Telephone and Data Systems, Inc. — FY2023 Form 10-K Summary
Business context and reporting period
This Form 10-K covers the fiscal year ended December 31, 2023, not a standalone fourth-quarter filing. TDS operates through two reportable segments: 83%-owned UScellular, a regional wireless carrier, and wholly owned TDS Telecom, which provides broadband, video and voice services. At year-end, TDS served approximately 4.6 million wireless retail connections and 1.2 million broadband, video and voice connections in the United States.
Key financial metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Operating revenues | $5.160 billion | $5.413 billion | Down 5% |
| Operating income (loss) | $(414) million | $122 million | Declined |
| Net income (loss) | $(487) million | $72 million | Declined |
| Net loss attributable to common shareholders | $(569) million | $(7) million | Declined |
| Diluted loss per share | $(5.06) | $(0.07) | Declined |
| Adjusted EBITDA | $1.267 billion | $1.257 billion | Up 1% |
| Cash flow from operating activities | $1.142 billion | $1.155 billion | Down 1% |
| Capital expenditures | $1.197 billion | $1.285 billion | Down 7% |
| Free cash flow | $(135) million | $(29) million | More negative |
Reported operating margin was approximately negative 8.0% and net margin approximately negative 9.4%. Adjusted EBITDA margin was approximately 24.6%; this is a non-GAAP measure and is not a substitute for GAAP earnings or operating cash flow.
- UScellular revenue was $3.906 billion, down 6%; operating income was $139 million versus $69 million. Adjusted EBITDA increased 3% to $986 million.
- UScellular ended the year with 4.557 million retail connections, down from 4.740 million. Postpaid handset losses increased, while fixed wireless and other connected-device additions improved. Total postpaid churn was 1.31%, compared with 1.34%.
- TDS Telecom revenue increased 1% to $1.028 billion, but operating loss was $523 million versus income of $66 million. Adjusted EBITDA decreased 2% to $285 million.
- TDS Telecom recorded a $547 million goodwill impairment in the fourth quarter, reducing its goodwill balance to zero. Excluding the after-tax goodwill effect, TDS reported a non-GAAP common-shareholder loss of $58 million.
- Cash, cash equivalents and restricted cash declined to $270 million from $399 million. Cash and cash equivalents alone were $236 million.
- Long-term debt was $4.106 billion net of discounts and issuance costs, compared with $3.750 billion at year-end 2022. Scheduled principal payments total $26 million in 2024, $26 million in 2025, and $676 million in 2026, excluding receivables-securitization repayments.
- TDS had $299 million of available undrawn revolving capacity; UScellular had $600 million of available undrawn capacity after covenant restrictions.
- Approximately 50% of TDS debt was fixed-rate and 50% variable-rate. Interest expense increased to $244 million from $174 million, primarily due to higher variable interest rates.
Material changes versus the prior comparable period
- Consolidated revenue declined primarily because of lower UScellular equipment sales, retail service revenue and inbound roaming revenue. Competitive promotions and pricing pressure remained significant.
- UScellular reduced capital expenditures to $611 million from $717 million and continued mid-band 5G deployment. It also recorded $9 million of severance and $8 million of strategic-review expenses.
- TDS Telecom broadband connections grew to 539,800 from 510,000, while total connections declined 1% because of commercial, voice and video losses. Service addresses increased 12% to 1.7 million, and 72% of the footprint offered 1 Gigabit-or-greater service.
- TDS Telecom slowed fiber deployment and reduced or deferred planned capital expenditures because of higher interest rates, liquidity constraints and competitive pressures. The goodwill impairment reflected a reset of its long-range forecast.
- TDS and UScellular began a process in August 2023 to explore strategic alternatives for UScellular. The filing states that the outcome and financial-statement impact cannot yet be predicted. TDS incurred $13 million of related third-party expenses in 2023.
- TDS entered into a new $300 million senior secured term loan in September 2023, secured by specified assets including 26 million UScellular common shares and certain subsidiary interests.
Guidance, outlook, commentary and risks
- Expected 2024 capital expenditures are $550 million to $650 million for UScellular and $310 million to $340 million for TDS Telecom.
- Management expects to fund 2024 capital expenditures primarily through operating cash flow, existing cash, additional debt financing and other available financing. TDS Telecom may substantially reduce fiber deployment if acceptable capital is unavailable.
- TDS Telecom expects approximately $90 million per year for 15 years beginning in 2024 under the E-ACAM program, subject to meeting obligations to deploy 100/20 Mbps service to approximately 270,000 locations.
- UScellular received $92 million of high-cost regulatory support in 2023, while TDS Telecom received $110 million under federal regulatory support programs. Management expects UScellular support to likely decline and identifies uncertainty around future support programs.
- TDS and UScellular were reported to be in compliance with debt covenants at December 31, 2023. The required maximum consolidated leverage ratio tightens from 4.25x through March 2024 to 4.00x through March 2025 and 3.75x thereafter; interest coverage must remain at least 3.00x.
- TDS and UScellular carry sub-investment-grade ratings. Moody’s rated them Ba1 with a stable outlook, S&P rated them BB with developing CreditWatch implications, and Fitch rated them BB+ with a stable outlook.
- Principal risks include intense wireless and broadband competition, subscriber losses and pricing pressure, roaming-revenue declines, 5G and fiber execution, spectrum requirements, negative free cash flow, variable-rate debt, covenant compliance, refinancing access, regulatory-support reductions, cybersecurity incidents, litigation and uncertainty surrounding the UScellular strategic review.
- The company paid $83 million of common dividends and $70 million of preferred dividends in 2023. The common dividend increased to $0.190 per share in the first quarter of 2024, but future dividends remain subject to liquidity, reinvestment needs and the UScellular strategic review.
- PricewaterhouseCoopers issued an unqualified audit opinion and concluded that internal control over financial reporting was effective as of December 31, 2023.
Most important facts for investors to verify
- Whether the UScellular strategic-alternatives process results in a transaction, asset sales, impairment charges, rating changes or changes to TDS’s dividend and investment strategy.
- UScellular’s ability to stabilize retail connections, reduce handset losses and monetize 5G, fixed wireless, tower and business-services investments.
- TDS Telecom’s broadband growth, fiber deployment pace, E-ACAM build-out obligations and ability to restore profitability following the goodwill impairment.
- 2024 operating cash flow and free cash flow relative to capital expenditures, dividends and debt maturities.
- Compliance with tightening leverage and interest-coverage covenants, refinancing needs and the effect of variable interest rates.
- The level and durability of federal and state regulatory support, including potential reductions or penalties for missed build-out requirements.
- Potential outcomes and financial exposure from the pending securities class action, FCC-related litigation and other contingencies.