Business Context and Reporting Period
Telephone and Data Systems, Inc. (TDS) filed its Form 10-K for the fiscal year ended December 31, 2021. TDS operates through two principal segments: 82%-owned United States Cellular Corporation (UScellular), providing wireless services, and wholly owned TDS Telecom, providing broadband, video and voice services. TDS served approximately 5.0 million wireless connections and 1.2 million wireline and cable connections at year-end. Prior-period segment information was revised to combine TDS Telecom’s Wireline and Cable segments.
Key Financial Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total operating revenues | $5,329 million | $5,225 million | 2% |
| Operating income | $261 million | $259 million | 1% |
| Operating margin | 4.9% | 5.0% | Down slightly |
| Net income | $188 million | $269 million | (30%) |
| Net income attributable to TDS common shareholders | $117 million | $226 million | (48%) |
| Diluted EPS | $1.00 | $1.93 | (48%) |
| Adjusted EBITDA | $1,372 million | $1,385 million | (1%) |
| Net cash from operating activities | $1,103 million | $1,532 million | (28%) |
| Free cash flow | $(28) million | $194 million | Down $222 million |
| Capital expenditures | $1,201 million | $1,317 million | (9%) |
UScellular generated $4,122 million of revenue, $170 million of operating income and $1,054 million of Adjusted EBITDA. TDS Telecom generated $1,006 million of revenue, $110 million of operating income and $310 million of Adjusted EBITDA. TDS Telecom broadband connections increased 7% to 490,300, while total connections remained essentially flat because of declines in video, voice and commercial connections.
Cash, cash equivalents and restricted cash totaled $414 million at December 31, 2021, including $367 million of cash and cash equivalents. TDS reported $2,934 million of long-term debt, including current debt, and $1,101 million of operating lease liabilities. Available borrowing capacity at year-end was $699 million for TDS and $950 million for UScellular. TDS and UScellular were rated sub-investment grade, with ratings ranging from Ba1 to BB+ and stable outlooks.
Material Changes Versus the Prior Comparable Period
- Revenue increased $104 million, led by higher UScellular retail service and equipment revenue and higher TDS Telecom residential revenue.
- Net income declined primarily because of higher interest expense and income taxes. Interest expense increased to $232 million from $168 million, including $57 million of debt issuance cost write-offs related to redeemed senior notes.
- The effective tax rate increased to 15.1% from 6.4%, mainly because 2020 benefited from CARES Act tax provisions. TDS received a $125 million tax refund in early 2022 related to a 2020 net operating loss carryback.
- UScellular postpaid retail connections declined to 4.4 million from 4.4 million, total postpaid churn increased to 1.18% from 1.09%, and inbound roaming revenue fell 27% to $110 million.
- TDS Telecom residential revenue increased 8% to $641 million. Fiber-to-the-home coverage increased to 43% of wireline service addresses from 36%, and 1-gigabit service was available to 58% of the footprint.
- Wireless spectrum licenses increased by approximately $1.5 billion, primarily from Auction 107 purchases. Consolidated licenses totaled $4.1 billion at year-end.
- Operating cash flow decreased $429 million, while cash used for spectrum licenses totaled $1.3 billion. Year-end cash, cash equivalents and restricted cash decreased $1.0 billion to $414 million.
Guidance, Outlook, Commentary and Risks
Management expects 2022 capital expenditures of $700 million to $800 million for UScellular and $500 million to $550 million for TDS Telecom. Spending is expected to support 5G deployment, network modernization, fiber expansion and broadband infrastructure. Management expects to fund these investments primarily through operating cash flow, existing cash and additional debt financing as needed.
UScellular expects inbound roaming revenue to continue declining in 2022. Supply-chain disruption, component shortages and labor constraints affected both businesses and may increase costs or delay network construction. COVID-19 did not materially affect 2021 results, but management stated that future effects remain uncertain.
- Key operating risks include intense wireless and broadband competition, pricing pressure, higher promotional activity, customer churn and the scale advantages of larger competitors.
- 5G and fiber deployment require substantial capital and may not generate expected incremental revenue or returns.
- UScellular faces spectrum availability, license-clearance, FCC renewal and regulatory-support risks. UScellular received $92 million of high-cost support in 2021; TDS Telecom received $112 million under federal regulatory support programs.
- Liquidity risks include sub-investment-grade credit ratings, significant debt, floating-rate exposure, covenant requirements and potential reliance on additional financing. The principal financial covenants require interest coverage of at least 3.00 to 1.00 and leverage of no more than 3.75 to 1.00; management reported compliance at year-end.
- The $450 million UScellular receivables securitization facility matures in December 2022, with repayments scheduled to begin in January 2023 unless extended.
- Cybersecurity incidents, supply-chain disruptions, regulatory changes, litigation, intellectual-property claims and adverse changes in unconsolidated investments could materially affect results.
- A False Claims Act-related proceeding concerning historical FCC spectrum auctions remains unresolved. TDS reported no accrued legal loss at December 31, 2021 and cannot predict the outcome.
TDS paid $80 million of common dividends and $39 million of preferred dividends in 2021. The common dividend increased to $0.180 per share in the first quarter of 2022. TDS also issued $1.11 billion of preferred shares and redeemed substantial amounts of senior debt during 2021.
Important Facts for Investors to Verify
- Reconcile consolidated debt, including the $450 million receivables securitization borrowing, subsequent 2022 borrowings and scheduled maturities.
- Assess whether projected 2022 capital expenditures and Auction 110 spectrum payments are supportable given negative 2021 free cash flow.
- Monitor UScellular postpaid churn, retail connections, roaming revenue and the ability of 5G investments to improve growth and returns.
- Track TDS Telecom fiber expansion, broadband additions, penetration, pricing and the continuing decline in voice and video connections.
- Evaluate dependence on regulatory support, including UScellular’s $92 million and TDS Telecom’s $112 million of 2021 support.
- Review the pending False Claims Act litigation, spectrum-clearance obligations and other legal and regulatory contingencies.
- Consider the implications of sub-investment-grade credit ratings, debt covenants, refinancing needs and preferred dividend obligations.
- Confirm the sustainability of dividends and share repurchases in light of capital requirements, leverage and free cash flow.