Telephone and Data Systems, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and six months ended June 30, 2021, filed August 6, 2021. TDS is a U.S.-only telecommunications company serving approximately 6 million connections through 82%-owned UScellular and wholly owned TDS Telecom. TDS Telecom combined its former Wireline and Cable segments into one reportable segment, with prior periods recast.
COVID-19 did not have a material impact on results during the periods presented, although future effects remain uncertain.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Operating revenues | $1,311 million | $1,263 million | $2,629 million | $2,524 million |
| Operating income | $58 million | $78 million | $168 million | $151 million |
| Net income | $34 million | $78 million | $105 million | $161 million |
| Net income attributable to TDS common shareholders | $20 million | $65 million | $77 million | $135 million |
| Diluted EPS | $0.17 | $0.56 | $0.65 | $1.15 |
| Adjusted EBITDA | $346 million | $364 million | $727 million | $726 million |
| Capital expenditures | $250 million | $247 million | $446 million | $539 million |
| Free cash flow | Not provided | Not provided | $24 million | $196 million |
Q2 operating margin was approximately 4.4% versus 6.2% in the prior-year quarter. Six-month operating margin was approximately 6.4% versus 6.0%. Six-month free cash flow declined sharply because operating cash flow fell to $481 million from $806 million, while cash paid for property, plant and equipment was $457 million versus $610 million.
Segment Performance and Material Changes
- UScellular: Q2 revenue increased 4% to $1,014 million, while operating income declined 32% to $36 million and Adjusted EBITDA declined 5% to $267 million. Equipment sales rose 9%, but equipment costs rose 19%; operating expenses increased 6% overall. Six-month revenue increased 5% to $2,037 million and operating income increased 16% to $120 million.
- UScellular ended the quarter with 4.906 million retail connections, including 4.399 million postpaid and 0.507 million prepaid connections. Q2 postpaid churn increased to 1.11% from 0.89%, and total postpaid net additions were negative 6,000 versus positive 12,000 in the prior year.
- Postpaid ARPU increased 3% to $47.74 and ARPA increased 4% to $125.25. Inbound roaming revenue declined 31% in Q2; management expects roaming revenue to continue declining during 2021.
- TDS Telecom: Q2 revenue increased 5% to $252 million, while operating income declined 10% to $28 million and Adjusted EBITDA declined 7% to $78 million. Residential revenue increased 10%, offset by declines in commercial and wholesale revenue. Six-month revenue increased 4% to $501 million.
- TDS Telecom had 1.2045 million connections at June 30, 2021. Broadband connections increased 7% to 478,700, while legacy voice connections declined 3% and commercial connections declined 8%. Fiber-to-the-home covered 39% of wireline service addresses versus 33% a year earlier.
- Consolidated interest expense increased to $86 million in Q2 from $38 million, primarily due to debt issuances and a $36 million write-off of unamortized debt issuance costs related to redeemed notes. The six-month increase also included additional debt issuance costs.
- The Q2 effective tax rate was a benefit of 48.9%, principally due to reductions in tax accruals following state statute-of-limitations expirations. The six-month effective tax rate was 15.5%, compared with 6.9% in 2020, partly because CARES Act benefits did not recur.
Liquidity, Debt and Capital Allocation
- Cash, cash equivalents and restricted cash declined $1.033 billion during the first six months to $419 million at June 30, 2021. Cash and cash equivalents were $385 million.
- Long-term debt, net was $3.335 billion, compared with $3.424 billion at December 31, 2020. Scheduled debt principal payments total $3.430 billion, including $3.181 billion due thereafter.
- At June 30, TDS had $274 million available under its $400 million revolving credit facility; UScellular had $300 million available under its $300 million facility. TDS and UScellular had fully drawn their $200 million and $300 million term loans, respectively.
- UScellular had $100 million outstanding and $350 million unused under its receivables securitization facility, subject to collateral availability.
- TDS issued $420 million of Series UU preferred stock for net proceeds of $406 million. TDS and UScellular redeemed $1.1 billion of senior notes and UScellular issued $500 million of 5.5% senior notes in May 2021.
- Full-year 2021 capital expenditure guidance was $775 million to $875 million for UScellular and $425 million to $475 million for TDS Telecom, primarily for 5G, network modernization and fiber deployment.
- During the first six months, TDS repurchased $3 million of common shares and paid $49 million of dividends to TDS shareholders.
Guidance, Outlook, Risks and Unusual Items
- Management expects continued investment in UScellular 5G and network modernization and in TDS Telecom fiber expansion. TDS expects to fund capital expenditures primarily through operating cash flow, existing cash and, if necessary, additional financing.
- UScellular was the provisional winning bidder for 254 Auction 107 spectrum licenses at a purchase price of $1.283 billion. The licenses were granted in July 2021, after quarter-end. Approximately $178 million of relocation and accelerated relocation incentive payments are expected from 2021 through 2024; access to the spectrum is not expected until late 2023.
- In July 2021, TDS and UScellular amended credit facilities, extending revolving facility maturities to July 2026 and adding $300 million of TDS term-loan capacity and $200 million of UScellular term-loan capacity. The facilities include a 3.75-to-1.00 consolidated leverage covenant.
- In August 2021, Moody’s downgraded UScellular senior unsecured notes from Ba1 to Ba2. TDS and UScellular also announced planned September 2021 redemptions totaling $458 million of senior notes; the filing states that $14 million of related debt issuance costs will be recorded as interest expense.
- Key risks include intense wireless and broadband competition, higher promotional discounts, rising churn, declining roaming and regulatory-support revenue, spectrum availability and deployment, substantial capital requirements, leverage and refinancing risk, regulatory changes, litigation, cybersecurity incidents and uncertainty surrounding public health or economic conditions.
- Private-party False Claims Act litigation concerning UScellular’s participation in prior FCC spectrum auctions remains pending. TDS states that it believes the arrangements complied with applicable law and cannot predict the outcome.
Most Important Facts to Verify
- Whether UScellular can stabilize churn, postpaid net additions and operating margins amid intensified wireless competition.
- Execution, timing and returns from the $1.283 billion Auction 107 spectrum investment, including the approximately $178 million of future relocation obligations.
- Whether projected 2021 capital expenditures can be funded while maintaining dividends and managing lower free cash flow.
- Post-quarter debt amendments, planned note redemptions, the Moody’s downgrade and compliance with the 3.75-to-1.00 leverage covenant.
- The outcome and potential financial exposure from the pending False Claims Act litigation and changes to federal and state telecommunications support programs.