Telephone and Data Systems, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022; filed February 16, 2023. The filing is an annual report rather than a quarterly filing. TDS operates through 84%-owned UScellular, a wireless carrier, and wholly owned TDS Telecom, a broadband, video and voice provider. TDS served approximately 4.7 million wireless retail connections and 1.2 million broadband, video and voice connections at year-end.
Financial Performance and Position
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Operating revenues | $5,413 million | $5,329 million | 2% |
| Operating income | $122 million | $261 million | (53%) |
| Income before taxes | $125 million | $221 million | (44%) |
| Net income | $72 million | $188 million | (62%) |
| Net income attributable to TDS shareholders | $62 million | $156 million | (61%) |
| Net loss attributable to TDS common shareholders | $7 million loss | $117 million income | Not meaningful |
| Diluted EPS | $0.07 loss | $1.00 | Not meaningful |
| Adjusted EBITDA | $1,257 million | $1,372 million | (8%) |
| Capital expenditures | $1,285 million | $1,201 million | 7% |
| Operating cash flow | $1,155 million | $1,103 million | 5% |
| Free cash flow | $29 million loss | $37 million loss | Improved |
Margins: Operating margin was approximately 2.3% in 2022 versus 4.9% in 2021. Net margin was approximately 1.3% versus 3.5%. Adjusted EBITDA margin was approximately 23.2% versus 25.8%.
Segment performance: UScellular revenue increased 1% to $4,169 million, but operating income fell 59% to $69 million and Adjusted EBITDA fell 9% to $956 million. TDS Telecom revenue increased 1% to $1,020 million, while operating income declined 40% to $66 million and Adjusted EBITDA declined 6% to $291 million.
- UScellular lost 133,000 postpaid connections during 2022; total retail connections declined to 4.74 million from 4.89 million. Postpaid churn increased to 1.34% from 1.18%.
- UScellular postpaid ARPU increased 4% to $50.14, while inbound roaming revenue fell 39% to $67 million.
- TDS Telecom broadband connections increased 4% to 510,000, but total connections declined 2% to 1.173 million due primarily to voice, video and CLEC declines.
- TDS Telecom service addresses increased 9% to 1.5 million; 39% of service addresses, including cable markets, were served by fiber.
Cash Flow, Debt and Liquidity
- Cash, cash equivalents and restricted cash ended at $399 million, down $15 million from year-end 2021. Balance-sheet cash and cash equivalents were $360 million.
- Cash used in investing activities was $1,783 million, including $1,161 million for property, plant and equipment and $585 million for wireless spectrum licenses.
- Long-term debt, net increased to $3,731 million from $2,928 million. Total principal long-term debt obligations were approximately $3,822 million before discounts and issuance costs.
- Approximately 50% of debt was fixed-rate and 50% variable-rate. Scheduled principal payments were $19 million in 2023, $26 million in 2024, $26 million in 2025, $275 million in 2026, $218 million in 2027 and $2,983 million thereafter.
- Undrawn borrowing capacity at December 31, 2022 was $499 million for TDS and $615 million for UScellular, subject to applicable terms and collateral requirements.
- TDS and UScellular reported compliance with debt covenants, including a minimum consolidated interest coverage ratio of 3.00 to 1.00 and a maximum consolidated leverage ratio of 3.75 to 1.00.
- TDS and UScellular were rated sub-investment grade: Moody’s Ba1, S&P BB and Fitch BB+, each with a stable outlook as disclosed.
Material Changes Versus 2021
- Profitability weakened materially despite modest revenue growth, primarily because of higher operating expenses, increased equipment costs, higher bad-debt expense and greater depreciation.
- UScellular’s competitive position deteriorated, with higher churn, greater postpaid handset losses and increased promotional pressure. Bad-debt expense increased by $76 million.
- TDS Telecom’s fiber investment accelerated, with capital expenditures rising 35% to $556 million; higher employee, programming, marketing and depreciation costs reduced operating income.
- Debt increased by approximately $803 million, primarily from new term-loan, export-credit and other borrowings.
- Regulatory and other investment income declined: equity in earnings of unconsolidated entities fell to $159 million from $182 million, including LA Partnership income of $65 million versus $82 million.
- Income tax expense increased to $53 million from $33 million, and the effective tax rate increased to 42.6% from 15.1%.
- TDS repurchased 2.75 million common shares for $40 million and UScellular repurchased 1.59 million shares for $43 million.
Guidance, Outlook, Risks and Unusual Items
- 2023 capital expenditure guidance was $600–$700 million for UScellular and $500–$550 million for TDS Telecom. Spending is expected to support 5G deployment, network modernization and fiber expansion.
- Management expects UScellular inbound roaming revenue to continue declining in 2023 and expects promotional aggressiveness by competitors to continue. It also expects future postpaid ARPU and ARPA growth to be lower than the 2022 growth rate.
- UScellular expects access to its Auction 107 spectrum only in late 2023. Approximately $133 million of related relocation payments remained classified as current at December 31, 2022, with additional amounts recorded as noncurrent.
- UScellular received $92 million of high-cost regulatory support in 2022, while TDS Telecom received $111 million under federal regulatory support programs. Management expects regulatory support payments may decline and notes that future support is uncertain.
- Key risks include intense wireless and broadband competition, customer churn, declining roaming revenue, spectrum availability and deployment, execution of 5G and fiber programs, supply-chain and labor constraints, inflation, cybersecurity, regulatory changes, litigation, interest-rate exposure and access to capital.
- TDS disclosed a False Claims Act-related proceeding concerning UScellular’s participation in FCC spectrum auctions. The company believes its arrangements complied with applicable law and stated that the outcome cannot currently be predicted; no significant legal accrual was recorded at year-end.
- UScellular recorded a $3 million impairment charge for licenses in markets where FCC buildout requirements are not expected to be met. No goodwill impairment was recorded.
- The independent auditor issued an unqualified opinion and concluded that internal control over financial reporting was effective. Revenue recognition for UScellular retail service and equipment sales was identified as a critical audit matter.
- TDS increased its common dividend to $0.185 per share in the first quarter of 2023 and reported no current plan to change its dividend policy, although continued dividends and repurchases are not assured.
Important Facts for Investors to Verify
- Whether UScellular can stabilize postpaid connections, churn, promotional spending and bad-debt expense.
- Whether 5G deployment and newly acquired spectrum generate sufficient incremental revenue and returns.
- The pace, funding and returns of TDS Telecom’s fiber expansion and the effect of continued voice, video and CLEC declines.
- Debt covenant headroom, refinancing requirements beginning in 2024, variable-rate exposure and the company’s sub-investment-grade ratings.
- The sustainability of operating cash flow and the ability to fund capital expenditures, dividends, share repurchases and spectrum-related obligations without further significant borrowing.
- Future regulatory support payments, Auction 107 relocation obligations and the outcome of the False Claims Act litigation.
- The reconciliation of non-GAAP Adjusted EBITDA and free cash flow to GAAP results, particularly because 2022 free cash flow remained negative.