ITTI(TDS) - 2023 Q3 - Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes TDS's financial performance, liquidity, and non-GAAP measures, including segment-level results Executive Overview TDS, a diversified telecom company, is exploring strategic alternatives for UScellular while reinvesting in its core businesses - 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[10] - On August 4, 2023, TDS and UScellular announced the initiation of a process to explore strategic alternatives for UScellular, incurring $4 million in third-party expenses during Q3 2023[14] - TDS's strategy involves reinvesting the majority of its operating capital to strengthen its businesses, focusing on enhancing UScellular's 5G network and expanding TDS Telecom's fiber deployment[13][15] Results of Operations – TDS Consolidated TDS consolidated revenue decreased in Q3 and YTD 2023, with improved Q3 operating income but a YTD net loss TDS Consolidated Financial Highlights (in millions) | Indicator | Q3 2023 | Q3 2022 | % Change | YTD 2023 | YTD 2022 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total operating revenues | $1,278 | $1,392 | (8)% | $3,848 | $4,056 | (5)% | | Total operating expenses | $1,230 | $1,403 | (12)% | $3,738 | $3,909 | (4)% | | Operating income (loss) | $48 | $(11) | N/M | $110 | $147 | (26)% | | Net income (loss) | $4 | $(10) | N/M | $16 | $101 | (84)% | | Net income (loss) attributable to TDS common shareholders | $(17) | $(25) | 30% | $(46) | $35 | N/M | | Adjusted EBITDA (Non-GAAP) | $328 | $271 | 21% | $956 | $987 | (3)% | - Interest expense increased for both the three and nine-month periods ended September 30, 2023, primarily due to interest rate increases on variable rate debt[22] - The increase in Q3 2023 net income was primarily due to lower operating expenses, which offset lower revenues and higher interest and tax expenses[28] - The decrease in YTD 2023 net income was driven by lower operating revenues and higher interest expense[29] UScellular Operations UScellular's Q3 2023 revenue declined, but operating income improved significantly due to expense reductions Operational Overview UScellular experienced postpaid handset losses but gained connected devices, with slight ARPU growth UScellular Postpaid Activity | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Gross Additions | 128,000 | 151,000 | 389,000 | 405,000 | | Handset Net Losses | (38,000) | (22,000) | (92,000) | (89,000) | | Connected Device Net Additions | 3,000 | (9,000) | 4,000 | (26,000) | | Total Net Losses | (35,000) | (31,000) | (88,000) | (115,000) | | Total Churn | 1.30% | 1.42% | 1.26% | 1.34% | - Postpaid handset net losses increased due to aggressive industry-wide competition, while connected device net additions grew, driven by higher demand for fixed wireless home internet[37][38] UScellular Postpaid Revenue Metrics | Metric | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | ARPU | $51.11 | $50.21 | 2% | | ARPA | $130.91 | $130.27 | — | Financial Overview UScellular's revenue declined due to lower equipment sales and service revenue, but operating expenses decreased significantly UScellular Financial Summary (in millions) | Indicator | Q3 2023 | Q3 2022 | % Change | YTD 2023 | YTD 2022 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total operating revenues | $963 | $1,083 | (11)% | $2,906 | $3,120 | (7)% | | Service revenues | $762 | $781 | (2)% | $2,289 | $2,351 | (3)% | | Equipment sales | $201 | $302 | (33)% | $617 | $769 | (20)% | | Total operating expenses | $906 | $1,098 | (17)% | $2,789 | $3,024 | (8)% | | Operating income (loss) | $57 | $(15) | N/M | $117 | $96 | 22% | | Adjusted OIBDA (Non-GAAP) | $220 | $163 | 35% | $624 | $627 | (1)% | - Retail service revenues decreased due to a decline in average postpaid and prepaid connections[47] - Inbound roaming revenues fell due to lower rates, and equipment sales revenues dropped because of fewer smartphone upgrades and gross additions[48] - Operating expenses decreased, primarily driven by a 36% reduction in the cost of equipment sold and a 10% decrease in SG&A expenses, which benefited from lower bad debts, commissions, and advertising[53][54] TDS Telecom Operations TDS Telecom's Q3 2023 revenue was flat, with residential growth offset by commercial declines, and operating income fell Operational Overview TDS Telecom expanded its fiber footprint and increased residential broadband connections, with customers opting for higher speeds TDS Telecom Residential Connections (as of Sept 30) | Connection Type | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Total Broadband | 532,600 | 506,500 | 5% | | Wireline, Expansion | 79,400 | 49,400 | 61% | | Video | 132,400 | 136,600 | (3)% | | Voice | 284,000 | 295,500 | (4)% | | Total Residential | 949,000 | 938,600 | 1% | - TDS Telecom increased its total service addresses by 11% year-over-year to 1.6 million, with 69% of its footprint now offering 1Gig+ service[63] - Residential broadband customers continue to select higher speeds, with 75% choosing 100 Mbps or greater[70] - Total residential revenue per connection increased 3% in Q3 2023[70] Financial Overview TDS Telecom's revenue remained flat, with residential growth offsetting commercial declines, while depreciation expenses increased TDS Telecom Financial Summary (in millions) | Indicator | Q3 2023 | Q3 2022 | % Change | YTD 2023 | YTD 2022 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total operating revenues | $256 | $256 | — | $767 | $763 | — | | Residential revenue | $177 | $170 | 4% | $521 | $500 | 4% | | Commercial revenue | $38 | $43 | (12)% | $118 | $130 | (10)% | | Total operating expenses | $256 | $246 | 4% | $752 | $702 | 7% | | Operating income | $— | $10 | (98)% | $15 | $61 | (76)% | | Adjusted OIBDA (Non-GAAP) | $67 | $66 | 2% | $203 | $224 | (9)% | - Residential revenues grew due to price increases and growth in broadband connections, while commercial revenues declined due to falling connections in CLEC markets[77][78] - Depreciation, amortization, and accretion expenses increased 16% in Q3 and 14% YTD due to increased capital expenditures on new fiber assets[82] Liquidity and Capital Resources TDS expects negative free cash flow, managing liquidity through financing and slowing fiber deployment, with $906 million in YTD capital expenditures - TDS expects to continue incurring negative free cash flow and has elected to slow the pace of TDS Telecom's fiber deployment to reduce funding needs[84][87] Available Undrawn Borrowing Capacity (as of Sept 30, 2023, in millions) | (Dollars in millions) | TDS | UScellular | | :--- | :--- | :--- | | Revolving Credit Agreement | $399 | $300 | | Receivables Securitization | — | $445 | | Repurchase Agreement (Restricted) | — | $200 | | Total available capacity | $399 | $745 | - In September 2023, TDS entered into a new $300 million senior secured term loan credit agreement and borrowed the full amount[95] - YTD 2023 capital expenditures totaled $906 million, with $462 million for UScellular and $434 million for TDS Telecom[106][108] Consolidated Cash Flow Analysis TDS's cash decreased by $106 million YTD 2023, with operating cash flow largely offset by investing activities and net financing outflows Consolidated Cash Flow Summary (YTD, in millions) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $923 | $901 | | Net cash used in investing activities | $(922) | $(1,408) | | Net cash provided by (used in) financing activities | $(107) | $574 | | Net (decrease) increase in cash | $(106) | $67 | - Key drivers for 2023 cash flows include $906 million in capital expenditures, a $57 million federal tax refund, and net financing activities that included $781 million in new debt issuance and $724 million in debt repayments[116][117][118] Supplemental Information Relating to Non-GAAP Financial Measures This section defines and reconciles non-GAAP measures, showing increased Q3 Adjusted EBITDA but negative YTD free cash flow Reconciliation of Net Income (Loss) to Adjusted EBITDA (Consolidated, in millions) | Line Item | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) (GAAP) | $4 | $(10) | $16 | $101 | | Add back adjustments... | | | | | | Adjusted EBITDA (Non-GAAP) | $328 | $271 | $956 | $987 | Free Cash Flow (Non-GAAP, YTD, in millions) | Line Item | 2023 | 2022 | | :--- | :--- | :--- | | Cash flows from operating activities (GAAP) | $923 | $901 | | Cash paid for additions to property, plant and equipment | $(906) | $(794) | | Cash paid for software license agreements | $(29) | $(5) | | Free cash flow (Non-GAAP) | $(12) | $102 | Regulatory Matters UScellular incurred spectrum relocation costs, while TDS Telecom secured $90 million in annual E-ACAM support for fiber deployment - For its Auction 107 spectrum, UScellular paid $17 million in relocation costs in the first nine months of 2023 and an additional $105 million in October 2023[137] - TDS Telecom accepted E-ACAM support for 24 states, which will provide approximately $90 million per year for 15 years starting in 2024[141] - In return, TDS Telecom must deploy 100/20 Mbps internet service to approximately 270,000 locations[141] Risk Factors New risk factors include uncertainties from UScellular's strategic review and default risks from the new $300 million secured credit agreement - A new risk factor highlights that the process to explore strategic alternatives for UScellular could divert management attention, incur significant expenses, and result in business disruption or stock price volatility, with no assurance of a successful outcome[151][152] - The new Senior Secured Credit Agreement entered in September 2023 introduces a risk factor related to its restrictive covenants[154] - A failure to comply could result in default, acceleration of the $300 million loan, and potential foreclosure on collateral, which includes 26.4 million UScellular shares[155] Quantitative and Qualitative Disclosures About Market Risk TDS faces interest rate risk as 50% of its $3.9 billion long-term debt is variable-rate, with a significant portion maturing in 2026 - Approximately 50% of TDS's long-term debt is variable-rate, creating exposure to volatility in interest expense due to fluctuations in market interest rates[156] Principal Payments Due on Long-Term Debt (as of Sept 30, 2023, in millions) | (Dollars in millions) | Principal Payments | Weighted-Avg. Interest Rate | | :--- | :--- | :--- | | Remainder of 2023 | $5 | 7.3% | | 2024 | $26 | 7.2% | | 2025 | $26 | 7.2% | | 2026 | $576 | 7.2% | | 2027 | $319 | 7.0% | | Thereafter | $2,982 | 6.5% | | Total | $3,934 | 6.7% | Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements, including statements of operations and balance sheets Consolidated Financial Statements The unaudited consolidated financial statements show YTD 2023 revenues of $3.85 billion and a net loss attributable to common shareholders Consolidated Statement of Operations (in millions, except per share) | Indicator | Q3 2023 | YTD 2023 | | :--- | :--- | :--- | | Total operating revenues | $1,278 | $3,848 | | Operating income (loss) | $48 | $110 | | Net income (loss) | $4 | $16 | | Net income (loss) attributable to TDS common shareholders | $(17) | $(46) | | Diluted EPS attributable to TDS common shareholders | $(0.16) | $(0.41) | Consolidated Balance Sheet (in millions) | Account | Sept 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total current assets | $1,680 | $2,028 | | Total assets | $14,414 | $14,550 | | Total current liabilities | $1,327 | $1,514 | | Long-term debt, net | $3,840 | $3,731 | | Total liabilities | $7,797 | $7,947 | | Total equity | $6,517 | $6,603 | Notes to Consolidated Financial Statements These notes detail accounting policies, revenue disaggregation, debt facilities, and segment financial data, including strategic review expenses Note 2: Revenue Recognition This note disaggregates revenue by segment and details contract liabilities and remaining performance obligations Disaggregation of Revenue - Q3 2023 (in millions) | Segment | Service Revenues | Equipment Sales | Total Revenues | | :--- | :--- | :--- | :--- | | UScellular | $737 | $201 | $938 | | TDS Telecom | $255 | $— | $256 | | Other/Elim. | $19 | $34 | $53 | | Total (from contracts) | $1,012 | $235 | $1,247 | - As of September 30, 2023, the company had contract liabilities of $373 million and estimated future service revenues from remaining performance obligations of $603 million[194][196] Note 9: Debt This note details TDS's new $300 million term loan, UScellular's amended securitization, and key debt covenants - In September 2023, TDS entered into a new $300 million senior secured term loan credit agreement, maturing in September 2026, and borrowed the full amount[219] - UScellular amended its receivables securitization agreement to extend the maturity to September 2025[221] - YTD, UScellular borrowed $115 million and repaid $385 million under this facility, with an additional $150 million borrowed subsequent to Q3[222] - Debt agreements require TDS and UScellular to maintain a Consolidated Leverage Ratio not to exceed 4.25 to 1.00 through March 31, 2024, and an Interest Coverage Ratio not lower than 3.00 to 1.00[224] Note 12: Business Segment Information This note provides detailed operating revenues, income, and Adjusted EBITDA for UScellular, TDS Telecom, and Corporate segments Segment Financial Data - Q3 2023 (in millions) | Segment | Operating Revenues | Operating Income (Loss) | Adjusted EBITDA (Non-GAAP) | | :--- | :--- | :--- | :--- | | UScellular | $963 | $57 | $263 | | TDS Telecom | $256 | $— | $68 | | Corporate & Other | $59 | $(9) | $(3) | Segment Financial Data - YTD 2023 (in millions) | Segment | Operating Revenues | Operating Income (Loss) | Adjusted EBITDA (Non-GAAP) | | :--- | :--- | :--- | :--- | | UScellular | $2,906 | $117 | $753 | | TDS Telecom | $767 | $15 | $207 | | Corporate & Other | $175 | $(22) | $(4) | Other Information This section covers controls, legal proceedings, and equity security sales Controls and Procedures Management concluded that disclosure controls were effective as of September 30, 2023, with no material changes to internal controls - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[246] - No changes in internal controls over financial reporting occurred during Q3 2023 that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[247] Legal Proceedings TDS is involved in an appeal of a False Claims Act case and a new stockholder class action lawsuit alleging securities violations - Private party plaintiffs are appealing the dismissal of a False Claims Act case concerning UScellular's participation in past FCC auctions[248] - The Department of Justice had previously investigated and declined to intervene in the False Claims Act case[248] - A putative stockholder class action was filed against TDS and UScellular in May 2023, alleging violations of securities law related to public statements made between May and November 2022 regarding business strategies[249] Unregistered Sales of Equity Securities and Use of Proceeds No TDS Common Shares were repurchased in Q3 2023, with $132 million remaining authorized under the repurchase program - No repurchases of TDS Common Shares were made during the third quarter of 2023[252] - As of September 30, 2023, $132 million remained authorized for future repurchases under the company's stock repurchase program[252]