Business Context and Reporting Period
Telephone and Data Systems, Inc. (TDS) filed this unaudited Form 10-Q for the three months ended March 31, 2021, compared with the three months ended March 31, 2020. TDS operates U.S. telecommunications businesses through 82%-owned UScellular and wholly owned TDS Telecom. UScellular provides wireless services, while TDS Telecom provides broadband, video and voice services.
Beginning in the first quarter of 2021, TDS combined its former Wireline and Cable segments into one TDS Telecom reportable segment; prior periods were recast. TDS served approximately 6 million connections nationwide.
Financial Performance and Liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total operating revenues | $1,318 million | $1,261 million | 4% |
| Operating income | $110 million | $72 million | 52% |
| Operating margin | 8.3% | 5.7% | +2.6 percentage points |
| Net income | $71 million | $83 million | (14%) |
| Net income attributable to TDS common shareholders | $57 million | $69 million | (18%) |
| Diluted EPS | $0.48 | $0.59 | (19%) |
| Adjusted EBITDA | $383 million | $362 million | 6% |
| Adjusted EBITDA margin | 29.1% | 28.7% | +0.4 percentage points |
| Cash flows from operating activities | $165 million | $367 million | (55%) |
| Free cash flow | $(55) million | $(10) million | Lower by $45 million |
| Capital expenditures | $197 million | $292 million | (32%) |
UScellular revenue increased 6% to $1,023 million and operating income increased 67% to $84 million. TDS Telecom revenue increased 4% to $249 million and operating income increased 12% to $32 million. UScellular Adjusted EBITDA increased 8% to $302 million, while TDS Telecom Adjusted EBITDA declined 1% to $81 million.
UScellular ended the quarter with 4.9 million retail connections, including 4.4 million postpaid and 0.5 million prepaid connections. Postpaid churn improved to 1.12% from 1.21%, and total postpaid net losses improved to 6,000 from 26,000. TDS Telecom total connections increased 1% to approximately 1.2 million, led by 9% broadband connection growth.
Cash, cash equivalents and restricted cash totaled $1.079 billion at March 31, 2021, compared with $1.452 billion at December 31, 2020. Cash used in investing activities was $1.480 billion, including $1.253 billion for wireless spectrum licenses and $220 million for property, plant and equipment. Cash provided by financing activities was $942 million.
Long-term debt, net was $3.991 billion at March 31, 2021, compared with $3.424 billion at year-end 2020. TDS and UScellular had no outstanding revolving credit borrowings at quarter-end, other than letters of credit, with unused capacity of $399 million and $298 million, respectively. TDS and UScellular had fully drawn their $200 million and $300 million term loan facilities, respectively, and UScellular had fully drawn its $300 million receivables securitization facility.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by higher UScellular equipment sales, retail service revenue and TDS Telecom residential broadband revenue.
- Operating income improved substantially because of revenue growth, lower UScellular selling, general and administrative expense, and lower depreciation.
- Net income declined despite higher operating income because interest expense increased from $37 million to $53 million and income tax expense increased from $3 million to $31 million. The 2020 tax expense benefited from CARES Act provisions.
- Operating cash flow declined by $202 million, primarily due to working-capital timing, including vendor payments and annual bonus payments, and lower tax-related benefits.
- UScellular’s capital expenditures declined 47% to $125 million, while TDS Telecom capital expenditures increased 30% to $70 million.
- UScellular acquired or provisionally won 254 wireless spectrum licenses in Auction 107 for $1.283 billion. The spectrum is not expected to be accessible until late 2023.
- TDS issued $420 million of 6.625% Series UU perpetual preferred stock, receiving $406 million net of issuance costs. Preferred dividends reduced common-share earnings by $2 million in the quarter.
Guidance, Outlook, Risks and Unusual Items
Management expected 2021 UScellular capital expenditures of $775 million to $875 million, principally for network modernization, 5G deployment, coverage, capacity and information technology. TDS Telecom capital expenditures were expected to be $425 million to $475 million, principally for fiber deployment, broadband upgrades and infrastructure requirements.
TDS stated that existing cash and investment balances, revolving credit capacity, expected tax refunds and anticipated operating and investing cash flows should provide sufficient liquidity for normal operations and debt service for the coming years. However, the company may require additional capital for spectrum purchases, fiber builds, acquisitions, capital expenditures, debt service, dividends and share repurchases.
After quarter-end, TDS initiated a $100 million borrowing under its revolving credit agreement. TDS and UScellular also announced planned redemptions of $225 million and $300 million of TDS senior notes and $275 million of UScellular senior notes, respectively, expected on May 12, 2021. The redemptions were expected to result in $26 million of interest expense related to unamortized debt issuance costs.
Key risks include intense wireless and broadband competition, declining roaming revenue, spectrum availability and deployment timing, substantial indebtedness, access to capital, regulatory and universal service changes, cybersecurity incidents, litigation, technology execution and uncertainty related to COVID-19. TDS disclosed no material changes to the risk factors in its 2020 Form 10-K.
Pending legal proceedings include private-party False Claims Act litigation concerning UScellular’s participation in prior FCC spectrum auctions. TDS and UScellular believe their arrangements complied with applicable law and FCC rules, but cannot predict the outcome.
Important Facts for Investors to Verify
- Verify the timing, cost and funding of the planned senior-note redemptions and the subsequent $100 million revolving-credit borrowing.
- Monitor leverage, interest expense and liquidity following the Auction 107 spectrum acquisition and additional debt issuance.
- Assess whether UScellular’s improved churn and postpaid trends persist while inbound roaming revenue continues to decline.
- Evaluate execution and returns from UScellular’s 5G investment and TDS Telecom’s fiber expansion; Auction 107 spectrum is not expected to be usable until late 2023.
- Reconcile GAAP earnings and cash flow with non-GAAP Adjusted EBITDA and free cash flow measures.
- Track the effect of the higher recurring preferred dividend requirement on common-shareholder returns.
- Review the outcome and potential exposure from the False Claims Act litigation and ongoing regulatory proceedings.