Telephone and Data Systems, Inc. — Q3 2021 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 82%-owned UScellular, a wireless operator, and wholly owned TDS Telecom, which provides broadband, video and voice services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
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 for comparability.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Operating revenues | $1,328 million | $1,324 million | $3,957 million | $3,849 million |
| Operating income | $69 million | $87 million | $237 million | $238 million |
| Net income | $47 million | $93 million | $152 million | $254 million |
| Net income attributable to common shareholders | $28 million | $78 million | $105 million | $212 million |
| Diluted EPS | $0.24 | $0.66 | $0.89 | $1.81 |
| Adjusted EBITDA | $341 million | $362 million | $1,069 million | $1,087 million |
| Capital expenditures | $279 million | $310 million | $726 million | $849 million |
Calculated consolidated operating margin was approximately 5.2% in Q3 2021 versus 6.6% in Q3 2020, and approximately 6.0% for the first nine months versus 6.2% in the prior-year period. Net margin was approximately 3.5% in Q3 versus 7.0% and 3.8% year-to-date versus 6.6%.
- UScellular: Q3 revenue was $1,016 million, down 1%; nine-month revenue was $3,053 million, up 3%. Q3 operating income declined 31% to $45 million; nine-month operating income declined 2% to $165 million. Adjusted EBITDA declined 7% in Q3 and 1% year-to-date. Retail connections were 4.909 million, including 4.391 million postpaid and 518,000 prepaid connections.
- TDS Telecom: Q3 revenue was $252 million, up 2%; nine-month revenue was $752 million, up 3%. Q3 operating income was $27 million, down 3%, and nine-month operating income was $87 million, down 1%. Broadband connections grew 7% to 487,400, while total connections remained essentially flat at 1.206 million because of declines in legacy voice and commercial connections.
- Cash flow: Nine-month cash flow from operating activities was $863 million, down from $1,166 million. Free cash flow, defined by TDS as operating cash flow less property, plant and equipment additions, was $137 million versus $252 million. Investing cash outflows were $2,006 million, including $1,273 million for wireless spectrum acquisitions and $726 million of capital expenditures.
- Liquidity: Cash and cash equivalents were $725 million at September 30, 2021, versus $1,429 million at December 31, 2020. Cash, cash equivalents and restricted cash totaled $761 million. Available revolving credit capacity was $399 million for TDS and $300 million for UScellular. Unused term-loan capacity was $300 million and $200 million, respectively. UScellular also had $125 million of unused receivables-securitization capacity at quarter-end, subject to collateral requirements.
- Debt and capital structure: Long-term debt, net, was $2,804 million, down from $3,424 million at year-end, while current debt was $194 million. Scheduled long-term debt obligations totaled $3,072 million, including $2,529 million due thereafter. TDS issued $1.11 billion of preferred shares during the first nine months and recorded $1.074 billion net in equity.
Material changes versus the prior comparable period
- Revenue increased modestly, but profitability declined substantially because of higher operating expenses, higher interest expense and higher income taxes.
- Interest expense increased to $193 million year-to-date from $119 million, reflecting new debt issuances and the write-off of $52 million of unamortized debt issuance costs associated with redeemed notes.
- The effective tax rate increased to 29.3% in Q3 and 20.3% year-to-date, compared with 5.8% and 6.5%, respectively, primarily because 2020 benefited from CARES Act tax provisions.
- UScellular experienced higher postpaid churn and Q3 net losses, lower inbound roaming revenue and reduced connected-device additions. Postpaid ARPU increased 2% to $48.12, and postpaid ARPA increased 2% to $125.99.
- TDS Telecom continued broadband and fiber expansion: fiber-to-the-home reached 40% of wireline service addresses versus 34% a year earlier, and 1 Gig service was available to 57% of its total footprint.
- UScellular acquired spectrum through Auction 107, increasing licenses by approximately $1.464 billion during the first nine months. The spectrum is not expected to be accessible until late 2023, and approximately $181 million of related relocation costs and accelerated relocation incentives are expected through 2024.
Guidance, outlook, risks and unusual items
- 2021 capital expenditure guidance was $700–$800 million for UScellular and $400–$450 million for TDS Telecom. Planned spending focuses on 5G, network modernization, fiber deployment, broadband capacity and information technology.
- Management stated that existing cash, investments, available credit facilities, expected tax refunds and anticipated operating and investing cash flows should provide sufficient liquidity for normal operations and debt service for the coming years, although additional capital may be needed for spectrum, acquisitions, network construction, dividends, share repurchases and other obligations.
- COVID-19 did not materially affect reported results through September 30, 2021, but its future impact remains uncertain. Supply-chain disruption, device constraints and labor shortages may negatively affect both businesses.
- UScellular expects inbound roaming revenue to continue declining relative to 2020. Competitive pricing and promotional activity may pressure wireless revenue and operating income.
- Moody’s downgraded UScellular senior unsecured notes from Ba1 to Ba2 in August 2021, primarily because financing increased debt structurally senior to those notes.
- UScellular borrowed the remaining $125 million under its receivables securitization facility in October 2021, and TDS redeemed $195 million of senior notes in October 2021; these are subsequent events to the quarter-end balance sheet.
- A $9 million out-of-period regulatory-fee billing error increased Q3 and year-to-date 2021 service revenue; management determined it was not material to any affected period.
- Pending False Claims Act litigation concerning UScellular’s participation in historical FCC spectrum auctions remained unresolved. TDS stated it could not predict the outcome.
- TDS reported no material changes to previously disclosed risk factors and stated that disclosure controls were effective as of September 30, 2021.
Important facts for investors to verify
- Reconcile the decline in earnings and free cash flow with the modest revenue growth, particularly the effects of higher interest expense, taxes and operating costs.
- Assess UScellular’s postpaid churn, customer additions, promotional intensity, roaming revenue decline and device supply constraints.
- Evaluate the timing, cost and expected returns of UScellular’s 5G and spectrum investments, including the delayed availability of Auction 107 spectrum.
- Monitor TDS Telecom’s broadband, fiber deployment, penetration and legacy voice trends against its capital spending program.
- Review liquidity, debt maturities, floating-rate exposure, covenant compliance and the structural separation between TDS and UScellular cash.
- Consider the impact of preferred-share dividends, which reduced income attributable to TDS common shareholders by $21 million year-to-date.
- Follow the pending False Claims Act proceedings, regulatory support and net-neutrality matters, as well as supply-chain, cybersecurity and competitive risks.