ITTI(TDS) - 2020 Q2 - Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations Executive Overview The company operates as a diversified telecommunications provider through its U.S. Cellular and TDS Telecom subsidiaries, focusing on 5G and fiber network investments - TDS operates through two main subsidiaries: U.S. Cellular (82%-owned) for wireless services and TDS Telecom (wholly-owned) for wireline and cable services, serving approximately 6 million connections nationwide[10] - The company's strategy involves significant capital reinvestment into its businesses to enhance competitive positioning and financial performance, while also providing shareholder returns via dividends[13] - Key strategic initiatives include U.S. Cellular's 5G service launch and 4G LTE network modernization, and TDS Telecom's focus on fiber deployment in new and existing markets[14] - The company acknowledges that the COVID-19 pandemic is expected to negatively impact its operations, with the severity and duration of the impact remaining uncertain[11] Results of Operations – TDS Consolidated Consolidated operating revenues remained flat while net income attributable to shareholders grew 46%, primarily due to a lower effective tax rate from the CARES Act TDS Consolidated Financial Highlights (Six Months Ended June 30) | Financial Metric | 2020 (in millions) | 2019 (in millions) | YoY Change | | :--- | :--- | :--- | :--- | | Total operating revenues | $2,524 | $2,518 | 0% | | Total operating income | $151 | $142 | +6% | | Net income | $161 | $109 | +47% | | Net income attributable to TDS shareholders | $135 | $92 | +46% | | Adjusted EBITDA (Non-GAAP) | $726 | $701 | +4% | | Capital expenditures | $539 | $411 | +31% | - The effective tax rate for the first six months of 2020 was 6.9%, a sharp decrease from 31.3% in the same period of 2019, primarily due to tax benefits from the CARES Act[19][20] - Equity in earnings of unconsolidated entities, primarily from the LA Partnership, contributed $90 million to pre-tax income in the first half of 2020, a 5% increase from $85 million in the prior year[18] U.S. Cellular Operations U.S. Cellular's net income grew 56% despite flat revenues, driven by tax benefits, while postpaid churn improved due to reduced customer switching during the pandemic - COVID-19 impacts included reduced customer switching activity, leading to lower gross additions and churn, while participation in the FCC Keep Americans Connected Pledge also reduced non-pay defections[29][30] U.S. Cellular Postpaid Activity (YTD 2020 vs YTD 2019) | Metric | YTD 2020 | YTD 2019 | Change | | :--- | :--- | :--- | :--- | | Total Gross Additions | 261,000 | 273,000 | -4% | | Total Net Additions (Losses) | (14,000) | (58,000) | +76% | | Total Churn | 1.05% | 1.24% | -19 bps | U.S. Cellular Financial Highlights (Six Months Ended June 30) | Financial Metric | 2020 (in millions) | 2019 (in millions) | YoY Change | | :--- | :--- | :--- | :--- | | Total operating revenues | $1,937 | $1,939 | 0% | | Operating income | $104 | $95 | +9% | | Net income | $141 | $90 | +56% | | Adjusted EBITDA (Non-GAAP) | $560 | $537 | +4% | | Capital expenditures | $405 | $297 | +36% | - Selling, general and administrative expenses decreased for the six months ended June 30, 2020, primarily due to lower bad debts expense, advertising, and employee-related expenses[53] TDS Telecom Operations TDS Telecom's revenues grew 4% driven by the Continuum acquisition and broadband growth, but operating income declined 10% due to higher operating expenses TDS Telecom Financial Highlights (Six Months Ended June 30) | Financial Metric | 2020 (in millions) | 2019 (in millions) | YoY Change | | :--- | :--- | :--- | :--- | | Total operating revenues | $481 | $464 | +4% | | Operating income | $59 | $66 | -10% | | Net income | $56 | $56 | 0% | | Adjusted EBITDA (Non-GAAP) | $165 | $165 | 0% | | Capital expenditures | $128 | $112 | +15% | - Revenue growth was primarily driven by the acquisition of Continuum (a cable company), along with organic growth in Wireline and Cable broadband services[65] - Operating expenses increased due to the addition of Continuum, higher plant maintenance, and building expenses, while a gain on asset sale in Q1 2019 also contributed to the unfavorable YoY comparison[66] - COVID-19 impacts included reduced churn and a temporary reduction in service revenues due to participation in the FCC Keep Americans Connected Pledge[59] Wireline Operations Wireline operating revenues and income declined due to falling commercial and wholesale revenues, which offset growth in the residential broadband segment Wireline Financial Highlights (Six Months Ended June 30) | Financial Metric | 2020 (in millions) | 2019 (in millions) | YoY Change | | :--- | :--- | :--- | :--- | | Total operating revenues | $339 | $343 | -1% | | Operating income | $50 | $61 | -18% | | Adjusted EBITDA (Non-GAAP) | $116 | $125 | -7% | - Residential revenues grew 5% YoY to $170 million, driven by growth in broadband and video connections, but this was offset by a 10% decline in Commercial revenues and a 3% decline in Wholesale revenues[80][84][85] - Total residential connections grew 2%, with broadband connections up 6% and video connections up 9%, while voice connections declined 3%[74] - Effective January 1, 2020, the company began capitalizing the cost of most modems and installation, which is estimated to be $14 million for the full year 2020[88] Cable Operations Cable operations saw strong growth with a 17% revenue increase and a 90% rise in operating income, primarily driven by the Continuum acquisition Cable Financial Highlights (Six Months Ended June 30) | Financial Metric | 2020 (in millions) | 2019 (in millions) | YoY Change | | :--- | :--- | :--- | :--- | | Total operating revenues | $142 | $121 | +17% | | Operating income | $9 | $5 | +90% | | Adjusted EBITDA (Non-GAAP) | $49 | $40 | +21% | - The acquisition of Continuum was a major driver of growth, contributing $11 million in revenue and $6 million in cost of services for the six-month period[101][102] - Total cable connections grew 12%, boosted by the Continuum acquisition which added 15,800 broadband, 9,400 video, and 5,800 voice connections[94] Liquidity and Capital Resources The company maintained strong liquidity with $565 million in cash and new credit facilities, supporting a 31% increase in capital expenditures for network investment - Consolidated Cash and cash equivalents increased to $565 million at June 30, 2020, from $465 million at December 31, 2019[111] - In March 2020, TDS and U.S. Cellular secured new revolving credit agreements of $400 million and $300 million, respectively, with no outstanding borrowings as of June 30, 2020[112] - U.S. Cellular was the winning bidder for 237 wireless spectrum licenses in Auction 103 for $146 million, with payment completed in April 2020[120] Consolidated Cash Flow Summary (Six Months Ended June 30) | Cash Flow Activity | 2020 (in millions) | 2019 (in millions) | | :--- | :--- | :--- | | Net cash provided by operating activities | $806 | $592 | | Net cash used in investing activities | ($769) | ($616) | | Net cash provided by (used in) financing activities | $75 | ($62) | | Net increase (decrease) in cash | $112 | ($86) | Supplemental Information Relating to Non-GAAP Financial Measures This section defines and reconciles non-GAAP metrics like EBITDA and Free Cash Flow to their GAAP counterparts to evaluate business performance and liquidity - The company uses non-GAAP measures like Adjusted EBITDA and Adjusted OIBDA to evaluate operating results, believing it provides useful information to investors on underlying business trends[139] TDS Consolidated Non-GAAP Reconciliation (Six Months Ended June 30, 2020) | Metric (in millions) | Amount | | :--- | :--- | | Net income (GAAP) | $161 | | Add: Income tax expense | $12 | | Add: Interest expense | $75 | | Add: Depreciation, amortization and accretion | $470 | | EBITDA (Non-GAAP) | $718 | | Add: (Gain) loss on asset disposals, net | $8 | | Adjusted EBITDA (Non-GAAP) | $726 | | Deduct: Equity in earnings & Interest/dividend income | ($98) | | Adjusted OIBDA (Non-GAAP) | $629 | Free Cash Flow (Six Months Ended June 30) | Metric (in millions) | 2020 | 2019 | | :--- | :--- | :--- | | Cash flows from operating activities (GAAP) | $806 | $592 | | Less: Cash paid for additions to property, plant and equipment | $610 | $393 | | Free cash flow (Non-GAAP) | $196 | $199 | Regulatory Matters Key regulatory developments include the FCC's proposed $9 billion '5G Fund' for rural deployment and U.S. Cellular's participation in spectrum auctions - The FCC proposed a $9 billion '5G Fund' to support rural deployment, which may replace legacy support from the Federal USF that U.S. Cellular currently receives[152][153] - U.S. Cellular was the winning bidder for 237 wireless spectrum licenses in Auction 103 for $146 million and has qualified to bid in Auction 105 (3.5 GHz band)[156][157] - U.S. Cellular filed an application to participate in the Rural Digital Opportunity Fund (Auction 904), a reverse auction to fund high-speed fixed broadband service in rural areas[158] Risk Factors The primary updated risk factor is the uncertain and potentially material adverse impact of the COVID-19 pandemic on the company's business and operations - The primary new risk factor disclosed is the uncertain and potentially material adverse effect of the COVID-19 pandemic on the company's business[163][164] - Potential negative impacts from COVID-19 include disruptions to business activities, supply chain issues, and economic downturns affecting customer attraction and retention[164] Financial Statements (Unaudited) Consolidated Statement of Operations Net income attributable to shareholders increased significantly to $135 million on flat operating revenues of $2.524 billion for the six-month period Consolidated Statement of Operations Highlights (Six Months Ended June 30) | Line Item (in millions, except per share) | 2020 | 2019 | | :--- | :--- | :--- | | Total operating revenues | $2,524 | $2,518 | | Operating income | $151 | $142 | | Income before income taxes | $173 | $159 | | Net income | $161 | $109 | | Net income attributable to TDS shareholders | $135 | $92 | | Diluted earnings per share | $1.15 | $0.78 | Consolidated Balance Sheet Total assets grew to $11.16 billion as of June 30, 2020, driven by increases in cash, licenses, and property, plant, and equipment Consolidated Balance Sheet Highlights | Account (in millions) | June 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $565 | $465 | | Total current assets | $2,086 | $1,921 | | Property, plant and equipment, net | $3,615 | $3,527 | | Total assets | $11,161 | $10,781 | | Liabilities & Equity | | | | Total current liabilities | $882 | $962 | | Long-term debt, net | $2,487 | $2,316 | | Total liabilities | $5,658 | $5,377 | | Total TDS shareholders' equity | $4,738 | $4,653 | | Total liabilities and equity | $11,161 | $10,781 | Consolidated Statement of Cash Flows Cash from operations increased significantly to $806 million, funding $769 million in investing activities and resulting in a $112 million net cash increase Consolidated Cash Flow Summary (Six Months Ended June 30) | Cash Flow Activity (in millions) | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $806 | $592 | | Net cash used in investing activities | ($769) | ($616) | | Net cash provided by (used in) financing activities | $75 | ($62) | | Net increase (decrease) in cash | $112 | ($86) | Notes to Consolidated Financial Statements The notes detail key accounting policies, the significant positive impact of the CARES Act on the tax rate, and segment-specific financial information - TDS adopted ASC 326 for credit losses on January 1, 2020, using a modified retrospective method, which did not have a material impact on retained earnings[198] - The effective tax rate for the first six months of 2020 was 6.9% (down from 31.3% in 2019) primarily due to benefits from the CARES Act, which allows for the carryback of net operating losses[221][222] - U.S. Cellular's net equipment installment plan receivables were $866 million as of June 30, 2020, down from $924 million at year-end 2019[219] - In April 2020, U.S. Cellular borrowed $125 million under its receivables securitization agreement, which is collateralized by its equipment installment plan receivables[230] Other Information Legal Proceedings The company is involved in ongoing civil actions under the Federal False Claims Act related to its participation in several FCC spectrum auctions - TDS and U.S. Cellular are defendants in civil actions under the Federal False Claims Act concerning participation in FCC spectrum auctions (58, 66, 73, and 97)[255] - The Department of Justice investigated the claims but declined to intervene in late 2019; the private plaintiffs are proceeding with the case[255] Unregistered Sales of Equity Securities and Use of Proceeds During the second quarter, TDS repurchased over 500,000 of its Common Shares for $7.8 million, with $185 million remaining under its buyback program TDS Common Share Repurchases (Q2 2020) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 1 - 30, 2020 | 501,212 | $15.62 | | May 1 - 31, 2020 | — | — | | June 1 - 30, 2020 | — | — | | Total for Quarter | 501,212 | $15.62 | - As of June 30, 2020, the maximum dollar value of shares that may yet be repurchased under the existing plan was $185 million[260]