EX-13 3 TDSexhibit13.htm EX-13

Exhibit 13

 

Telephone and Data Systems, Inc.

 

 

 

Financial Reports Contents

Page No.

 

 

 

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

1

 

Executive Overview

1

 

Terms used by TDS

3

 

Results of Operations – TDS Consolidated

4

 

U.S. Cellular Operations

7

 

TDS Telecom Operations

15

 

Wireline Operations

19

 

Cable Operations

22

 

HMS Operations

25

 

Liquidity and Capital Resources

27

 

Contractual and Other Obligations

32

 

Consolidated Cash Flows

33

 

Consolidated Balance Sheet Analysis

34

 

Applications of Critical Accounting Policies and Estimates

35

 

Other Items

39

 

Regulatory Matters

39

 

Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement

41

 

Market Risk

43

 

Supplemental Information

45

Consolidated Statement of Operations

49

Consolidated Statement of Comprehensive Income (Loss)

50

Consolidated Statement of Cash Flows

51

Consolidated Balance Sheet – Assets

52

Consolidated Balance Sheet – Liabilities and Equity

53

Consolidated Statement of Changes in Equity

54

Notes to Consolidated Financial Statements

57

Reports of Management

95

Report of Independent Registered Public Accounting Firm

97

Selected Consolidated Financial Data

98

Consolidated Quarterly Information (Unaudited)

99

Shareholder Information

100


Telephone and Data Systems, Inc.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations

 

Executive Overview

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Financial Statements and Notes to Consolidated Financial Statements for the year ended December 31, 2015. This report contains statements that are not based on historical facts, including the words “believes,” “anticipates,” “intends,” “expects” and similar words.  These statements constitute and represent “forward looking statements” as this term is defined in the Private Securities Litigation Reform Act of 1995.  Such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward looking statements. 

TDS uses certain “non-GAAP financial measures” throughout the MD&A.  A discussion of the reason TDS uses these measures and a reconciliation to their most directly comparable GAAP financial measure is included in the Supplemental Information section within this MD&A.

General

Telephone and Data Systems, Inc. (“TDS”) is a diversified telecommunications company that provides high-quality telecommunications services to approximately 6 million customers nationwide.   TDS provides wireless services through its 84%-owned subsidiary, United States Cellular Corporation (“U.S. Cellular”).  TDS also provides wireline services, cable services and hosted and managed services (“HMS”), through its wholly-owned subsidiary, TDS Telecommunications Corporation (“TDS Telecom”).  TDS’ segments operate almost entirely in the United States.  See Note 18Business Segment Information in the Notes to Consolidated Financial Statements for summary financial information on each business segment.

*Represents a non-GAAP financial measure.  Refer to Supplemental Information within this MD&A for a reconciliation of this measure.

 

TDS Mission and Strategy

TDS’ mission is to provide outstanding communications services to its customers and meet the needs of its shareholders, its people, and its communities.  In pursuing this mission, TDS seeks to profitably grow its businesses, create opportunities for its associates and employees, and steadily build value over the long-term for its shareholders.  Across all of its businesses, TDS is focused on providing exceptional customer experiences through best-in-class services and products and superior customer service.

TDS’ long-term strategy calls for the majority of its capital to be reinvested in its operating businesses to strengthen their competitive positions, while still returning value to TDS shareholders through the payment of a regular quarterly cash dividend and share repurchases. 

Throughout 2015, as discussed below, TDS primarily focused on investing in the networks that are the backbone of its commitment to provide outstanding communications services to its customers.  TDS believes these investments will strengthen its competitive position and improve operating performance.  Looking ahead to 2016, TDS will look to build shareholder value by continuing to execute on its strategies to build strong, competitive businesses providing high-quality, data-focused products and services. 

Invest in the business to improve returns and pursue initiatives that align with long-term strategies

Consistent with its strategy, TDS made significant investments in 2015 to improve the performance of its networks.  U.S. Cellular completed the rollout of the 4G LTE network giving customers faster data speeds on an even higher-quality wireless network.  U.S. Cellular also participated in Auction 97 indirectly through its limited partnership interest in Advantage Spectrum L.P. (“Advantage Spectrum”).  Advantage Spectrum was the provisional winning bidder of 124 licenses for an aggregate bid of $338.3 million. 

At TDS Telecom, the wireline segment continued its targeted fiber deployment and now offers IPTV service in 27 markets.  During 2015, TDS Telecom also worked to integrate cable acquisitions and continued efforts to improve network quality and product offerings of previously acquired cable businesses.  The HMS segment opened a new data center in Denver, CO to expand its presence in the IT outsourcing market.

Return value to shareholders

Since August of 2013, TDS has invested $581.4 million, primarily through acquisition of cable companies and returned $195.8 million to shareholders through payment of $147.0 million in regular quarterly cash dividends and $48.8 million of stock repurchases.  During 2015, TDS paid $61.2 million in regular quarterly cash dividends.  TDS increased the dividend paid to its investors by 5% in 2015 which marks the 41st consecutive year of dividend increases and in February 2016, TDS increased its dividend per share from $0.141 to $0.148.  There were no TDS and limited U.S. Cellular share repurchases in 2015.  There is no assurance that TDS will continue to increase the dividend rate or pay dividends and no assurance that TDS or U.S. Cellular will make any significant amount of share repurchases in the future.

 

Support growth initiatives through sound and disciplined financing strategies.

During 2015, U.S. Cellular sold $300 million in 7.25% senior notes and secured a $225 million term loan to fund its operations, current and future spectrum purchases, growth in equipment installment plan receivables and capital expenditures.

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 attributable to TDS shareholders was $219.0 million in 2015, compared to a net loss of $136.4 million in 2014.  The year-over-year improvement was attributable to several factors including (i) increased equipment revenues bolstered by equipment installment plan activity; (ii) reduced cost of equipment sold due to fewer wireless equipment sales transactions overall and lower cost per wireless unit sold; (iii) reduced selling, general and administrative expenses; (iv) increased gains from sales and exchanges of businesses and licenses; and (v) non-cash losses on impairment in 2014.  Diluted earnings per share was $1.98 compared to a diluted loss per share of $1.26 one year ago.
  • In March 2015, U.S. Cellular announced that it would discontinue its loyalty reward program effective September 1, 2015.  All unredeemed reward points expired at that time and the deferred revenue balance related to such expired points was recognized as service revenues.  The amount of deferred revenue recognized upon discontinuation of this program was $58.2 million.
  • U.S. Cellular completed license exchanges and the sale of towers outside of its operating markets.  See Note 6  Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to these transactions.
  • Total additions to Property, plant and equipment were $759.4 million, including expenditures to complete the network rollout of 4G LTE, construct cell sites, increase capacity in existing cell sites and switches, outfit new and remodel existing retail stores, enhance billing and other customer management related systems and platforms, perform network upgrades and fiber expansion, and expand HMS data center facilities.

Terms Used by TDS

All defined terms in this MD&A are used as defined in the Notes to Consolidated Financial Statements, and additional terms are defined below:

  • 4G LTE –fourth generation Long-Term Evolution which is a wireless broadband technology.
  • Auction 97 – An FCC auction of AWS-3 spectrum licenses that ended in January 2015.
  • Average Billings per Account (“ABPA”) – metric is calculated by dividing total postpaid service revenues plus equipment installment plan billings by the average number of postpaid accounts by the number of months in the period.
  • Average Billings per User (“ABPU”) – metric is calculated by dividing total postpaid service revenues plus equipment installment plan billings by the average number of postpaid customers by the number of months in the period.
  • Average Revenue per Account (“ARPA”) metric is calculated by dividing total postpaid service revenues by the average number of postpaid accounts by the number of months in the period.
  • Average Revenue per User (“ARPU”) – metric is calculated by dividing a revenue base by an average number of customers by the number of months in the period.  These revenue bases and customer populations are shown below:
  • Postpaid ARPU consists of total postpaid service revenues and postpaid customers.
  • Service Revenue ARPU consists of total postpaid, prepaid and reseller service revenues, inbound roaming and other service revenues and postpaid, prepaid and reseller customers.
  • Broadband Connections – refers to the number of Wireline customers provided high-capacity data circuits via various technologies, including DSL and dedicated internet circuit technologies or the Cable billable number of lines into a building for high-speed data services.
  • Churn Rate – represents the percentage of the customers that disconnect service each month.  These rates represent the average monthly churn rate for each respective period.
  • FCC – Federal Communications Commission
  • Gross Additions – represents the total number of new customers added during the period, without regard to customers who terminate service.
  • IPTV Connections – represents the number of customers provided video services using IP networking technology.
  • ManagedIP Connections – refers to the number of telephone handsets, data lines and IP trunks providing communications using IP networking technology.
  • Net Additions (Losses) – represents the total number of new customers added during the period, net of customers who terminate service during that period.
  • Smartphone Penetration is calculated by dividing postpaid smartphone customers by total postpaid customers.
  • Video Connections – generally, a home or business receiving video programming counts as one video connection.  In counting bulk residential or commercial connections, such as an apartment building or a hotel, connections are counted based on the number of units/rooms within the building receiving service.
  • Voice Connections – refers to the individual circuit connecting a customer to Wireline’s central office facilities or the Cable billable number of lines into a building for voice services.
  • VoLTE – Voice over Long-Term Evolution which is a technology specification that defines the standards and procedures for delivering voice communication and data over 4G LTE networks.
  • Wireline Residential Revenue per Connection is calculated by dividing total wireline residential revenue by the average number of total wireline residential customers.

Results of Operations — TDS Consolidated

Year Ended December 31,

2015

 

2014

 

2013

 

2015 vs. 2014

 

2014 vs. 2013

(Dollars in thousands)

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Cellular

$

3,996,853 

 

$

3,892,747 

 

$

3,918,836 

 

$

104,106 

 

3%

 

$

(26,089)

 

(1)%

 

TDS Telecom

 

1,158,043 

 

 

1,088,312 

 

 

947,003 

 

 

69,731 

 

6%

 

 

141,309 

 

15%

 

All other1

 

21,345 

 

 

28,379 

 

 

35,397 

 

 

(7,034)

 

(25)%

 

 

(7,018)

 

(20)%

 

 

Total operating revenues

 

5,176,241 

 

 

5,009,438 

 

 

4,901,236 

 

 

166,803 

 

3%

 

 

108,202 

 

2%

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Cellular

 

3,683,911 

 

 

4,036,137 

 

 

3,771,971 

 

 

(352,226)

 

(9)%

 

 

264,166 

 

7%

 

TDS Telecom

 

1,078,583 

 

 

1,098,683 

 

 

902,171 

 

 

(20,100)

 

(2)%

 

 

196,512 

 

22%

 

All other1 2

 

16,676 

 

 

64,482 

 

 

(8,265)

 

 

(47,806)

 

(74)%

 

 

72,747 

 

>100%

 

 

Total operating expenses

 

4,779,170 

 

 

5,199,302 

 

 

4,665,877 

 

 

(420,132)

 

(8)%

 

 

533,425 

 

11%

Operating income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Cellular

 

312,942 

 

 

(143,390)

 

 

146,865 

 

 

456,332 

 

>100%

 

 

(290,255)

 

>(100)%

 

TDS Telecom

 

79,460 

 

 

(10,371)

 

 

44,832 

 

 

89,831 

 

>100%

 

 

(55,203)

 

>(100)%

 

All other1 2

 

4,669 

 

 

(36,103)

 

 

43,662 

 

 

40,772 

 

>100%

 

 

(79,765)

 

>(100)%

 

 

Total operating income (loss)

 

397,071 

 

 

(189,864)

 

 

235,359 

 

 

586,935 

 

>100%

 

 

(425,223)

 

>(100)%

Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  unconsolidated entities

 

140,076 

 

 

131,965 

 

 

132,714 

 

 

8,111 

 

6%

 

 

(749)

 

(1)%

 

Interest and dividend income

 

38,783 

 

 

16,957 

 

 

9,092 

 

 

21,826 

 

>100%

 

 

7,865 

 

87%

 

Gain (loss) on investments

 

 

 

 

 

 

 

14,547 

 

 

 

 

N/M

 

 

(14,547)

 

N/M

 

Interest expense

 

(141,719)

 

 

(111,397)

 

 

(98,811)

 

 

(30,322)

 

(27)%

 

 

(12,586)

 

(13)%

 

Other, net

 

391 

 

 

115 

 

 

(37)

 

 

276 

 

>100%

 

 

152 

 

>100%

 

 

Total other income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  (expenses)

 

37,531 

 

 

37,640 

 

 

57,505 

 

 

(109)

 

-

 

 

(19,865)

 

(35)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

434,602 

 

 

(152,224)

 

 

292,864 

 

 

586,826 

 

>100%

 

 

(445,088)

 

>(100)%

 

Income tax expense (benefit)

 

171,992 

 

 

(4,932)

 

 

126,043 

 

 

176,924 

 

>100%

 

 

(130,975)

 

>(100)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

262,610 

 

 

(147,292)

 

 

166,821 

 

 

409,902 

 

>100%

 

 

(314,113)

 

>(100)%

 

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

 

43,573 

 

 

(10,937)

 

 

24,894 

 

 

54,510 

 

>100%

 

 

(35,831)

 

>(100)%

Net income (loss) attributable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  to TDS shareholders

 

219,037 

 

 

(136,355)

 

 

141,927 

 

 

355,392 

 

>100%

 

 

(278,282)

 

>(100)%

 

Preferred dividend requirement

 

(49)

 

 

(49)

 

 

(49)

 

 

 

 

-

 

 

 

 

-

Net income (loss) available to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  common shareholders

$

218,988 

 

$

(136,404)

 

$

141,878 

 

$

355,392 

 

>100%

 

$

(278,282)

 

>(100)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

$

759,368 

 

$

770,577 

 

$

909,660 

 

$

(11,209)

 

(1)%

 

$

(139,083)

 

(15)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

N/M - Percentage change not meaningful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

Consists of corporate and other operations and intercompany eliminations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

In 2015 and 2013, TDS recognized an incremental gain compared to U.S. Cellular of $11.9 million on the Tower Sale and $53.5 million upon closing of the Divestiture Transaction, respectively, as a result of lower asset basis in the assets disposed.  In 2014, TDS recognized expenses of $20.2 million related to exit and disposal activities due to a License Purchase and Customer Recommendation Agreement between U.S. Cellular and Airadigm.  See Note 6 — Acquisitions, Divestitures and Exchanges for additional information related to these transactions.

 

 

2015-2014 Commentary

TDS’ 3% increase in operating revenues was driven by Equipment sales revenues at U.S. Cellular due primarily to an increasing number of customers choosing equipment installment plans.  Cable acquisitions completed in 2014 also contributed to the improvement.

2014-2013 Commentary

Cable and HMS acquisitions completed in 2013 and 2014 drove the 2% increase in TDS’s operating revenues in 2014.  This was partially offset by a decrease in U.S. Cellular’s operating revenues which experienced a decline in retail service revenue and inbound roaming and an improvement in Equipment sales revenue due primarily to the implementation of equipment installment plans on a broad basis in 2014.

Refer to individual segment discussions in this MD&A for additional details on operating revenues at the segment level.

 

Operating expenses

TDS’ operating expenses decreased by 8% from 2014.  Expenses associated with ongoing operations of TDS, specifically Cost of equipment and products, decreased due primarily to an overall lower average price per unit on a fewer number of devices sold in the wireless operations.  Additionally, effective cost management of Selling, general and administrative expenses contributed to the decline in operating expenses.  Operating cost improvements were partially offset by additional expenses added to support the newly acquired cable operations in 2014.  Further contributing to the improvement was increased gains on divestiture and exchange transactions recognized in 2015.  Such gains were $282.8 million in 2015 and $128.8 million in 2014.  See Note 6Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to these gains.

TDS’ operating expenses increased by 11% from 2013 to 2014.  Cable and HMS acquisitions completed in 2013 and 2014 partially drove the increase as well as an increase in Cost of equipment and products associated with higher cost per wireless device as U.S. Cellular’s customers’ preferences shifted toward higher priced devices.  Significant gains recognized in 2013 related to divestiture and exchange transactions also contributed to the increased operating expenses from 2013 to 2014.  Such gains were $128.8 million in 2014 and $556.1 million in 2013.  This was partially offset by accelerated depreciation expense recognized as a result of the Divestiture Transaction in 2013 and a year-over-year decrease caused by the NY1 and NY2 Deconsolidation in 2013.  The NY1 and NY2 Deconsolidation and the Divestiture Transaction are discussed in Note 8Investments in Unconsolidated Entities and Note 6Acquisitions, Divestitures and Exchanges, respectively, in the Notes to Consolidated Financial Statements.

Refer to individual segment discussions in this MD&A for additional details on operating expenses at the segment level.

Equity in earnings of unconsolidated entities

Equity in earnings of unconsolidated entities represents TDS’ share of net income from entities in which it has a noncontrolling interest and that are accounted for by the equity method.  TDS’ investment in the Los Angeles SMSA Limited Partnership (“LA Partnership”) contributed $74.0 million, $71.8 million and $78.4 million to Equity in earnings of unconsolidated entities in 2015, 2014 and 2013, respectively.

Interest and dividend income

Interest and dividend income increased due to imputed interest income recognized on equipment installment plans of $33.9 million and $8.7 million in 2015 and 2014, respectively.  See Note 3 Equipment Installment Plans in the Notes to Consolidated Financial Statements for additional information.

Gain (loss) on investments

In connection with the NY1 & NY2 Deconsolidation, TDS recognized a non-cash pre-tax gain of $14.5 million which was recorded in Gain (loss) on investments in 2013. See Note 8 Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.

Interest expense

Interest expense increased from 2014 to 2015 due primarily to U.S. Cellular’s issuance of $275 million of 7.25% Senior Notes in December 2014 and the $225 million Term Loan in July 2015.  Interest expense increased from 2013 to 2014 due primarily to a decrease in capitalized interest related to network and systems projects.

Income tax expense

The effective tax rates on Income before income taxes and extraordinary items (“pre-tax income”) for 2015, 2014 and 2013 were 39.6%, 3.2% and 43.0%, respectively.  The following significant discrete and other items impacted income tax expense for these years:

2015 — The effective tax rate for 2015 is consistent with a normalized tax rate inclusive of federal and state tax.  There were no significant discrete items that impacted the rate.

2014 — The effective tax rate for 2014 includes tax expense of $38.5 million related to valuation allowances recorded against certain state deferred tax assets, higher tax expense of $18.3 million due to the tax effects of a nondeductible impairment of Goodwill, and a tax benefit of $10.8 million related to a release of valuation allowance on federal net operating losses previously limited under loss utilization rules.  The overall effective tax rate is lower due to the effect of these items combined with the loss in 2014 in Income (loss) before income taxes.

2013 The effective tax rate for 2013 includes tax expense of $14.9 million related to the NY1 & NY2 Deconsolidation and the Divestiture Transaction, and a tax benefit of $5.5 million resulting from statute of limitation expirations.  The NY1 and NY2 Deconsolidation and the Divestiture Transaction are discussed in Note 8Investments in Unconsolidated Entities and Note 6Acquisitions, Divestitures and Exchanges, respectively, in the Notes to Consolidated Financial Statements.

See Note 4Income Taxes in the Notes to Consolidated Financial Statements for further information on the effective tax rate.

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

Net income (loss) attributable to noncontrolling interests, net of tax includes the noncontrolling public shareholders’ share of U.S. Cellular’s net income (loss), the noncontrolling shareholders’ or partners’ share of certain U.S. Cellular subsidiaries’ net income (loss) and other TDS noncontrolling interests.

Year Ended December 31,

2015

 

2014

 

2013

(Dollars in thousands)

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

U.S. Cellular noncontrolling public shareholders’

$

38,230 

 

$

(6,826)

 

$

21,775 

 

Noncontrolling shareholders’ or partners’

 

5,343 

 

 

(4,111)

 

 

3,119 

 

 

$

43,573 

 

$

(10,937)

 

$

24,894 

 

 

 

2015-2014 Commentary

Adjusted EBITDA increased due primarily to increased revenues and decreased cash expenses in U.S. Cellular’s operations.  U.S. Cellular’s Loss on equipment (Equipment sales less Cost of equipment sold) decreased $291.5 million from 2014 to 2015 as a result of the continued adoption of equipment installment plans, less devices sold, and a lower average cost per device sold.  Net income (loss) increased from 2014 to 2015 due to the same reasons as Adjusted EBITDA, and also due to an increase in Gain on sale of business and other exit costs in U.S. Cellular, and a Loss on impairment of Goodwill recognized in the HMS segment in 2014.

2014-2013 Commentary

Adjusted EBITDA decreased due primarily to decreased revenues and increased cash expenses in U.S. Cellular’s operations.  U.S. Cellular’s Service revenues declined due to a decrease in the average retail customer base and a decrease in Inbound roaming revenue, among other factors.  Net income (loss) decreased from 2013 to 2014 due to the same reasons as Adjusted EBITDA, and also due to a decrease in both Gain on sale of business and other exit costs and Gain on license sales and exchanges in U.S. Cellular.  In addition, a Loss on impairment of Goodwill recognized in the HMS segment in 2014 further decreased Net income from 2013 to 2014.

*Represents a non-GAAP measure.  Refer to Supplemental Information within this MD&A for a reconciliation of this measure.


 

U.S. CELLULAR OPERATIONS

 

Business Overview

U.S. Cellular owns, operates, and invests in wireless markets throughout the United States. U.S. Cellular is an 84%-owned subsidiary of TDS.   U.S. Cellular’s strategy is to attract and retain wireless customers through a value proposition comprised of a high-quality network, outstanding customer service, and competitive devices, plans, and pricing, all provided with a local focus.

 

OPERATIONS

  • Serves approximately 4.9 million customers including 4.4 million postpaid and 0.4 million prepaid customers.
  • Operates in 23 states.
  • Employs approximately 6,400 employees.
  • Headquartered in Chicago, Illinois.
  • 6,297 cell sites including 3,978 owned towers in service.

 


Significant Trends and Developments

Technology and Support Systems:

  • U.S. Cellular continued to deploy 4G LTE as a result of U.S. Cellular’s strategic initiative to enhance its network.  4G LTE now reaches 99% of postpaid customers and 98% of cell sites.  The adoption of data-rich smartphones and connected devices is driving significant growth in data traffic.  At the end of the year, 72% of postpaid customers had 4G capable devices, with the LTE network handling 81% of data traffic.  Also, U.S. Cellular began user trials related to VoLTE technology to allow customers to utilize the LTE network for both voice and data services, and these trials are anticipated to continue into 2016.
  • In 2015, U.S. Cellular spent $285.8 million in cash for license acquisitions, the majority of which came from U.S. Cellular’s participation in Auction 97 indirectly through its limited partnership interest in Advantage Spectrum.  Advantage Spectrum was the provisional winning bidder of 124 AWS licenses for an aggregate bid of $338.3 million, after its expected designated entity discount of 25%.  Advantage Spectrum’s bid amount, less the initial deposit amount of $60.0 million paid in 2014, was paid to the FCC in March 2015.  These licenses have not yet been granted by the FCC.  U.S. Cellular’s strategy is to continue to obtain interests in and access to wireless licenses in current operating markets.  This strategy will help ensure adequate spectrum to deliver a best-in-class network that meets the growing capacity and speed requirements of U.S. Cellular customers.

Asset Management:

  • U.S. Cellular continued to pursue opportunities to monetize non-strategic assets to support investment in the business.  In December 2014, U.S. Cellular entered into an agreement with a third party to sell 595 towers and certain related contracts, assets, and liabilities for $159.0 million in cash.  The gain recognized was $3.8 million and $108.2 million in 2014 and 2015, respectively.  This agreement and related transactions are referred to as the “Tower Sale.”
  • Additionally, U.S. Cellular entered into various agreements to transfer certain non-operating licenses to third parties in exchange for receiving licenses in operating markets and cash.  In connection with these various agreements, U.S. Cellular received cash totaling $145.0 million and recognized an aggregate pre-tax gain of $149.1 million in 2015. 
  • In January 2016, U.S. Cellular entered into an agreement to purchase a 700 MHz A Block license for $36.0 million.  The transaction is expected to close in the third quarter of 2016 pending regulatory approval.   In February 2016, U.S. Cellular entered into multiple agreements with third parties that provide for the transfer of certain AWS and PCS spectrum licenses and approximately $30 million in cash to U.S. Cellular, in exchange for U.S. Cellular transferring certain AWS, PCS and 700 MHz licenses to the third parties. The transactions are subject to regulatory approval and other customary closing conditions, and are expected to close in 2016.  Upon closing of the transactions, U.S. Cellular expects to recognize a gain. 

Products and Services:

  • U.S. Cellular continued to leverage competitive value-based pricing for its plans and services, including equipment installment plan offerings.  U.S. Cellular will continue to offer equipment installment plans in 2016.  To the extent that customers adopt these plans, U.S. Cellular expects an increase in equipment sales revenues.  However, certain of the equipment installment plans provide the customer with a reduction in the monthly access charge for the device; thus, to the extent that existing customers adopt such plans, U.S. Cellular expects a reduction in retail service revenues and ARPU.
  • U.S. Cellular launched iconic Samsung and Apple devices and expanded the portfolio of tablets and connected devices in line with the strategic initiative to increase gross additions, reduce churn, and increase data usage.
  • U.S. Cellular continued to expand distribution through third-party national and on-line retailers.  As a growing base of customers purchase wireless service outside of corporate and agent owned locations, U.S. Cellular will continue to explore new relationships with additional third-party retailers as part of the strategy to expand distribution.
  • U.S. Cellular also expanded its solutions available to business and government customers, including a growing suite of machine-to-machine solutions across various categories.  U.S. Cellular will continue to enhance its advanced wireless services and connected solutions for consumer, business and government customers.

Operational Overview

 

Postpaid Customer Results

 

 

2013

2014

2015

 

 

Gross Additions

697,000

940,000

831,000

 

 

Net Additions (Losses)

(325,000)

31,000

111,000

 

 

Churn

1.8%

1.8%

1.4%

 

 

Postpaid customers – end of period

4,267,000

4,298,000

4,409,000

 

 

 

 

 

 

 

2015-2014 Commentary

Postpaid customers comprised approximately 92% of U.S. Cellular’s retail customers at December 31, 2015.  U.S. Cellular believes the increase in net additions in 2015 is a result of competitive products and services priced to offer the best value to customers, improved speed to market for product offerings, and expanded equipment installment plan offerings. U.S. Cellular also believes postpaid churn continued to decline from 2014 levels due to an improved customer experience and strong retention programs.  Total retail customers at the period ended December 31, 2015, 2014 and 2013 were 4,796,000, 4,646,000 and 4,610,000, respectively. 

 

2014-2013 Commentary

Postpaid customers comprised approximately 93% of U.S. Cellular’s retail customers at December 31, 2014.  Postpaid churn in 2013 and the first half of 2014 was adversely affected by the billing system conversion in 2013; however it improved over the course of 2014.

 

 


2015-2014 Commentary

Smartphone penetration increased to 74% of the postpaid handset customer base, up from 65% a year ago. 

The percentage of postpaid handset customers with feature phones has continued to decrease from 35% in 2014 to 26% in 2015 and is expected to continue declining as handset gross additions consist primarily of smartphones.  During the fourth quarter of 2015, smartphones represented 91% of total handset sales.

Continued growth in revenues and costs related to data products and services may result in increased operating expenses and the need for additional investment in spectrum, network capacity and network enhancements.

2014-2013 Commentary

Smartphone penetration increased to 65% of the postpaid handset customer base, up from 53% a year ago.  This contributed to increased service revenues from data. 

 

 

2015-2014 Commentary

Postpaid ARPU decreased in 2015 due to industry-wide price competition, including discounts on shared data plans provided to customers on equipment installment plans and those providing their own device at the time of activation or renewal partially offset by the continued adoption of smartphones and shared data plans.  The increase in postpaid ARPA is the result of increased postpaid connections per account driven by increased connected device penetration. 

U.S. Cellular implemented equipment installment plans on a broad basis in 2014.  These plans increase equipment sales revenue as customers pay for their wireless devices in installments at a total device price that is generally higher than the device price offered to customers in conjunction with alternative plans that are subject to a service contract.  Equipment installment plans also have the impact of reducing service revenues as many equipment installment plans provide for reduced monthly access charges.  In order to reflect the ARPU and ARPA trend for the impact of equipment installment plans in 2014 and 2015, U.S. Cellular has also presented ARPU and ARPA plus average monthly equipment installment plan billings per customer (ABPU) and account (ABPA), respectively.  U.S. Cellular believes presentation of these measures is useful in order to reflect the trends in total revenues per customer and account.

2014-2013 Commentary

The increases are a result of increased smartphone penetration, increased adoption of shared data plans, and the special issuance of loyalty rewards points which negatively impacted these metrics in 2013, partially offset by discounts on shared data plans provided to customers on equipment installment plans and those providing their own device at the time of activation or renewal.


Financial Overview

The Divestiture Transaction and the NY1 & NY2 Deconsolidation were consummated in the second quarter of 2013 as further described in Note 6Acquisitions, Divestitures and Exchanges and Note 8Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements.  The information presented below includes the Divestiture Markets and the NY1 & NY2 Partnerships for the portion of 2013 prior to the respective transactions

Components of Operating Income (Loss)

Year Ended December 31,

2015

 

2014

 

2013

 

2015 vs. 2014

 

2014 vs. 2013

(Dollars in thousands)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Retail service

$

2,994,353 

  

$

3,012,984 

  

$

3,165,496 

  

$

(18,631)

  

(1)%

  

$

(152,512)

  

(5)%

Inbound roaming

  

191,801 

  

  

224,090 

  

  

263,186 

  

  

(32,289)

  

(14)%

  

  

(39,096)

  

(15)%

Other

  

164,277 

  

  

160,863 

  

  

166,091 

  

  

3,414 

  

2%

  

  

(5,228)

  

(3)%

  

Service revenues

  

3,350,431 

  

  

3,397,937 

  

  

3,594,773 

  

  

(47,506)

  

(1)%

  

  

(196,836)

  

(5)%

Equipment sales

  

646,422 

  

  

494,810 

  

  

324,063 

  

  

151,612 

  

31%

  

  

170,747 

  

53%

  

Total operating revenues

  

3,996,853 

  

  

3,892,747 

  

  

3,918,836 

  

  

104,106 

  

3%

  

  

(26,089)

  

(1)%

  

  

  

   

  

  

   

  

  

   

  

  

   

  

  

  

  

   

  

  

System operations (excluding

  

 

  

  

 

  

  

 

  

  

 

  

 

  

  

 

  

 

  Depreciation, amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  and accretion reported below)

775,042 

 

 

769,911 

 

 

763,435 

 

 

5,131 

 

1%

 

 

6,476 

 

1%

Cost of equipment sold

  

1,052,810 

  

  

1,192,669 

  

  

999,000 

  

  

(139,859)

  

(12)%

  

  

193,669 

  

19%

Selling, general and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  administrative

 

1,493,730 

 

 

1,591,914 

 

 

1,677,395 

 

 

(98,184)

 

(6)%

 

 

(85,481)

 

(5)%

 

 

 

3,321,582 

 

 

3,554,494 

 

 

3,439,830 

 

 

(232,912)

 

(7)%

 

 

114,664 

 

3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flow*

 

675,271 

 

 

338,253 

 

 

479,006 

 

 

337,018 

 

100%

 

 

(140,753)

 

(29)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization

  

 

  

  

 

  

  

 

  

  

 

  

 

  

  

 

  

 

  and accretion

 

606,455 

 

 

605,997 

 

 

803,781 

 

 

458 

 

-

 

 

(197,784)

 

(25)%

(Gain) loss on asset

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  disposals, net

  

16,313 

  

  

21,469 

  

  

30,606 

  

  

(5,156)

  

(24)%

  

  

(9,137)

  

(30)%

(Gain) loss on sale of business

 

  

  

 

  

  

 

  

  

 

  

 

  

  

 

  

 

  and other exit costs, net

 

(113,555)

 

 

(32,830)

 

 

(246,767)

 

 

(80,725)

 

>(100)%

 

 

213,937 

 

87%

(Gain) loss on license sales

  

 

  

  

 

  

  

 

  

  

 

  

 

  

  

 

  

 

  and exchanges

 

(146,884)

 

 

(112,993)

 

 

(255,479)

 

 

(33,891)

 

(30)%

 

 

142,486 

 

56%

  

Total operating expenses

  

3,683,911 

  

  

4,036,137 

  

  

3,771,971 

  

  

(352,226)

  

(9)%

  

  

264,166 

  

7%

Operating income (loss)

$

312,942 

  

$

(143,390)

  

$

146,865 

  

$

456,332 

  

>100%

  

$

(290,255)

  

>(100)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA*

$

852,152 

 

$

480,325 

 

$

615,204 

 

$

371,827 

 

77%

 

$

(134,879)

 

(22)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

$

533,053 

 

$

557,615 

 

$

737,501 

 

$

(24,562)

 

(4)%

 

$

(179,886)

 

(24)%

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

*

Represents a non-GAAP financial measure. Refer to Supplemental Information within this MD&A for a reconciliation of this measure.

 

 

Service revenues consist of:

  • Charges for access, airtime, roaming, recovery of regulatory costs and value added services, including data products and services (“retail service”)
  • Charges to other wireless carriers whose customers use U.S. Cellular’s wireless systems when roaming
  • Amounts received from the Federal USF
  • Tower rental revenues

 

Equipment revenues consist of:

  • Sales of wireless devices and related accessories to new and existing customers, agents, and third-party distributors

 

 

Key components of changes in the statement of operations line items were as follows:

2015-2014 Commentary

Total operating revenues

Service revenues decreased as a result of (i) a decrease in retail service revenues driven by industry-wide price competition, including discounts on shared data plans provided to customers on equipment installment plans and those providing their own device at the time of activation or renewal; and (ii) reductions in inbound roaming revenue driven by lower roaming ratesSuch reductions were partially offset by an increase in the average customer base, continued adoption of shared data plans, and the $58.2 million of revenue recognized in 2015 from unredeemed rewards points upon termination of U.S. Cellular’s rewards program.

Revenue representing amounts received from the Federal USF for the year ended December 31, 2015 was $92.1 million, which remained flat year over year.  Pursuant to the FCC's Reform Order (“Reform Order”), U.S. Cellular’s current Federal USF support is being phased down at the rate of 20% per year beginning July 1, 2012.  The Phase II Mobility Fund was not operational as of July 2014 and, therefore, as provided by the Reform Order, the phase down was suspended at 60% of the baseline amount.  U.S. Cellular will continue to receive USF support at the 60% level until the FCC takes further action.  At this time, U.S. Cellular cannot predict what changes that the FCC might make to the USF high cost support program and, accordingly, cannot predict whether such changes will have a material adverse effect on U.S. Cellular’s business, financial condition or results of operations.

Equipment sales revenues increased due primarily to an increase in average revenue per device sold driven by sales under equipment installment plans, a mix shift to smartphones and connected devices and an increase in accessory sales, partially offset by a decrease in the number of devices sold. Equipment installment plan sales contributed $350.7 million and $190.4 million in 2015 and 2014, respectively.

System operations expenses

Maintenance, utility and cell site expenses increased $13.3 million, or 4%, reflecting higher support costs and utility usage for the expanded 4G LTE network and the completion of certain tower maintenance and repair projects.

Expenses incurred when U.S. Cellular’s customers used other carriers’ networks while roaming increased $19.4 million, or 11%, driven primarily by an increase in data roaming usage, partially offset by lower rates and voice volume.

Customer usage expenses decreased $27.6 million, or 13%, driven by lower fees for platform and content providers, a decrease in long distance charges driven by rate reductions, and a decrease in circuit costs from the migration to LTE.

U.S. Cellular expects system operations expenses to increase in the future to support the continued growth in cell sites and other network facilities as it continues to add capacity, enhance quality and deploy new technologies as well as to support increases in total customer usage, particularly data usage. However, these increases are expected to be offset to some extent by cost savings generated by shifting data traffic to the 4G LTE network from the 3G network.

Cost of equipment sold

The decrease in Cost of equipment sold is a result of an 11% reduction in devices sold and a decrease in the average cost per device sold driven by the lower cost of smartphones and connected devices.  Cost of equipment sold in 2015 included $448.7 million related to equipment installment plan sales compared to $280.3 million in 2014.  Loss on equipment was $406.4 million and $697.9 million for 2015 and 2014, respectively.

Selling, general and administrative expenses

Selling expenses decreased $20.5 million, or 3%, due primarily to lower agent and retail commission expenses driven by fewer activations and renewals, partially offset by increased advertising expenses.

General and administrative expenses decreased $77.7 million, or 9%, due primarily to lower consulting expenses related to the billing system and customer service operations, and lower rates for roamer administration.

Depreciation, amortization and accretion expense

Depreciation, amortization and accretion expense remained relatively flat year over year.

(Gain) loss on asset disposals, net

The decrease in Loss on asset disposals was due primarily to fewer write-offs and disposals of certain network assets.

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

The net gain in 2015 was due primarily to a $108.2 million gain recognized on the Tower Sale. The net gain in 2014 was due primarily to $29.3 million of gain related to the continuing impact of the Divestiture Transaction. See Note 6Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.

(Gain) loss on license sales and exchanges, net

The net gains in 2015 and 2014 were due to license sales and exchanges with third parties.  See Note 6Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.

2014-2013 Commentary

Total operating revenues

Service revenues decreased as a result of a decrease in the average customer base (including the reductions caused by the Divestiture Transaction and NY1 and NY2 Deconsolidation) and a reduction in revenues from the Federal USF. A decrease in Inbound roaming revenues caused by reductions in inbound roaming rates and voice volumes partially offset by higher inbound roaming data usage further contributed to the decrease in service revenues.

Such reductions were partially offset by increased revenues as a result of higher smartphone penetration and tower rental revenues.

Equipment sales revenues increased due to an increase in the average revenue per device sold due primarily to the implementation of equipment installment plans on a broad basis in 2014, and increases in the sales of connected devices and accessories.  This increase is partially offset by a decrease in sales of other device categories, primarily the feature phone category, and the effects of the Divestiture Transaction and the NY1 & NY2 Deconsolidation.  Equipment installment plan sales contributed $190.4 million and $0.8 million in 2014 and 2013, respectively.

System operations expenses

Maintenance, utility and cell site expenses increased $26.6 million, or 8%, reflecting higher support costs for the expanded 4G LTE network and completion of certain maintenance projects, partially offset by the impacts of the Divestiture Transaction and NY1 & NY2 Deconsolidation. 

Expenses incurred when U.S. Cellular’s customers used other carriers’ networks while roaming increased $5.8 million, or 3%, driven primarily by an increase in data roaming usage, partially offset by lower rates, lower voice usage, and the impacts of the Divestiture Transaction and NY1 & NY2 Deconsolidation. 

Customer usage expenses decreased $25.9 million, or 11%, driven by impacts of the Divestiture Transaction and NY1 & NY2 Deconsolidation, by lower fees for platform and content providers, a decrease in long distance charges driven by rate reductions, and a decrease in circuit costs from LTE migration. 

Cost of equipment sold

The increase in Cost of equipment sold was the result of a 22% increase in the average cost per device sold, which more than offset the impact of selling fewer devices.  Average cost per device sold increased due to general customer preference for higher priced 4G LTE smartphones and tablets.  Cost of equipment sold in 2014 includes $280.3 million related to equipment installment plan sales compared to $0.8 million in 2013.  Loss on equipment was $697.9 million and $674.9 million for 2014 and 2013, respectively.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased $85.5 million, or 5%, in 2014 due to the impacts of the Divestiture Transaction, NY1 & NY2 Deconsolidation and lower consulting expenses in 2014 related to the billing system conversion in the prior year.

Depreciation, amortization and accretion expense

Depreciation, amortization and accretion decreased due to acceleration of Depreciation, amortization and accretion resulting from the Divestiture Transaction. Accelerated depreciation resulting from the Divestiture Transaction was $13.1 million and $158.5 million in 2014 and 2013, respectively.

(Gain) loss on asset disposals, net

The decrease in Loss on asset disposals was due primarily to fewer write-offs and disposals of certain network assets.

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

The net gain in 2014 and 2013 was due primarily to $29.3 million and $248.4 million of gain recognized related to the Divestiture Transaction.  See Note 6Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.

(Gain) loss on license sales and exchanges

The net gain in 2014 and 2013 was due to license sales and exchanges with third parties. See Note 6Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.


TDS TELECOM OPERATIONS

 

Business Overview

TDS Telecom operates in three reportable segments: Wireline, Cable and HMS. The overall strategy for the Wireline and Cable businesses is to own the best pipe in the market in order to capitalize on data growth and the need for higher broadband speeds.  In addition, through its HMS business, TDS Telecom provides a wide range of Information Technology (“IT”) services including colocation, dedicated hosting, hosted application management, cloud computing services and planning, engineering, procurement, installation, sales and management of  IT infrastructure hardware solutions.

OPERATIONS

 

  • Wireline and Cable serve approximately 1.2 million broadband, video and voice connections in 34 states.
  • Wireline operates 105 incumbent local exchange carriers (“ILEC”) in 25 states and competitive local exchange carriers (“CLEC”) in 4 states.
  • Cable operates primarily in Colorado, New Mexico, Texas, Utah and Oregon.
  • HMS operates a total of eight data centers.  It owns two data centers in Iowa, one each in Minnesota, Wisconsin, Colorado and Oregon and it leases two data centers in Arizona.

 

Significant Trends and Developments

 

Acquisition/ Divestiture

 

  • TDS Telecom entered the cable business with the acquisition of substantially all of the assets of Baja Broadband, LLC (“Baja”) on August 1, 2013, which operates cable systems in markets primarily in Colorado, New Mexico, Texas, and Utah.  Baja was rebranded as TDS in 2015.  On September 1, 2014, TDS Telecom expanded it cable operations with the acquisition of substantially all of the assets of a group of companies operating as BendBroadband (“BendBroadband”), headquartered in Bend, Oregon.  As part of the agreement, a Tier III data center providing colocation and managed services and a cable advertising and broadcast business were also acquired.  The operations of the data center are included in the HMS segment.  The operations of the cable and the advertising and broadcast businesses are included in the Cable segment.  Through its Cable operations, TDS Telecom is expanding broadband services while leveraging its core competencies in network management and customer focus.  Additionally, TDS Telecom will continue to pursue cable acquisitions that meet its criteria of having favorable competitive environments, attractive market demographics and the ability to grow broadband penetration.
  • As a result of continually reviewing all of its operations, in 2015 and 2014, TDS Telecom divested certain ILEC markets that it considered non-strategic.  On an annualized basis these ILEC divestitures collectively represented approximately 1% of TDS Telecom 2015 Total operating revenues.
  • In 2013, TDS Telecom acquired 100% of the outstanding shares of MSN Communications, Inc. (“MSN”) for $43.6 million in cash.  MSN is an information technology solutions provider whose service offerings complement the HMS portfolio of products.

 

Technology & Support Systems:

 

  • TDS Telecom’s Wireline segment continued to upgrade and expand its network to respond to the needs of its customers for greater bandwidth and advanced technologies.  Where economically feasible, TDS Telecom is deploying fiber technology to provide internet speeds of up to 1 Gigabits per second (“Gbps”).  In non-fiber markets, TDS Telecom offers speeds reaching up to 50 Megabits per second (“Mbps”) using a bonded product.
  • TDS Telecom launched ARRIS’ Whole Home Solution branded as CatchTV, and TV Everywhere, and successfully trialed managedIP services in certain cable markets.  TDS Telecom has continued to make capacity investments in its cable markets in line with its strategy to increase broadband penetration in those markets.
  • Beginning in 2014 TDS Telecom was able to offer a full suite of end-to-end IT solutions through its OneNeck IT Solutions unified brand.  These integration efforts continued in 2015 across all markets.
  • TDS Telecom launched a data center in Colorado and completed a Madison data center expansion in 2015.  TDS Telecom will continue to explore additional facility expansion, reconfiguration, and development opportunities in 2016 and beyond.

 

Products and Services:

 

  • In 2015, TDS Telecom continued rolling out IPTV, branded as TDS TV, to new markets in order to leverage its high-speed network.  TDS TV provides customers with connected-home DVRs, video-on-demand (“VOD”) and TV Everywhere.  TDS Telecom has now launched TDS TV in 27 markets, enabling 167,000 service addresses, which is roughly 23% of its service addresses.  Where TDS TV is not available, TDS Telecom partners with a satellite TV provider to allow for triple or double play bundling.
  • TDS Telecom strives to be the preferred broadband provider in its ILEC residential markets.   As such, TDS Telecom continues to invest to offer higher speed data service.  As of December 31, 2015, TDS Telecom was able to provide broadband service to 94% of its ILEC physical access lines.  At December 31, 2015, 65% of the service addresses in its ILEC markets had 10 Mbps or faster service available and 36% of the service addresses in its ILEC markets had 25 Mbps or faster service available.
  • TDS Telecom continues to focus its commercial sales on managedIP.  TDS managedIP is available in Wireline markets that cover 88% of all commercial customers at December 31, 2015 and is also available in certain cable markets.


Financial Overview

Components of Operating Income (Loss)

Year Ended December 31,

 

2015

 

2014

 

2013

 

2015 vs. 2014

 

2014 vs. 2013

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wireline

 

$

700,903 

 

$

716,422 

 

$

726,567 

 

$

(15,519)

 

(2)%

 

$

(10,145)

 

(1)%

 

Cable

 

 

174,966 

 

 

116,855 

 

 

35,883 

 

 

58,111 

 

50%

 

 

80,972 

 

>100%

 

HMS

 

 

286,795 

 

 

258,732 

 

 

185,616 

 

 

28,063 

 

11%

 

 

73,116 

 

39%

 

Intra-company elimination

 

 

(4,621)

 

 

(3,697)

 

 

(1,063)

 

 

(924)

 

(25)%

 

 

(2,634)

 

>(100)

 

 

TDS Telecom operating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  revenues

 

 

1,158,043 

 

 

1,088,312 

 

 

947,003 

 

 

69,731 

 

6%

 

 

141,309 

 

15%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wireline

 

 

612,346 

 

 

617,948 

 

 

661,561 

 

 

(5,602)

 

(1)%

 

 

(43,613)

 

(7)%

 

Cable

 

 

168,627 

 

 

116,565 

 

 

35,927 

 

 

52,062 

 

45%

 

 

80,638 

 

>100%

 

HMS

 

 

302,231 

 

 

367,867 

 

 

205,746 

 

 

(65,636)

 

(18)%

 

 

162,121 

 

79%

 

Intra-company elimination

 

 

(4,621)

 

 

(3,697)

 

 

(1,063)

 

 

(924)

 

(25)%

 

 

(2,634)

 

>(100)

 

 

TDS Telecom operating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  expenses

 

 

1,078,583 

 

 

1,098,683 

 

 

902,171 

 

 

(20,100)

 

(2)%

 

 

196,512 

 

22%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TDS Telecom operating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  income (loss)

 

$

79,460 

 

$

(10,371)

 

$

44,832 

 

$

89,831 

 

>100%

 

$

(55,203)

 

>(100)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA*

 

$

306,029 

 

$

298,042 

 

$

249,474 

 

$

7,987 

 

3%

 

$

48,568 

 

19%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

219,065 

 

$

208,063 

 

$

164,858 

 

$

11,002 

 

5%

 

$

43,205 

 

26%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*

Represents a non-GAAP financial measure.  Refer to Supplemental Information within this MD&A for a reconciliation of this measure.

 

 

Key components of changes in the statement of operations items were as follows:

2015-2014 Commentary

Total operating revenues

Operating revenues increased in 2015 due to $55.5 million from Cable acquisitions, offset by declines in Wireline commercial and wholesale revenues of $19.3 million.  HMS equipment sales increased $21.0 million.

Total operating expenses

Operating expenses decreased in 2015 due to the impact of an $84.0 million non-cash goodwill impairment loss in 2014 offset by a $43.8 million increase from Cable acquisitions.  HMS equipment cost of goods sold increased $16.6 million.

2014-2013 Commentary

Total operating revenues

Operating revenues increased in 2014 due primarily to $164.5 million from Cable and HMS acquisitions.

Total operating expenses

Operating expenses increased in 2014 due primarily to $160.6 million from Cable and HMS acquisitions and an $84.0 million non-cash goodwill impairment loss, which was partially offset by a $43.6 million decrease in Wireline expenses.

An $84.0 million loss on impairment of goodwill was recognized in the HMS segment during the quarter ended September 30, 2014.  See Note 7Intangible Assets in the Notes to Consolidated Financial Statements for more information related to this impairment.


WIRELINE OPERATIONS

 

 

Business Overview

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.

Operational Overview

ILEC Residential Customers by Broadband Speeds

Wireline Residential Revenue per Connection

Residential broadband customers are increasingly choosing higher speeds in ILEC markets with 47% choosing speeds of 10 Mbps or greater, and 16% choosing speeds of 25 Mbps or greater, driving increases in average revenue per connection.

 

Residential Connections

Commercial Connections

TDS Telecom added 11,000 IPTV connections in 2015 with expansion into nine new markets.  Voice connections continued to decline in 2015.

TDS managedIP connections grew in 2015; however, this did not completely offset the decline in voice connections.

 

 

Financial Overview—Wireline

Components of Operating Income (Loss)

Year Ended December 31,

 

2015

 

2014

 

2013

 

2015 vs. 2014

 

2014 vs. 2013

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

296,943 

 

$

293,304 

 

$

293,217 

 

$

3,639 

 

1%

 

$

87 

 

-

 

Commercial

 

 

220,643 

 

 

229,306 

 

 

229,715 

 

 

(8,663)

 

(4)%

 

 

(409)

 

-

 

Wholesale

 

 

181,352 

 

 

191,976 

 

 

200,440 

 

 

(10,624)

 

(6)%

 

 

(8,464)

 

(4)%

 

 

Total service revenues

 

 

698,938 

 

 

714,586 

 

 

723,372 

 

 

(15,648)

 

(2)%

 

 

(8,786)

 

(1)%

Equipment and product sales

 

 

1,965 

 

 

1,836 

 

 

3,195 

 

 

129 

 

7%

 

 

(1,359)

 

(43)%

 

 

 

Total operating revenues

 

 

700,903 

 

 

716,422 

 

 

726,567 

 

 

(15,519)

 

(2)%

 

 

(10,145)

 

(1)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services (excluding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  depreciation, amortization and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  accretion reported below)

 

 

254,879 

 

 

256,878 

 

 

266,635 

 

 

(1,999)

 

(1)%

 

 

(9,757)

 

(4)%

Cost of equipment and products

 

 

2,212 

 

 

2,336 

 

 

3,831 

 

 

(124)

 

(5)%

 

 

(1,495)

 

(39)%

Selling, general and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  administrative

 

 

193,850 

 

 

189,956