ITTI(TDS) - 2022 Q2 - Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a comprehensive analysis of the company's financial performance, liquidity, and capital resources, along with detailed segment-level results Executive Overview TDS is a diversified telecommunications company focused on enhancing network capabilities through UScellular's 5G deployment and TDS Telecom's fiber expansion - TDS is a diversified telecommunications company providing wireless services through its 83%-owned subsidiary, UScellular, and broadband, video, and voice services through its wholly-owned subsidiary, TDS Telecom, serving approximately 6 million connections nationwide[9] - UScellular's strategy focuses on increasing revenues from device protection plans, fixed wireless internet, and tower rentals, while enhancing its network by deploying 5G technology using low, high, and mid-band spectrum[13] - TDS Telecom's strategy is to be the preferred broadband provider by investing in fiber deployment in both its expansion markets and incumbent markets, aiming to expand its total footprint in attractive, growing areas[13] Results of Operations – TDS Consolidated For the second quarter of 2022, TDS reported a 3% increase in total operating revenues to $1.35 billion and a 28% increase in net income attributable to TDS shareholders to $35 million compared to the prior year TDS Consolidated Financial Highlights (Q2 & YTD 2022 vs 2021) | Indicator (in millions) | Q2 2022 | Q2 2021 | % Change | YTD 2022 | YTD 2021 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total operating revenues | $1,349 | $1,311 | 3% | $2,664 | $2,629 | 1% | | Total operating income | $63 | $58 | 8% | $158 | $168 | (6)% | | Net income attributable to TDS shareholders | $35 | $27 | 28% | $96 | $86 | 11% | | Adjusted EBITDA (Non-GAAP) | $345 | $346 | 0% | $716 | $727 | (2)% | | Capital expenditures | $391 | $250 | 57% | $633 | $446 | 42% | - Interest expense decreased significantly in Q2 and YTD 2022 due to the write-off of unamortized debt issuance costs related to Senior Notes redeemed in 2021, which were replaced by debt with lower interest rates[18] - The effective tax rate increased for the three and six months ended June 30, 2022, primarily because a 2021 reduction of tax accruals, resulting from the expiration of state statutes of limitations, did not recur in 2022[19] - During the first six months of 2022, TDS received a federal income tax refund of $125 million related to the 2020 net operating loss carryback enabled by the CARES Act[20] UScellular Operations UScellular's operating revenue for Q2 2022 increased 1% year-over-year to $1.027 billion, driven by a 2% rise in retail service revenue, despite competitive pressures leading to a postpaid net loss of 40,000 connections UScellular Postpaid Activity (Q2 & YTD 2022 vs 2021) | Metric | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Total Gross Additions | 128,000 | 141,000 | 254,000 | 283,000 | | Total Net Additions (Losses) | (40,000) | (6,000) | (84,000) | (12,000) | | Total Churn | 1.30% | 1.11% | 1.30% | 1.12% | UScellular Financial Overview (in millions) | Metric | Q2 2022 | Q2 2021 | % Change | YTD 2022 | YTD 2021 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total operating revenues | $1,027 | $1,014 | 1% | $2,037 | $2,037 | 0% | | Operating income | $40 | $36 | 10% | $111 | $120 | (8)% | | Adjusted OIBDA (Non-GAAP) | $221 | $218 | 2% | $464 | $476 | (2)% | | Adjusted EBITDA (Non-GAAP) | $261 | $267 | (2)% | $550 | $567 | (3)% | | Capital expenditures | $268 | $148 | 81% | $405 | $273 | 48% | - Postpaid ARPU and ARPA increased by 5% and 4% respectively for both Q2 and YTD 2022, driven by favorable plan/product mix, increased cost recovery surcharges, and higher device protection revenue[37] - Inbound roaming revenues decreased 36% in Q2 2022 due to lower data usage and rates, a trend expected to continue[43] - Selling, general and administrative expenses increased due to higher bad debts expense, driven by an increase in non-pay customers and a shift to higher-priced devices[48] TDS Telecom Operations TDS Telecom's Q2 2022 operating revenue grew 2% year-over-year to $256 million, fueled by a 5% increase in residential revenues from broadband connection growth and price adjustments, despite a decline in operating income - TDS Telecom increased its service addresses by 7% to 1.4 million, with 34% of addresses now served by fiber, and 1Gig service available to 63% of its total footprint as of June 30, 2022[54] TDS Telecom Financial Overview (in millions) | Metric | Q2 2022 | Q2 2021 | % Change | YTD 2022 | YTD 2021 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total operating revenues | $256 | $252 | 2% | $507 | $501 | 1% | | Operating income | $23 | $28 | (18)% | $51 | $60 | (14)% | | Adjusted OIBDA (Non-GAAP) | $76 | $78 | (3)% | $158 | $159 | 0% | | Adjusted EBITDA (Non-GAAP) | $76 | $78 | (2)% | $159 | $158 | 1% | | Capital expenditures | $120 | $99 | 21% | $225 | $169 | 33% | - Total residential broadband connections grew 5% year-over-year to 500,800, driven by a 56% increase in expansion market wireline connections[56] - Residential revenues increased due to price increases and broadband connection growth, while commercial revenues decreased due to declining connections in CLEC markets[67][68] - Selling, general and administrative expenses rose due to increased costs to support growth, including employee-related expenses, advertising, and software costs[69] Liquidity and Capital Resources TDS maintains sufficient liquidity through cash, operating cash flows, and various financing agreements, supporting significant capital expenditures and share repurchases Undrawn Borrowing Capacity as of June 30, 2022 (in millions) | Facility | TDS | UScellular | | :--- | :--- | :--- | | Revolving Credit Agreement | $399 | $300 | | Term Loan Agreements | $150 | $100 | | Receivables Securitization Agreement | — | $150 | | Repurchase Agreement | — | $140 | | Total | $549 | $690 | Capital Expenditures YTD June 30 (in millions) | Segment | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | UScellular | $405 | $273 | 48% | | TDS Telecom | $225 | $169 | 33% | - In the first half of 2022, TDS borrowed $150 million and UScellular borrowed $400 million under their respective term loan agreements, with UScellular also borrowing the full $150 million available under its export credit financing agreement[81][82] - TDS repurchased 1,220,226 Common Shares for $20 million in the first six months of 2022, with $157 million remaining under its repurchase authorization[93] Consolidated Cash Flow Analysis For the first six months of 2022, TDS's cash and equivalents increased by $91 million, driven by operating cash flows and new debt borrowings, partially offset by significant investing activities - Net cash provided by operating activities was $734 million for the six months ended June 30, 2022, driven by net income, non-cash adjustments, and a $125 million federal income tax refund[97] - Cash used for investing activities totaled $1.122 billion, which included $563 million for wireless spectrum licenses and $526 million for property, plant, and equipment[98] - Cash provided by financing activities was $479 million, resulting from $775 million in new borrowings under various facilities, partially offset by debt repayments, dividends, and share repurchases[99] Consolidated Balance Sheet Analysis Key changes on the consolidated balance sheet as of June 30, 2022, include a $535 million increase in net long-term debt and a $126 million decrease in income taxes receivable due to a federal tax refund Change in Long-term debt, net (in millions) | Description | Amount | | :--- | :--- | | Balance at December 31, 2021 | $2,928 | | Borrowings under Term Loan Agreements | $550 | | Borrowings under Export Credit Financing | $150 | | Repayments under Receivables Securitization | ($150) | | Other (net) | ($15) | | Balance at June 30, 2022 | $3,463 | - Income taxes receivable decreased by $126 million due to a federal income tax refund related to the 2020 net operating loss carryback enabled by the CARES Act[104] - Other current liabilities increased by $116 million, primarily due to accruals for software license agreements and $60 million borrowed under the EIP receivables repurchase agreement[106] Supplemental Information Relating to Non-GAAP Financial Measures This section defines and reconciles non-GAAP financial measures such as EBITDA, Adjusted EBITDA, Adjusted OIBDA, and Free Cash Flow, which management uses to assess performance TDS Consolidated Reconciliation of Net Income to Adjusted EBITDA (in millions) | | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net income (GAAP) | $111 | $105 | | Add back: Income tax expense | $65 | $20 | | Add back: Interest expense | $72 | $138 | | Add back: Depreciation, amortization and accretion | $456 | $457 | | EBITDA (Non-GAAP) | $704 | $720 | | Add back/deduct: Other items | $12 | $7 | | Adjusted EBITDA (Non-GAAP) | $716 | $727 | Free Cash Flow (in millions) | | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Cash flows from operating activities (GAAP) | $734 | $481 | | Less: Cash paid for additions to property, plant and equipment | $526 | $457 | | Free cash flow (Non-GAAP) | $208 | $24 | Regulatory Matters UScellular has been actively participating in FCC spectrum auctions, securing 380 licenses in Auction 110 for $580 million and becoming a qualified bidder for Auction 108 - In January 2022, UScellular was the winning bidder for 380 wireless spectrum licenses in Auction 110 for $580 million, with licenses granted by the FCC on May 4, 2022[122] - UScellular was the winning bidder for 254 licenses in Auction 107 for $1.283 billion, plus an expected $187 million in relocation costs, with spectrum access not expected until late 2023[121] - UScellular was qualified as a bidder for Auction 108 (2.5 GHz band), with bidding beginning on July 29, 2022[123] Risk Factors This section outlines the company's key operational, financial, and regulatory risks, noting no material changes from the prior annual report - The company has not identified any material changes to the risk factors previously disclosed in its Form 10-K for the year ended December 31, 2021[133] - Key operational risks include intense competition, failure to obtain adequate radio spectrum, inability to attract and retain talent, and complexities with deploying new technologies[128] - Key financial and general risks include uncertainty in future cash flow, significant indebtedness, concentration in the U.S. telecom industry, and the potential for cyber-attacks[129][131] Quantitative and Qualitative Disclosures About Market Risk TDS is exposed to market risk, primarily from interest rate fluctuations on its variable-rate debt, which constituted approximately 40% of its long-term debt as of June 30, 2022 - As of June 30, 2022, approximately 40% of TDS's long-term debt was variable-rate, exposing the company to interest rate risk[134] Long-Term Debt Principal Payments Due by Period (as of June 30, 2022) | Period | Principal Payments (in millions) | Weighted-Avg. Interest Rate | | :--- | :--- | :--- | | Remainder of 2022 | $3 | 3.8% | | 2023 | $16 | 3.3% | | 2024 | $16 | 3.3% | | 2025 | $16 | 3.3% | | 2026 | $286 | 2.8% | | Thereafter | $2,911 | 5.3% | | Total | $3,248 | 5.2% | Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements and accompanying notes, providing detailed financial position, performance, and cash flow information Consolidated Financial Statements This section contains the unaudited consolidated financial statements for Telephone and Data Systems, Inc. for the periods ended June 30, 2022, and 2021, prepared in accordance with GAAP Consolidated Statement of Operations (Six Months Ended June 30, in millions) | | 2022 | 2021 | | :--- | :--- | :--- | | Total operating revenues | $2,664 | $2,629 | | Operating income | $158 | $168 | | Net income | $111 | $105 | | Net income attributable to TDS common shareholders | $61 | $77 | | Diluted earnings per share | $0.52 | $0.65 | Consolidated Balance Sheet (in millions) | | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total current assets | $2,051 | $2,044 | | Total assets | $14,242 | $13,493 | | Total current liabilities | $1,234 | $1,180 | | Long-term debt, net | $3,463 | $2,928 | | Total equity | $6,743 | $6,734 | | Total liabilities and equity | $14,242 | $13,493 | Notes to Consolidated Financial Statements The notes provide detailed explanations of the accounting policies and financial data presented in the consolidated statements, covering revenue recognition, debt facilities, and segment performance Note 2: Revenue Recognition This note disaggregates revenue by service type for each business segment, detailing total revenues from contracts with customers and estimated future service revenues from remaining performance obligations Disaggregation of Revenue (Six Months Ended June 30, 2022, in millions) | Segment | Service Revenues | Equipment/Product Sales | Total Revenues | | :--- | :--- | :--- | :--- | | UScellular | $1,570 | $467 | $2,037 | | TDS Telecom | $507 | $1 | $507 | | Corporate, Eliminations & Other | $48 | $71 | $120 | | Total | $2,125 | $539 | $2,664 | - As of June 30, 2022, TDS had an estimated $679 million in service revenues expected to be recognized from remaining performance obligations in future periods[171][172] Note 9: Debt This note details the company's debt structure, including available borrowing capacity under revolving credit agreements and outstanding amounts under securitization and repurchase agreements - As of June 30, 2022, TDS had $399 million and UScellular had $300 million available for use under their respective revolving credit agreements[194] - In January 2022, UScellular entered into a repurchase agreement to borrow up to $200 million secured by equipment installment plan receivables, with $60 million outstanding as of June 30, 2022[202] - In March 2022, UScellular extended the maturity of its receivables securitization agreement to March 2024, with $300 million outstanding and $150 million of unused capacity as of June 30, 2022[200] Note 12: Business Segment Information This note provides detailed financial data for TDS's reportable segments, including total operating revenues, operating income, Adjusted EBITDA, and capital expenditures for the six months ended June 30, 2022 Segment Financial Data (Six Months Ended June 30, 2022, in millions) | Segment | Total Operating Revenues | Operating Income | Adjusted EBITDA (Non-GAAP) | Capital Expenditures | | :--- | :--- | :--- | :--- | :--- | | UScellular | $2,037 | $111 | $550 | $405 | | TDS Telecom | $507 | $51 | $159 | $225 | | Corporate, Eliminations & Other | $120 | ($4) | $7 | $3 | | Total | $2,664 | $158 | $716 | $633 | Other Information This section covers the company's internal controls, ongoing legal matters, and details regarding equity security repurchases Controls and Procedures TDS management concluded that the company's disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal control over financial reporting during the quarter - The principal executive officer and principal financial officer concluded that TDS's disclosure controls and procedures were effective as of June 30, 2022, at the reasonable assurance level[224] - There were no changes in internal controls over financial reporting during the second quarter of 2022 that have materially affected, or are reasonably likely to materially affect, TDS' internal control[225] Legal Proceedings TDS and UScellular are defendants in ongoing civil actions under the federal False Claims Act related to past FCC spectrum auctions, with the Department of Justice declining to intervene - TDS and UScellular are defendants in civil actions under the Federal False Claims Act related to participation in FCC spectrum auctions 58, 66, 73, and 97[226] - The Department of Justice (DOJ) declined to intervene in the case, but the private party plaintiffs are continuing the action, with TDS believing its arrangements complied with applicable law[226] Unregistered Sales of Equity Securities and Use of Proceeds TDS has an ongoing $250 million share repurchase program for its Common Shares, under which it repurchased 966,124 shares for $16.25 per share during Q2 2022 Issuer Purchases of Equity Securities (Q2 2022) | Period | Total Shares Purchased | Average Price Paid per Share | Maximum Dollar Value Remaining for Purchase | | :--- | :--- | :--- | :--- | | April 2022 | 59,100 | $18.97 | $171,613,870 | | May 2022 | 171,315 | $17.93 | $168,541,695 | | June 2022 | 735,709 | $15.64 | $157,033,260 | | Total | 966,124 | $16.25 | $157,033,260 | - The Board of Directors authorized a $250 million stock repurchase program for TDS Common Shares on August 2, 2013, which does not have an expiration date[229]