TELEPHONE & DATA SYSTEMS INC quarterly report, Q2 FY2022

Telephone and Data Systems, Inc. — Q2 2022 Form 10-Q Summary

Business Context and Reporting Period

TDS is a U.S.-only diversified telecommunications company serving approximately 6 million connections. Its principal businesses are 83%-owned UScellular, a wireless carrier, and wholly owned TDS Telecom, a broadband, video and voice provider. This report covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods. The financial statements are unaudited and prepared under U.S. GAAP.

Key Financial Metrics

Metric	Q2 2022	Q2 2021	YTD 2022	YTD 2021
Operating revenues	$1.349 billion	$1.311 billion	$2.664 billion	$2.629 billion
Operating income	$63 million	$58 million	$158 million	$168 million
Net income	$39 million	$34 million	$111 million	$105 million
Net income attributable to TDS common shareholders	$18 million	$20 million	$61 million	$77 million
Diluted EPS	$0.15	$0.17	$0.52	$0.65
Adjusted EBITDA	$345 million	$346 million	$716 million	$727 million
Capital expenditures	$391 million	$250 million	$633 million	$446 million

Q2 operating margin was approximately 4.7%, versus 4.4% in the prior-year quarter. YTD operating margin was approximately 5.9%, versus 6.4% in 2021.
Q2 net margin was approximately 2.9%, versus 2.6%; YTD net margin was approximately 4.2%, versus 4.0%.
Net cash provided by operating activities was $734 million for the first six months, compared with $481 million in 2021. Free cash flow, a non-GAAP measure, was $208 million versus $24 million.
Cash, cash equivalents and restricted cash totaled $505 million at June 30, 2022, including $466 million of cash and cash equivalents.
Long-term debt, net was $3.463 billion, up from $2.928 billion at December 31, 2021. Approximately 60% of long-term debt was fixed-rate and 40% variable-rate.
Undrawn borrowing capacity was $549 million at TDS and $690 million at UScellular. TDS and UScellular reported compliance with applicable debt covenants.

Segment Performance and Material Changes

UScellular: Q2 revenue increased 1% to $1.027 billion, while operating income increased 10% to $40 million. YTD revenue was flat at $2.037 billion and operating income declined 8% to $111 million. Q2 and YTD Adjusted EBITDA declined 2% and 3%, respectively.
UScellular had 4.786 million retail connections at quarter-end, down from 4.906 million a year earlier. Q2 total postpaid net losses were 40,000 versus 6,000, and total postpaid churn increased to 1.30% from 1.11%.
UScellular postpaid ARPU increased 5% to $50.07 in Q2, supported by product mix, cost-recovery surcharges and device-protection revenue. Inbound roaming revenue declined 36% in Q2, and management expects continued declines during 2022.
UScellular capital expenditures rose 81% in Q2 and 48% YTD, primarily reflecting network modernization and 5G deployment.
TDS Telecom: Q2 revenue increased 2% to $256 million, while operating income declined 18% to $23 million. YTD revenue increased 1% to $507 million and operating income declined 14% to $51 million.
TDS Telecom broadband connections increased 5% to 500,800, but total connections declined 1% to 1.187 million because of continued declines in legacy voice, video and commercial CLEC connections.
TDS Telecom increased service addresses 7% to approximately 1.4 million and offered 1 Gigabit service to 63% of its footprint, versus 56% a year earlier. Capital expenditures increased 21% in Q2 and 33% YTD.
Corporate, eliminations and other activities improved operating results compared with 2021, when the category included higher interest expense and other costs.

Cash Flow, Debt and Liquidity

Operating cash flow of $734 million was aided by a $125 million federal income-tax refund related to a CARES Act net operating loss carryback, distributions from unconsolidated entities and working-capital changes.
Investing cash flow used $1.122 billion, including $563 million for wireless spectrum licenses and $526 million for property, plant and equipment.
Financing cash flow provided $479 million, primarily from term-loan, export-credit and other borrowings, partially offset by debt repayments, dividends and share repurchases.
During the first six months, TDS borrowed $150 million under term-loan facilities, while UScellular borrowed $400 million under term loans and $150 million under export-credit financing. UScellular also had $300 million outstanding under its receivables securitization agreement and $60 million under a repurchase agreement.
In July 2022, after the reporting date, TDS borrowed the remaining $150 million available under its term-loan agreements and UScellular borrowed the remaining $100 million. UScellular also repaid $50 million under each of its receivables securitization and repurchase agreements.
TDS repurchased $20 million of common shares during the first six months and had $157 million remaining under its authorization at June 30, 2022. It paid $76 million of dividends to TDS shareholders.

Guidance, Outlook, Risks and Unusual Items

Management expects 2022 UScellular capital expenditures of $700 million to $800 million and TDS Telecom capital expenditures of $500 million to $550 million. Planned spending emphasizes 5G, network modernization and fiber expansion.
Management stated that existing cash, investments, financing availability, expected tax refunds and anticipated cash flows should provide sufficient liquidity for foreseeable operating and debt-service needs, while noting that additional capital may be required for spectrum, acquisitions, network investments, dividends and other obligations.
Key risks include intense wireless competition, elevated promotions and churn, declining roaming revenue, supply-chain and device constraints, higher bad-debt expense, labor shortages, interest-rate exposure, substantial indebtedness, spectrum availability and regulatory support.
UScellular recorded a $3 million loss on impairment of licenses in the first six months. Spectrum licenses acquired in Auction 110 were granted in May 2022; access to certain Auction 107 spectrum is not expected until late 2023. UScellular also participated in the FCC’s 2.5 GHz Auction 108, which began after quarter-end.
The filing reports an ongoing False Claims Act-related legal proceeding concerning UScellular’s participation in historical FCC spectrum auctions. TDS states that it cannot predict the outcome and believes the arrangements complied with applicable law and FCC rules.
The filing identifies no material changes to previously disclosed risk factors. Management concluded that disclosure controls and procedures were effective as of June 30, 2022.

Investor Verification Items

Verify whether UScellular can stabilize retail connections, postpaid churn and gross additions amid aggressive competition.
Track the effect of declining roaming revenue, promotional discounts, device availability and rising bad-debt expense on UScellular margins.
Assess whether TDS Telecom’s fiber expansion can offset declines in legacy voice, video and commercial CLEC services.
Reconcile planned 2022 capital expenditures with operating cash flow, incremental borrowing and leverage trends.
Review the terms and interest-rate sensitivity of variable-rate debt, including term loans, receivables securitization and repurchase borrowings.
Monitor spectrum-related payments, deployment timing, regulatory developments and the pending legal proceedings.
Distinguish GAAP results from non-GAAP Adjusted EBITDA, Adjusted OIBDA and free cash flow when evaluating performance.