating Data for U.S. Cellular Core Markets

 

Following is a table of summarized operating data for U.S. Cellular's Core Markets.  For comparability, Core Markets as presented here excludes the results of the Divestiture Markets and NY1 and NY2 Partnerships as of or for the twelve months ended December 31, 2013 and December 31, 2012.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

As of or for the Year Ended December 31,

2014 

  

2013 

  

2012 

Retail Customers

  

  

  

  

  

  

  

  

  

  

  

  

Postpaid

  

  

  

  

  

  

  

  

  

  

  

  

  

Total at end of period

  

 4,298,000 

  

  

  

 4,267,000 

  

  

  

 4,496,000 

  

  

  

Gross additions

  

 940,000 

  

  

  

 682,000 

  

  

  

 746,000 

  

  

  

Net additions (losses)

  

 31,000 

  

  

  

 (217,000) 

  

  

  

 (92,000) 

  

  

  

ARPU(1)

$

 56.75 

  

  

$

 54.23 

  

  

$

 53.65 

  

  

  

ARPA(2)

$

 133.19 

  

  

$

 115.00 

  

  

$

 120.78 

  

  

  

Churn rate(3)

  

 1.8 

%

  

  

1.7 

%

  

  

1.5 

%

  

  

Smartphone penetration(4)

  

 59.8 

%

  

  

50.8 

%

  

  

41.1 

%

  

Prepaid

  

  

  

  

  

  

  

  

  

  

  

  

  

Total at end of period

  

 348,000 

  

  

  

 343,000 

  

  

  

 342,000 

  

  

  

Gross additions

  

 274,000 

  

  

  

 295,000 

  

  

  

 288,000 

  

  

  

Net additions (losses)

  

 5,000 

  

  

  

 2,000 

  

  

  

 124,000 

  

  

  

ARPU(1)

$

 34.07 

  

  

$

 31.45 

  

  

$

 32.98 

  

  

  

Churn rate(3)

  

 6.4 

%

  

  

6.7 

%

  

  

5.2 

%

Total customers at end of period

  

 4,760,000 

  

  

  

 4,774,000 

  

  

  

 5,022,000 

  

Billed ARPU (1)

$

 53.49 

  

  

$

 50.82 

  

  

$

 50.54 

  

Service revenue ARPU(1)

$

 60.32 

  

  

$

 57.66 

  

  

$

 58.49 

  

Smartphones sold as a percent of total handsets sold

  

 81.3 

%

  

  

73.0 

%

  

  

58.9 

%

Total Population

  

  

  

  

  

  

  

  

  

  

  

  

Consolidated markets(5)

  

 50,906,000 

  

 

  

 58,013,000 

  

  

  

 83,384,000 

  

  

Consolidated operating markets(5)

  

 31,729,000 

  

 

  

 31,759,000 

  

  

  

 31,445,000 

  

Market penetration at end of period

  

  

  

  

  

  

  

  

  

  

  

  

Consolidated markets(6)

  

 9.4 

%

  

  

8.2 

%

  

  

6.0 

%

  

Consolidated operating markets(6)

  

 15.0 

%

  

  

15.0 

%

  

  

16.0 

%

Capital expenditures (000s)

$

 557,615 

  

  

$

 735,082 

  

  

$

 768,884 

  

Total cell sites in service

  

 6,220 

  

 

  

 6,161 

  

  

  

 6,130 

  

Owned towers in service

  

 3,951 

  

  

  

 3,883 

  

  

  

 3,847 

  

 

11

 


 

 

(1)     Average Revenue per User (“ARPU”) metrics are 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:

a.        Postpaid ARPU consists of total postpaid service revenues and postpaid customers.

b.        Prepaid ARPU consists of total prepaid service revenues and prepaid customers.

c.         Billed ARPU consists of total postpaid, prepaid and reseller service revenues and postpaid, prepaid and reseller customers.

d.        Service revenue ARPU consists of total postpaid, prepaid and reseller service revenues, inbound roaming and other service revenues and postpaid, prepaid and reseller customers.

 

(2)     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.

 

(3)     Churn metrics represent the percentage of the postpaid or prepaid customers that disconnects service each month. These metrics represent the average monthly postpaid or prepaid churn rate for each respective period.

 

(4)     Smartphones represent wireless devices which run on an Android, Apple, BlackBerry or Windows Mobile operating system, excluding connected devices.  Smartphone penetration is calculated by dividing postpaid smartphone customers by total postpaid customers.  

 

(5)     The decrease in the population of consolidated markets is due primarily to the divestiture of the Mississippi Valley non-operating license in October 2013, the majority of the St. Louis area non-operating market license in March 2014, and certain non-operating licenses in North Carolina in December 2014.  Total Population is used only to calculate market penetration of consolidated markets and consolidated operating markets, respectively. See footnote (6) below.  

 

(6)     Market penetration is calculated by dividing the number of wireless customers at the end of the period by the total population of consolidated markets and consolidated operating markets, respectively, as estimated by Claritas.  The increase in consolidated markets penetration is due primarily to a lower denominator as a result of the license divestitures described in footnote (5) above.   

 

 

12

 


 

Components of Operating Income (Loss)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Year Ended

December 31,

2014 

  

Increase/

(Decrease)

  

Percentage

Change

  

2013 

  

Increase/

(Decrease)

  

Percentage

Change

  

2012 

(Dollars in thousands)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Retail service

$

 3,012,984 

  

$

 (152,512) 

  

 (5)% 

  

$

 3,165,496 

  

$

 (382,483) 

  

 (11)% 

  

$

 3,547,979 

Inbound roaming

  

 224,090 

  

  

 (39,096) 

  

 (15)% 

  

  

 263,186 

  

  

 (85,531) 

  

 (25)% 

  

  

 348,717 

Other

  

 160,863 

  

  

 (5,228) 

  

 (3)% 

  

  

 166,091 

  

  

 (36,069) 

  

 (18)% 

  

  

 202,160 

  

Service revenues

  

 3,397,937 

  

  

 (196,836) 

  

 (5)% 

  

  

 3,594,773 

  

  

 (504,083) 

  

 (12)% 

  

  

 4,098,856 

Equipment sales

  

 494,810 

  

  

 170,747 

  

53%

  

  

 324,063 

  

  

 (29,165) 

  

 (8)% 

  

  

 353,228 

  

Total operating revenues

  

 3,892,747 

  

  

 (26,089) 

  

 (1)% 

  

  

 3,918,836 

  

  

 (533,248) 

  

 (12)% 

  

  

 4,452,084 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

System operations (excluding

  Depreciation, amortization

  and accretion reported below)

  

 769,911 

  

  

 6,476 

  

1%

  

  

 763,435 

  

  

 (183,370) 

  

 (19)% 

  

  

 946,805 

Cost of equipment sold

  

 1,192,669 

  

  

 193,669 

  

19%

  

  

 999,000 

  

  

 63,053 

  

7%

  

  

 935,947 

Selling, general and

  administrative

  

 1,591,914 

  

  

 (85,481) 

  

 (5)% 

  

  

 1,677,395 

  

  

 (87,538) 

  

 (5)% 

  

  

 1,764,933 

Depreciation, amortization

  and accretion

  

 605,997 

  

  

 (197,784) 

  

 (25)% 

  

  

 803,781 

  

  

 195,148 

  

32%

  

  

 608,633 

(Gain) loss on asset disposals, net

  

 21,469 

  

  

 9,137 

  

30%

  

  

 30,606 

  

  

 (12,518) 

  

 (69)% 

  

  

 18,088 

(Gain) loss on sale of business

  and other exit costs, net

  

 (32,830) 

  

  

 (213,937) 

  

 (87)% 

  

  

 (246,767) 

  

  

 267,789 

  

>100%

  

  

 21,022 

(Gain) loss on license sales and

  exchanges

  

 (112,993) 

  

  

 (142,486) 

  

 (56)% 

  

  

 (255,479) 

  

  

 255,479 

  

N/M  

  

  

 - 

  

Total operating expenses

  

 4,036,137 

  

  

 264,166 

  

7%

  

  

 3,771,971 

  

  

 (523,457) 

  

 (12)% 

  

  

 4,295,428 

Operating income (loss)

$

 (143,390) 

  

$

 (290,255) 

  

>(100)%

  

$

 146,865 

  

$

 (9,791) 

  

 (6)% 

  

$

 156,656 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

N/M - Percentage change not meaningful

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

 

Operating Revenues

 

Service revenues

 

Service revenues consist primarily of: (i) charges for access, airtime, roaming, recovery of regulatory costs and value added services, including data products and services, provided to U.S. Cellular’s retail customers and to end users through third party resellers (“retail service”); (ii) charges to other wireless carriers whose customers use U.S. Cellular’s wireless systems when roaming; and (iii) amounts received from the Federal USF.

 

Retail service revenues

 

Retail service revenues decreased by $152.5 million, or 5%, to $3,013.0 million due primarily to a decrease in U.S. Cellular’s average customer base (including the reductions caused by the Divestiture Transaction and NY1 & NY2 Deconsolidation), partially offset by an increase in billed ARPU. 

 

In 2013, Retail service revenues decreased by $382.5 million, or 11%, to $3,165.5 million due primarily to a decrease in U.S. Cellular’s average customer base (including the reductions caused by the Divestiture Transaction and NY1 & NY2 Deconsolidation) and a slight decrease in billed ARPU.  In the fourth quarter of 2013, U.S. Cellular issued loyalty reward points with a value of $43.5 million as a loyalty bonus in recognition of the inconvenience experienced by customers during U.S. Cellular’s billing system conversion in 2013. The value of the loyalty bonus reduced Operating revenues in the Consolidated Statement of Operations and increased Customer deposits and deferred revenues in the Consolidated Balance Sheet.  

 

Billed ARPU increased to $53.49 in 2014 from $50.73 in 2013.  This overall increase is due primarily to an increase in postpaid ARPU to $56.75 in 2014 from $54.31 in 2013 and an increase in prepaid ARPU to $34.07 in 2014 from $31.44 in 2013, reflecting an increase in smartphone penetration and corresponding revenues from data products and services, partially offset by lower monthly service billings for customers on equipment installment plans. Billed ARPU in 2013 was relatively flat compared to $50.81 in 2012.  An increase in smartphone adoption and corresponding revenues from data products and services drove higher ARPU; however, this growth was offset by the special issuance of loyalty rewards points in the fourth quarter of 2013, which negatively impacted billed ARPU for the year by $0.70.

 

 

13

 


 

U.S. Cellular expects continued pressure on retail service revenues in the foreseeable future due to industry competition for customers and related effects on pricing of service plan offerings offset to some degree by continued adoption of smartphones and data usage.  In addition, beginning in the second quarter of 2014, U.S. Cellular expanded its offerings of equipment installment plans.  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.

 

Inbound roaming revenues

 

Inbound roaming revenues decreased by $39.1 million, or 15% in 2014 to $224.1 million.  The decrease was due in part to a $17.6 million impact related to the Divestiture Transaction and NY1 & NY2 Deconsolidation recorded in 2013.  The remaining decrease in the Core Markets was due to a decrease in rates and a decline in voice volume, partially offset by higher data usage.  U.S. Cellular expects modest growth in data volume, declining voice volumes and declining rates which likely will result in declining inbound roaming revenues in the near term.  Both inbound and outbound roaming rates are subject to periodic revision; further, U.S. Cellular is negotiating 4G LTE roaming rates with several carriers which could materially affect roamer revenues and expenses going forward.

 

Inbound roaming revenues decreased by $85.5 million, or 25% in 2013 to $263.2 million.  The decrease was due primarily to lower rates ($47.9 million) and the impacts of the Divestiture Transaction and NY1 & NY2 Deconsolidation ($37.6 million).  Data volume increased year-over year but the impact of this increase was offset by the combined impacts of lower volume for voice and lower rates for both data and voice.  The decline in roaming revenues was offset by a decline in roaming expense also due to lower rates. 

 

Other revenues

 

Other revenues of $160.9 million in 2014 decreased by $5.2 million, or 3%, compared to 2013 due to a $14.8 million decrease in ETC support, partially offset by an increase in tower rental revenue.  Tower rental revenue was $55.5 million and $45.7 million in 2014 and 2013, respectively.  In 2013, Other revenues decreased by $36.1 million, or 18%, due primarily to a decrease in ETC support. 

 

Equipment sales revenues

 

Equipment sales revenues include revenues from sales of wireless devices and related accessories to both new and existing customers, as well as revenues from sales of wireless devices and accessories to agents. All Equipment sales revenues are recorded net of rebates.

 

U.S. Cellular offers a competitive line of quality wireless devices to both new and existing customers. U.S. Cellular's customer acquisition and retention efforts include offering new wireless devices to customers at discounted prices; in addition, customers on currently offered rate plans receive loyalty reward points that may be used to purchase a new wireless device or accelerate the timing of a customer's eligibility for a wireless device upgrade at promotional pricing. U.S. Cellular also continues to sell wireless devices to agents including national retailers; this practice enables U.S. Cellular to provide better control over the quality of wireless devices sold to its customers, establish roaming preferences and earn quantity discounts from wireless device manufacturers which are passed along to agents and other retailers.

 

Beginning in the second quarter of 2014, U.S. Cellular expanded its offerings of equipment installment plans.  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.

 

Equipment sales revenues increased $170.7 million, or 53%,  to $494.8  million in 2014.  Equipment sales revenues in 2014 include $190.4 million related to equipment installment plan sales.  The increase is due primarily to an increase in average revenue per device sold (including the impact of sales under equipment installment plans) and sales of connected devices and accessories.  This increase is partially offset by a decrease in the sales of other device categories, primarily the feature phone category, and the effects of the Divestiture Transaction and the NY1 & NY2 Deconsolidation.

 

The decrease in 2013 equipment sales revenues of $29.2 million, or 8%, to $324.1 million was driven primarily by selling fewer devices, partially due to the Divestiture Transaction.  Declines in volume were offset by an increase of 12% in average revenue per device.  Average revenue per wireless device sold increased due to a continued shift in customer preference to higher priced smartphones.

 

Operating Expenses

 

System operations expenses (excluding Depreciation, amortization and accretion)

 

 

14

 


 

System operations expenses (excluding Depreciation, amortization and accretion) include charges from telecommunications service providers for U.S. Cellular’s customers’ use of their facilities, costs related to local interconnection to the wireline network, charges for cell site rent and maintenance of U.S. Cellular’s network, long-distance charges, outbound roaming expenses and payments to third‑party data product and platform developers.  

 

System operations expenses increased $6.5 million, or 1%, to $769.9 million in 2014 and decreased $183.4 million, or 19%, to $763.4 million in 2013.  Key components of the net changes in System operations expenses were as follows:

 

·         Maintenance, utility and cell site expenses increased $26.6 million, or 8%, in 2014 and decreased $61.6 million, or 15%, in 2013.  The increase in 2014 reflects higher support costs for the expanded 4G LTE network and completion of certain maintenance projects deferred from 2013, partially offset by the impacts of the Divestiture Transaction and NY1 & NY2 Deconsolidation.  The decrease in 2013 is driven primarily by impacts of the Divestiture Transaction and reductions in expenses related to 3G equipment support and network costs, offset by increases in charges related to 4G LTE equipment and network costs.

 

·         Expenses incurred when U.S. Cellular’s customers used other carriers’ networks while roaming increased $5.8 million, or 3%, in 2014 and decreased $64.1 million, or 27%, in 2013.  The increase in 2014 is 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.  The decrease in 2013 is due primarily to lower rates for both voice and data and lower voice volume, which more than offset increased data roaming usage, as well as the impacts of the Divestiture Transaction and NY1 & NY2 Deconsolidation.

 

·         Customer usage expenses decreased by $25.9 million, or 11%, in 2014, and $57.7 million, or 19%, in 2013.  The decrease in 2014 is driven by impacts of the Divestiture Transaction and NY1 & NY2 Deconsolidation, lower volume and rates for long distance usage and lower fees for platform and content providers, partially offset by LTE migration costs.  The decrease in 2013 is driven by impacts of the Divestiture Transaction and decreases in intercarrier charges as a result of the FCC’s Reform Order and certain data costs, partially offset by increases due to network costs for 4G 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

 

Cost of equipment sold increased $193.7 million, or 19%, in 2014 and $63.1 million, or 7% in 2013.  In both years, the increase was driven primarily by an increase in the average cost per wireless device sold (22% in 2014 and 33% in 2013), 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.  Smartphones sold as a percentage of total devices sold were 73%, 68% and 56% in 2014, 2013 and 2012, respectively.  The total number of devices sold decreased by 3% and 18% in 2014 and 2013, respectively, partially due to the Divestiture Transaction.

 

U.S. Cellular’s loss on equipment, defined as equipment sales revenues less cost of equipment sold, was $697.9 million, $674.9 million and $582.7 million for 2014, 2013 and 2012, respectively. U.S. Cellular expects loss on equipment to continue to be a significant cost in the foreseeable future as iconic data-centric wireless devices continue to increase in cost and wireless carriers continue to use device availability and pricing as a means of competitive differentiation.  However, U.S. Cellular expects that sales of wireless devices under equipment installment plans and, for certain devices such as tablets, under non-subsidized plans, will offset loss on equipment to some degree.     

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses include salaries, commissions and expenses of field sales and retail personnel and facilities; telesales department salaries and expenses; agent commissions and related expenses; corporate marketing and merchandise management; and advertising expenses.  Selling, general and administrative expenses also include bad debts expense, costs of operating customer care centers and corporate expenses.

 

Selling, general and administrative expenses decreased by $85.5 million to $1,591.9 million in 2014 and by $87.5 million to $1,677.4 million in 2013.  Key components of the net changes in Selling, general and administrative expenses were as follows:

 

2014 —

·         General and administrative expenses decreased by $79.7 million, or 8%, due primarily to the Divestiture Transaction and NY1 & NY2 Deconsolidation and lower consulting expenses related to the billing system conversion in the prior year.

 

15

 


 

 

·         Selling and marketing expenses decreased by $5.7 million, or 1%, due primarily to lower agent, employee and facilities costs as a result of the Divestiture Transaction, partially offset by increases in advertising expense and commissions; higher commissions reflected increases in gross additions, renewals and accessory sales volumes.

 

2013 —

·         Selling and marketing expenses decreased by $75.7 million, or 9%, primarily from lower commission expenses, more cost-effective advertising spending and reduced employee and facilities costs as a result of the Divestiture Transaction.

 

·         General and administrative expenses decreased by $11.8 million, or 1%, driven by corporate cost containment and reduction initiatives and reduced spending as a result of the Divestiture Transaction, offset by costs associated with launching the new billing system of $55.8 million and higher bad debts expense of $31.5 million due to higher customer accounts receivable balances resulting from billing issues experienced after the system conversion.

 

Depreciation, amortization and accretion

 

Depreciation, amortization and accretion expense decreased $197.8 million, or 25%, in 2014, due primarily to the higher amount of accelerated depreciation, amortization and accretion in the Divestiture Markets that occurred in 2013.  Depreciation, amortization and accretion expense increased $195.1 million, or 32%, in 2013 due primarily to the acceleration of depreciation, amortization and accretion in the Divestiture Markets.  The impact of the acceleration was $13.1 million and $158.5 million in 2014 and 2013, respectively.  The accelerated depreciation, amortization and accretion in the Divestiture Markets was completed in the first quarter of 2014.

 

(Gain) loss on asset disposals, net

 

(Gain) loss on asset disposals, net was a loss of $21.5 million in 2014 and $30.6 million in 2013 due primarily to losses resulting from the write-off and disposals of certain network assets.

 

(Gain) loss on sale of business and other exit costs, net

 

(Gain) loss on sale of business and other exit costs, net was a gain of $32.8 million in 2014 and $246.8 million in 2013, both primarily 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

 

(Gain) loss on license sales and exchanges was a net gain in 2014  resulting from the sale of the St. Louis area non-operating market license and the license exchanges primarily in Wisconsin, Oklahoma, North Carolina and Tennessee.  The gain in 2013 resulted from the sale of the Mississippi Valley non-operating market license for $308.0 million, which resulted in a pre-tax gain of $250.6 million. See Note 6 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.  

 

16

 


 

RESULTS OF OPERATIONS—TDS TELECOM

 

TDS conducts its Wireline, Cable and HMS operations through TDS Telecom, a wholly-owned subsidiary.  The following table summarizes operating data for Wireline and Cable operations:

 

As of or for the year ended December 31,

  

2014 

  

2013 

  

2012 

Wireline

  

  

  

  

  

  

  

  

  

  

  

  

  

Residential connections

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Voice (1)

  

  

 335,900 

  

  

  

 352,100 

  

  

  

 374,700 

  

  

  

Broadband (2)

  

  

 229,200 

  

  

  

 227,000 

  

  

  

 229,900 

  

  

  

IPTV (3)

  

  

 23,400 

  

  

  

 13,800 

  

  

  

 7,900 

  

  

  

  

Wireline residential connections

  

  

 588,500 

  

  

  

 592,900 

  

  

  

 612,500 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Total residential revenue per connection (4)

  

$

 41.22 

  

  

$

 40.53 

  

  

$

 39.65 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial connections

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Voice (1)

  

  

 193,200 

  

  

  

 218,400 

  

  

  

 243,100 

  

  

  

Broadband (2)

  

  

 24,700 

  

  

  

 27,100 

  

  

  

 29,700 

  

  

  

managedIP (5)

  

  

 140,200 

  

  

  

 127,600 

  

  

  

 94,600 

  

  

  

  

Wireline commercial connections

  

  

 358,100 

  

  

  

 373,100 

  

  

  

 367,400 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Total Wireline connections

  

  

 946,600 

  

  

  

 966,000 

  

  

  

 979,900 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Cable

  

  

  

  

  

  

  

  

  

  

  

  

  

Cable connections

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Video (6)

  

  

 110,400 

  

  

  

 69,100 

  

  

  

  

  

  

  

Broadband (7)

  

  

 110,900 

  

  

  

 61,000 

  

  

  

  

  

  

  

Voice (7)

  

  

 46,000 

  

  

  

 17,200 

  

  

  

  

  

  

  

  

Cable connections

  

  

 267,300 

  

  

  

 147,300 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

The individual circuit connecting a customer to TDS Telecom’s central office facilities.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(2)

The number of customers provided high-capacity data circuits via various technologies, including DSL and dedicated internet circuit technologies.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(3)

The number of customers provided video services using IP networking technology.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(4)

Total residential revenue divided by the average number of total residential connections.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(5)

The number of telephone handsets, data lines and IP trunks providing communications using IP networking technology.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(6)

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.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(7)

Broadband and voice connections reflect billable number of lines into a building for high speed data and voice services, respectively.

 

 

17

 


 

TDS Telecom Total (Wireline, Cable and HMS Operations)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Components of Operating Income

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Increase/

  

Percentage

  

  

  

  

Increase/

  

Percentage

  

  

  

Year Ended December 31,

  

2014 

  

(Decrease)

  

Change

  

2013 

  

(Decrease)

  

Change

  

2012 

(Dollars in thousands)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Operating revenues

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Wireline

  

$

 716,422 

  

$

 (10,145) 

  

(1)%

  

$

 726,567 

  

$

 (15,181) 

  

(2)%

  

$

 741,748 

  

Cable

  

  

 116,855 

  

  

 80,972 

  

>100%

  

  

 35,883 

  

  

 35,883 

  

N/M  

  

  

 - 

  

HMS

  

  

 258,732 

  

  

 73,116 

  

39%

  

  

 185,616 

  

  

 72,606 

  

64%

  

  

 113,010 

  

Intra-company elimination

  

  

 (3,697) 

  

  

 (2,634) 

  

>(100)%

  

  

 (1,063) 

  

  

 (811) 

  

>(100)%

  

  

 (252) 

  

  

TDS Telecom operating

  revenues

  

  

 1,088,312 

  

  

 141,309 

  

15%

  

  

 947,003 

  

  

 92,497 

  

11%

  

  

 854,506 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Operating expenses

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Wireline

  

  

 617,948 

  

  

 (43,613) 

  

(7)%

  

  

 661,561 

  

  

 (21,805) 

  

(3)%

  

  

 683,366 

  

Cable

  

  

 116,565 

  

  

 80,638 

  

>100%

  

  

 35,927 

  

  

 35,927 

  

N/M  

  

  

 -