SEC Form 10-Q filed by Telephone and Data Systems Inc.
$TDS
Telecommunications Equipment
Telecommunications
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| (Mark One) | ||||||||
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
For the quarterly period ended March 31, 2024
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
For the transition period from to
Commission file number 001-14157
| (Exact name of Registrant as specified in its charter) | ||||||||
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |||||||
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (312) 630-1900
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||||||||||||||
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||||||||
| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | ☒ | No | ☐ | ||||||||||||||||||||
| Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). | ☒ | No | ☐ | ||||||||||||||||||||
| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | |||||||||||||||||||||||
| ☒ | Accelerated filer | ☐ | |||||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||||||||||||||
| Emerging growth company | |||||||||||||||||||||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ | ||||||||||||||||||||||
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes | No | ☒ | ||||||||||||||||||||
The number of shares outstanding of each of the issuer's classes of common stock, as of March 31, 2024, is 106 million Common Shares, $.01 par value, and 7 million Series A Common Shares, $.01 par value.
Telephone and Data Systems, Inc.
Quarterly Report on Form 10-Q
For the Period Ended March 31, 2024
| Index | Page No. | ||||
| Telephone and Data Systems, Inc. Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||
Executive Overview
The following discussion and analysis compares Telephone and Data Systems, Inc.’s (TDS) financial results for the three months ended March 31, 2024, to the three months ended March 31, 2023. It should be read in conjunction with TDS’ interim consolidated financial statements and notes included herein, and with the description of TDS’ business, its audited consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) included in TDS’ Annual Report on Form 10-K (Form 10-K) for the year ended December 31, 2023. Certain numbers included herein are rounded to millions for ease of presentation; however, certain calculated amounts and percentages are determined using the unrounded numbers.
This report contains statements that are not based on historical facts, which may be identified by words such as “believes,” “anticipates,” “estimates,” “expects,” “plans,” “intends,” “projects,” “will” and similar expressions. These statements constitute and represent “forward looking statements” as this term is defined in the Private Securities Litigation Reform Act of 1995. Such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward looking statements. See the disclosure under the heading Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement elsewhere in this report for additional information.
The accounting policies of TDS conform to accounting principles generally accepted in the United States of America (GAAP). However, TDS uses certain “non-GAAP financial measures” in the MD&A. A discussion of the reasons TDS determines these metrics to be useful and reconciliations of these measures to their most directly comparable measures determined in accordance with GAAP are included in the disclosure under the heading Supplemental Information Relating to Non-GAAP Financial Measures within the MD&A of this report.
General
TDS is a diversified telecommunications company that provides high-quality communications services to approximately 6 million connections nationwide. TDS provides wireless services through its 83%-owned subsidiary, United States Cellular Corporation (UScellular). TDS also provides broadband, video and voice services through its wholly-owned subsidiary, TDS Telecommunications LLC (TDS Telecom). TDS operates entirely in the United States. See Note 10 — Business Segment Information in the Notes to Consolidated Financial Statements for additional information about TDS' segments.
1
TDS Mission and Strategy
TDS’ mission is to provide outstanding communications services to its customers and meet the needs of its shareholders, its associates, and its communities. In pursuing this mission, TDS seeks to grow its businesses, create opportunities for its associates, support the communities it serves, and build value over the long term for its shareholders. Since its founding, TDS has been committed to bringing high-quality communications services to rural and underserved communities. TDS continues to make progress on developing and enhancing its Environmental, Social and Governance (ESG) program, including the publication of the most recent TDS ESG Report in July 2023, which is available on the TDS website.
TDS’ historical long-term strategy has been to re-invest the majority of its operating capital in its businesses to strengthen their competitive positions and financial performance, while also returning value to TDS shareholders primarily through the payment of a regular quarterly cash dividend. It is uncertain at this time how the strategic alternatives review for UScellular, TDS' available opportunities to reinvest in its businesses, or TDS' ongoing liquidity needs may impact TDS' long-term strategy, including with regard to the payment of dividends, in future periods.
TDS plans to build shareholder value by continuing to execute on its strategies to build strong, competitive businesses providing high-quality, data-focused services and products. Strategic efforts include:
▪UScellular offers economical and competitively priced service plans and devices to its customers and is focused on increasing revenues from sales of related products such as device protection plans and from services such as fixed wireless home internet. In addition, UScellular is focused on increasing tower rent revenues and expanding its solutions available to business and government customers.
▪UScellular continues to enhance its network capabilities, including by deploying 5G technology. 5G technology helps address customers’ growing demand for data services and creates opportunities for new services requiring high speed and reliability as well as low latency. UScellular's initial 5G deployment in 2019-2022 predominantly used low-band spectrum to launch 5G services in portions of substantially all of its markets. During 2023, UScellular continued to invest in 5G with a focus on deployment of mid-band spectrum, which largely overlaps areas already covered with low-band 5G service. During 2024, UScellular is continuing the multi-year deployment of 5G mid-band spectrum. 5G service deployed over mid-band spectrum further enhances speed and capacity for UScellular's mobility and fixed wireless services.
▪UScellular assesses its existing wireless interests on an ongoing basis with a goal of maximizing the value of its assets and operational profitability. As part of this strategy, UScellular may seek attractive opportunities to acquire and divest wireless spectrum as deemed necessary.
▪TDS Telecom strives to provide high-quality broadband services in its markets with the ability to provide value-added bundling with video and voice service options. TDS Telecom focuses on driving growth by investing in fiber deployment primarily in its expansion markets and also in its incumbent and cable markets that have historically utilized copper and coaxial cable technologies.
▪TDS Telecom seeks to grow its operations by creating clusters of markets in attractive, growing locations and may seek to acquire and/or divest of assets to support its strategy.
Strategic Alternatives Review
On August 4, 2023, TDS and UScellular announced that the Boards of Directors of both companies have decided to initiate a process to explore a range of strategic alternatives for UScellular. During the three months ended March 31, 2024, TDS incurred third-party expenses of $11 million related to the strategic alternatives review. At this time, TDS cannot predict the ultimate outcome of such process or estimate the potential impact of such process on the financial statements.
2
Terms Used by TDS
The following is a list of definitions of certain industry terms that are used throughout this document:
▪4G LTE – fourth generation Long-Term Evolution, which is a wireless technology that enables more network capacity for more data per user as well as faster access to data compared to third generation (3G) technology.
▪5G – fifth generation wireless technology that helps address customers’ growing demand for data services and creates opportunities for new services requiring high speed and reliability as well as low latency.
▪Account – represents an individual or business financially responsible for one or multiple associated connections. An account may include a variety of types of connections such as handsets and connected devices.
▪Auction 107 – Auction 107 was an FCC auction of 3.7-3.98 GHz wireless spectrum licenses that started in December 2020 and concluded in February 2021.
▪Broadband Connections – refers to the individual customers provided internet access through various transmission technologies, including fiber, coaxial and copper.
▪Broadband Penetration – metric which is calculated by dividing total broadband connections by total service addresses.
▪Cable Markets – markets where TDS provides service as the cable provider using coaxial cable and fiber technologies.
▪Churn Rate – represents the percentage of the connections that disconnect service each month. These rates represent the average monthly churn rate for each respective period.
▪Connected Devices – non-handset devices that connect directly to the UScellular network. Connected devices include products such as tablets, wearables, modems, fixed wireless, and hotspots.
▪EBITDA – refers to earnings before interest, taxes, depreciation, amortization and accretion and is used in the non-GAAP metric Adjusted EBITDA throughout this document. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information.
▪Enhanced Alternative Connect America Cost Model (E-ACAM) – a USF support mechanism for certain carriers, which provides revenue support through 2038. This support comes with an obligation to provide 100 megabits per second (Mbps) of download speed and 20 Mbps of upload speed (100/20 Mbps) to a certain number of locations.
▪Expansion Markets – markets utilizing fiber networks in areas where TDS does not serve as the incumbent service provider.
▪Free Cash Flow – non-GAAP metric defined as Cash flows from operating activities less Cash paid for additions to property, plant and equipment and less Cash paid for software license agreements. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information.
▪Gross Additions – represents the total number of new connections added during the period, without regard to connections that were terminated during that period.
▪Incumbent Markets – markets where TDS is positioned as the traditional local telephone company.
▪IPTV – internet protocol television.
▪Net Additions (Losses) – represents the total number of new connections added during the period, net of connections that were terminated during that period.
▪OIBDA – refers to operating income before depreciation, amortization and accretion and is used in the non-GAAP metric Adjusted OIBDA throughout this document. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information.
▪Postpaid Average Revenue per Account (Postpaid ARPA) – metric which is calculated by dividing total postpaid service revenues by the average number of postpaid accounts and by the number of months in the period.
▪Postpaid Average Revenue per User (Postpaid ARPU) – metric which is calculated by dividing total postpaid service revenues by the average number of postpaid connections and by the number of months in the period.
▪Residential Revenue per Connection – metric which is calculated by dividing total residential revenue by the average number of residential connections and by the number of months in the period.
▪Retail Connections – individual lines of service associated with each device activated by a postpaid or prepaid customer. Connections are associated with all types of devices that connect directly to the UScellular network.
▪Service Addresses – number of single residence homes, multi-dwelling units, and business locations that are capable of being connected to the TDS network, based on best available information.
▪Universal Service Fund (USF) – a system of telecommunications collected fees and support payments managed by the FCC intended to promote universal access to telecommunications services in the United States.
▪Video Connections – represents the individual customers provided video services.
▪Voice Connections – refers to the individual circuits connecting a customer to TDS' central office facilities that provide voice services or the billable number of lines into a building for voice services.
3
Results of Operations — TDS Consolidated
The following discussion and analysis compares financial results for the three months ended March 31, 2024, to the three months ended March 31, 2023.
| Three Months Ended March 31, | |||||||||||||||||
| 2024 | 2023 | 2024 vs. 2023 | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Operating revenues | |||||||||||||||||
| UScellular | $ | 950 | $ | 986 | (4) | % | |||||||||||
| TDS Telecom | 266 | 253 | 5 | % | |||||||||||||
All other1 | 46 | 64 | (29) | % | |||||||||||||
| Total operating revenues | 1,262 | 1,303 | (3) | % | |||||||||||||
| Operating expenses | |||||||||||||||||
| UScellular | 899 | 960 | (6) | % | |||||||||||||
| TDS Telecom | 240 | 245 | (2) | % | |||||||||||||
All other1 | 56 | 69 | (20) | % | |||||||||||||
| Total operating expenses | 1,195 | 1,274 | (6) | % | |||||||||||||
| Operating income (loss) | |||||||||||||||||
| UScellular | 51 | 26 | 94 | % | |||||||||||||
| TDS Telecom | 27 | 8 | N/M | ||||||||||||||
All other1 | (11) | (5) | (83) | % | |||||||||||||
| Total operating income | 67 | 29 | N/M | ||||||||||||||
| Investment and other income (expense) | |||||||||||||||||
| Equity in earnings of unconsolidated entities | 42 | 44 | (3) | % | |||||||||||||
| Interest and dividend income | 5 | 5 | (4) | % | |||||||||||||
| Interest expense | (57) | (53) | (9) | % | |||||||||||||
| Other, net | 1 | — | N/M | ||||||||||||||
| Total investment and other expense | (9) | (4) | N/M | ||||||||||||||
| Income before income taxes | 58 | 25 | N/M | ||||||||||||||
| Income tax expense | 20 | 13 | 49 | % | |||||||||||||
| Net income | 38 | 12 | N/M | ||||||||||||||
| Less: Net income attributable to noncontrolling interests, net of tax | 9 | 4 | N/M | ||||||||||||||
| Net income attributable to TDS shareholders | 29 | 8 | N/M | ||||||||||||||
| TDS Preferred Share dividends | 17 | 17 | — | ||||||||||||||
| Net income (loss) attributable to TDS common shareholders | $ | 12 | $ | (9) | N/M | ||||||||||||
Adjusted OIBDA (Non-GAAP)2 | $ | 318 | $ | 272 | 17 | % | |||||||||||
Adjusted EBITDA (Non-GAAP)2 | $ | 366 | $ | 321 | 14 | % | |||||||||||
Capital expenditures3 | $ | 219 | $ | 343 | (36) | % | |||||||||||
Numbers may not foot due to rounding.
N/M - Percentage change not meaningful
1Consists of corporate and other operations and intercompany eliminations.
2Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.
3Refer to Liquidity and Capital Resources within this MD&A for additional information on Capital expenditures.
Refer to individual segment discussions in this MD&A for additional details on operating revenues and expenses at the segment level.
4
Equity in earnings of unconsolidated entities
Equity in earnings of unconsolidated entities represents TDS’ share of net income from entities in which it has a noncontrolling interest and that are accounted for using the equity method or the net asset value practical expedient. TDS’ investment in the Los Angeles SMSA Limited Partnership (LA Partnership) contributed pre-tax income of $16 million and $20 million for the three months ended March 31, 2024 and 2023, respectively. See Note 6 — Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.
Interest expense
Interest expense increased for the three months ended March 31, 2024 due primarily to borrowings under the TDS secured term loan and revolving credit agreements and interest rate increases on variable rate debt, partially offset by a decrease in the average principal balance outstanding on the receivables securitization agreement and higher capitalized interest. See Market Risk for additional information regarding maturities of long-term debt and weighted average interest rates.
Income tax expense
Income tax expense increased for the three months ended March 31, 2024 due primarily to the increase in Income before income taxes.
TDS calculated income taxes for the three months ended March 31, 2024, based on an estimated year-to-date tax rate. The effective tax rates are expected to vary in subsequent interim periods in 2024 due to fluctuations in Income before income taxes.
Net income attributable to noncontrolling interests, net of tax
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| (Dollars in millions) | |||||||||||
| UScellular noncontrolling public shareholders’ | $ | 3 | $ | 2 | |||||||
| Noncontrolling shareholders’ or partners’ | 6 | 2 | |||||||||
| Net income attributable to noncontrolling interests, net of tax | $ | 9 | $ | 4 | |||||||
Net income attributable to noncontrolling interests, net of tax includes the noncontrolling public shareholders’ share of UScellular’s net income, the noncontrolling shareholders’ or partners’ share of certain UScellular subsidiaries’ net income and other TDS noncontrolling interests.
Earnings
(Dollars in millions)
Three Months Ended
Net income increased due primarily to lower operating expenses, partially offset by lower operating revenues and higher interest and income tax expenses. Adjusted EBITDA increased due primarily to lower operating expenses, partially offset by lower operating revenues.
*Represents a non-GAAP financial measure. Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.
5
 | UScellular OPERATIONS | ||||
Business Overview
UScellular owns, operates, and invests in wireless markets throughout the United States. UScellular is an 83%-owned subsidiary of TDS. UScellular’s strategy is to attract and retain customers by providing a high-quality network, outstanding customer service, and competitive devices, plans and pricing - all provided with a community focus.
OPERATIONS
▪Serves customers with 4.5 million retail connections including 4.1 million postpaid and 0.4 million prepaid connections
▪Operates in 21 states
▪Employs approximately 4,300 associates
▪Owns 4,382 towers
▪Operates 6,995 cell sites in service
6
Operational Overview — UScellular
| As of March 31, | 2024 | 2023 | |||||||||||||||
| Retail Connections – End of Period | |||||||||||||||||
| Postpaid | 4,051,000 | 4,223,000 | |||||||||||||||
| Prepaid | 436,000 | 470,000 | |||||||||||||||
| Total | 4,487,000 | 4,693,000 | |||||||||||||||
| Q1 2024 | Q1 2023 | Q1 2024 vs. Q1 2023 | |||||||||||||||
| Postpaid Activity and Churn | |||||||||||||||||
| Gross Additions | |||||||||||||||||
| Handsets | 63,000 | 93,000 | (32) | % | |||||||||||||
| Connected Devices | 43,000 | 44,000 | (2) | % | |||||||||||||
| Total Gross Additions | 106,000 | 137,000 | (23) | % | |||||||||||||
| Net Additions (Losses) | |||||||||||||||||
| Handsets | (47,000) | (25,000) | (88) | % | |||||||||||||
| Connected Devices | 3,000 | 1,000 | N/M | ||||||||||||||
| Total Net Additions (Losses) | (44,000) | (24,000) | (83) | % | |||||||||||||
| Churn | |||||||||||||||||
| Handsets | 1.03 | % | 1.06 | % | |||||||||||||
| Connected Devices | 2.52 | % | 2.78 | % | |||||||||||||
| Total Churn | 1.22 | % | 1.27 | % | |||||||||||||
N/M - Percentage change not meaningful
Total postpaid handset net losses increased for the three months ended March 31, 2024, when compared to the same period last year due to lower gross additions as a result of continued aggressive industry-wide competition and a decrease in the pool of available customers.
Total postpaid connected device net additions increased for the three months ended March 31, 2024, when compared to the same period last year due to higher demand for fixed wireless home internet as well as a decrease in hotspot churn.
UScellular decommissioned its 3G Code Division Multiple Access (CDMA) network in the first quarter of 2024. Total net additions (losses) for the three months ended March 31, 2024 exclude a one-time adjustment to remove 11,000 connections that were dependent on the CDMA network.
Postpaid Revenue
| Three Months Ended March 31, | |||||||||||||||||
| 2024 | 2023 | 2024 vs. 2023 | |||||||||||||||
| Average Revenue Per User (ARPU) | $ | 51.96 | $ | 50.66 | 3 | % | |||||||||||
| Average Revenue Per Account (ARPA) | $ | 132.00 | $ | 130.77 | 1 | % | |||||||||||
Postpaid ARPU increased for the three months ended March 31, 2024, when compared to the same period last year, due to a decrease in promotional discounts, an increase in cost recovery surcharges, favorable plan and product offering mix, and an increase in device protection plan revenues.
Postpaid ARPA increased slightly for the three months ended March 31, 2024, when compared to the same period last year, due to the impacts to Postpaid ARPU, partially offset by a decrease in the number of connections per account.
7
Financial Overview — UScellular
The following discussion and analysis compares financial results for the three months ended March 31, 2024, to the three months ended March 31, 2023.
| Three Months Ended March 31, | |||||||||||||||||
| 2024 | 2023 | 2024 vs. 2023 | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Retail service | $ | 678 | $ | 691 | (2) | % | |||||||||||
| Tower rental | 25 | 25 | 3 | % | |||||||||||||
| Other | 51 | 51 | (1) | % | |||||||||||||
| Service revenues | 754 | 767 | (2) | % | |||||||||||||
| Equipment sales | 196 | 219 | (10) | % | |||||||||||||
| Total operating revenues | 950 | 986 | (4) | % | |||||||||||||
| System operations (excluding Depreciation, amortization and accretion reported below) | 182 | 182 | — | ||||||||||||||
| Cost of equipment sold | 216 | 253 | (14) | % | |||||||||||||
| Selling, general and administrative | 331 | 345 | (4) | % | |||||||||||||
| Depreciation, amortization and accretion | 165 | 170 | (2) | % | |||||||||||||
| (Gain) loss on asset disposals, net | 6 | 10 | (43) | % | |||||||||||||
| (Gain) loss on license sales and exchanges, net | (1) | — | N/M | ||||||||||||||
| Total operating expenses | 899 | 960 | (6) | % | |||||||||||||
| Operating income | $ | 51 | $ | 26 | 94 | % | |||||||||||
| Net income | $ | 24 | $ | 14 | 64 | % | |||||||||||
Adjusted OIBDA (Non-GAAP)1 | $ | 228 | $ | 206 | 11 | % | |||||||||||
Adjusted EBITDA (Non-GAAP)1 | $ | 272 | $ | 252 | 8 | % | |||||||||||
Capital expenditures2 | $ | 131 | $ | 208 | (37) | % | |||||||||||
N/M - Percentage change not meaningful
1Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.
2Refer to Liquidity and Capital Resources within this MD&A for additional information on Capital expenditures.
8
Operating Revenues
Three Months Ended March 31, 2024 and 2023
(Dollars in millions)
Service revenues consist of:
▪Retail Service - Postpaid and prepaid charges for voice, data and value-added services and cost recovery surcharges
▪Tower Rental - Revenues from third-party leases of tower space
▪Other Service - Amounts received from the Federal USF, inbound roaming, miscellaneous other service revenues and Internet of Things (IoT)
Equipment revenues consist of:
▪Sales of wireless devices and related accessories to new and existing customers, agents, and third-party distributors
Key components of changes in the statement of operations line items were as follows:
Total operating revenues
Retail service revenues decreased for the three months ended March 31, 2024, primarily as result of a decrease in average postpaid and prepaid connections, partially offset by an increase in Postpaid ARPU as previously discussed in the Operational Overview section.
Equipment sales revenues decreased for the three months ended March 31, 2024, due primarily to a decline in smartphone devices sold due to lower gross additions and upgrades, partially offset by a higher average price of new smartphone sales.
Wireless service providers have been aggressive promotionally and on price to attract and retain customers. This includes both traditional carriers and cable wireless companies. UScellular expects promotional aggressiveness by traditional carriers and pricing pressures from cable wireless companies to continue into the foreseeable future. Operating revenues and Operating income have been negatively impacted in current and prior periods, and are expected to be negatively impacted in future periods, by competitive promotional offers to new and existing customers.
Total operating expenses
Total operating expenses for the three months ended March 31, 2023, include $10 million of severance and related expenses associated with the second quarter of 2023 reduction in workforce. These severance expenses are included in System operations expenses and Selling, general and administrative expenses.
System operations expenses
System operations expenses were flat for the three months ended March 31, 2024, due primarily to decreases in customer usage and employee expenses, which include the second quarter of 2023 reduction in workforce, partially offset by an increase in roaming expense. The increase in roaming expense was driven by an increase in usage partially offset by a decrease in roaming rates.
Cost of equipment sold
Cost of equipment sold decreased for the three months ended March 31, 2024, due primarily to a decline in smartphone upgrades and gross additions, partially offset by a higher average cost per unit sold.
9
Selling, general and administrative expenses
Selling, general and administrative expenses decreased for the three months ended March 31, 2024, due primarily to decreases in employee-related expenses, which include the impact of the second quarter of 2023 reduction in workforce, commissions, and advertising expense, partially offset by a $7 million increase related to the strategic alternatives review expenses.
10
 | TDS TELECOM OPERATIONS | ||||
Business Overview
TDS Telecom owns, operates and invests in high-quality networks, services and products in a mix of small to mid-sized urban, suburban and rural communities throughout the United States. TDS Telecom is a wholly-owned subsidiary of TDS and provides a wide range of broadband, video and voice communications services to residential, commercial and wholesale customers, with the constant focus on delivering outstanding customer service.
OPERATIONS
 | ||
▪Serves 1.2 million connections in 32 states
▪Employs approximately 3,400 associates
11
Operational Overview — TDS Telecom
Total Service Address Mix
As of March 31,
TDS Telecom increased its service addresses 12% from a year ago to 1.7 million as of March 31, 2024 through network expansion.
TDS Telecom offers 1Gig+ service to 73% of its total footprint as of March 31, 2024, compared to 67% a year ago.
As of March 31, | 2024 | 2023 | 2024 vs. 2023 | ||||||||||||||
| Residential connections | |||||||||||||||||
| Broadband | |||||||||||||||||
| Incumbent | 245,100 | 247,900 | (1) | % | |||||||||||||
| Expansion | 100,400 | 62,800 | 60 | % | |||||||||||||
| Cable | 202,400 | 204,700 | (1) | % | |||||||||||||
| Total Broadband | 547,900 | 515,400 | 6 | % | |||||||||||||
| Video | 128,800 | 132,600 | (3) | % | |||||||||||||
| Voice | 279,400 | 289,200 | (3) | % | |||||||||||||
| Total Residential Connections | 956,100 | 937,200 | 2 | % | |||||||||||||
| Commercial connections | 206,200 | 229,800 | (10) | % | |||||||||||||
| Total connections | 1,162,200 | 1,167,000 | — | ||||||||||||||
Numbers may not foot due to rounding.
Total residential broadband connections increased by 8,100 during the three months ended March 31, 2024, due primarily to net additions of 6,400 as well as certain other adjustments.
Total connections decreased due to legacy voice, video, and competitive local exchange carrier (CLEC) connections declines, partially offset by broadband connection growth.
A majority of TDS Telecom's residential customers take advantage of bundling options as 54% of customers subscribe to more than one service.
12
Residential Broadband Connections by Speed
As of March 31,
Residential broadband customers continue to choose higher speeds with 78% taking speeds of 100 Mbps or greater and 17% choosing 1Gig+.
Residential Revenue per Connection
Total residential revenue per connection increased 7% for the three months ended March 31, 2024, due to price increases and product mix changes, partially offset by promotional activity.
13
Financial Overview — TDS Telecom
The following discussion and analysis compares financial results for the three months ended March 31, 2024, to the three months ended March 31, 2023.
| Three Months Ended March 31, | |||||||||||||||||
| 2024 | 2023 | 2024 vs. 2023 | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Residential | |||||||||||||||||
| Incumbent | $ | 90 | $ | 86 | 4 | % | |||||||||||
| Expansion | 26 | 15 | 71 | % | |||||||||||||
| Cable | 70 | 68 | 3 | % | |||||||||||||
| Total residential | 185 | 169 | 10 | % | |||||||||||||
| Commercial | 37 | 41 | (9) | % | |||||||||||||
| Wholesale | 44 | 43 | 3 | % | |||||||||||||
| Total service revenues | 266 | 253 | 5 | % | |||||||||||||
| Equipment revenues | — | — | (35) | % | |||||||||||||
| Total operating revenues | 266 | 253 | 5 | % | |||||||||||||
| Cost of services (excluding Depreciation, amortization and accretion reported below) | 98 | 104 | (6) | % | |||||||||||||
| Cost of equipment and products | — | — | 15 | % | |||||||||||||
| Selling, general and administrative | 75 | 80 | (6) | % | |||||||||||||
| Depreciation, amortization and accretion | 65 | 59 | 10 | % | |||||||||||||
| (Gain) loss on asset disposals, net | 2 | 1 | 60 | % | |||||||||||||
| Total operating expenses | 240 | 245 | (2) | % | |||||||||||||
| Operating income | $ | 27 | $ | 8 | N/M | ||||||||||||
| Net income | $ | 24 | $ | 8 | N/M | ||||||||||||
Adjusted OIBDA (Non-GAAP)1 | $ | 93 | $ | 68 | 37 | % | |||||||||||
Adjusted EBITDA (Non-GAAP)1 | $ | 95 | $ | 69 | 38 | % | |||||||||||
Capital expenditures2 | $ | 87 | $ | 130 | (33) | % | |||||||||||
N/M - Percentage change not meaningful
Numbers may not foot due to rounding.
1Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.
2Refer to Liquidity and Capital Resources within this MD&A for additional information on Capital expenditures.
14
Operating Revenues
Three Months Ended March 31, 2024 and 2023
(Dollars in millions)
Residential revenues consist of:
•Broadband services
•Video services, including IPTV, traditional cable programming and satellite offerings
•Voice services
Commercial revenues consist of:
•High-speed and dedicated business internet services
•Video services
•Voice services
Wholesale revenues consist of:
•Network access services primarily to interexchange and wireless carriers for carrying data and voice traffic on TDS Telecom's networks
•Federal and state regulatory support, including E-ACAM
Key components of changes in the statement of operations items were as follows:
Total operating revenues
Residential revenues increased for the three months ended March 31, 2024, due primarily to price increases and growth in broadband connections, partially offset by promotional activity and a decline in video and voice connections.
Commercial revenues decreased for the three months ended March 31, 2024, due primarily to declining connections in CLEC markets.
Cost of services
Cost of services decreased for the three months ended March 31, 2024, due primarily to a decrease in employee-related expenses and lower plant and maintenance costs, partially offset by higher video programming costs.
Selling, general and administrative
Selling, general and administrative expenses decreased for the three months ended March 31, 2024, due primarily to a decrease in employee-related expenses and lower advertising and marketing costs.
Depreciation, amortization and accretion
Depreciation, amortization and accretion increased for the three months ended March 31, 2024, due primarily to capital expenditures on new fiber assets and customer premise equipment.
15
Liquidity and Capital Resources
Sources of Liquidity
TDS and its subsidiaries operate capital-intensive businesses. TDS incurred negative free cash flow in the three months ended March 31, 2024, has incurred negative free cash flow in prior periods, and may continue to incur negative free cash flow in future periods. In the past, TDS’ existing cash and investment balances, funds available under its financing agreements, preferred share offerings, and cash flows from operating and certain investing and financing activities, including sales of assets or businesses, provided sufficient liquidity and financial flexibility for TDS to meet its day-to-day operating needs and debt service requirements, to finance the build-out and enhancement of markets, pay dividends and to fund acquisitions. There is no assurance that this will be the case in the future.
TDS believes that existing cash and investment balances, funds available under its financing agreements, its ability to obtain future external financing, potential dispositions and expected cash flows from operating and investing activities will provide sufficient liquidity for TDS to meet its day-to-day operating needs and debt service requirements. In addition, TDS retains the ability, as described below, to reduce its capital and operating expenditures to lower its funding needs.
TDS may require substantial additional funding for, among other uses, capital expenditures, making additional investments including new technologies, fiber deployments and E-ACAM builds, acquisitions of providers of telecommunications services, wireless spectrum license acquisitions, agreements to purchase goods or services, leases, repurchases of shares, or payment of dividends. It may be necessary from time to time to increase the size of its existing credit facilities, to amend existing or put in place new credit agreements, to obtain other forms of financing, issue equity securities, or to divest assets in order to fund potential expenditures. TDS' liquidity would be adversely affected if it is unable to obtain short or long-term financing on acceptable terms.
TDS will continue to monitor the rapidly changing business and market conditions and is taking and intends to take appropriate actions, as necessary, to meet its liquidity needs, including reducing its planned capital expenditures. Specifically, TDS Telecom has elected to slow the pace of its fiber deployment and reduce or defer planned capital expenditures as a means to lower its funding needs. It is possible that TDS Telecom will be required, if it is unable to access capital on acceptable terms, to substantially reduce its plans for fiber deployment, in both the short and long-term.
Cash and Cash Equivalents
Cash and cash equivalents include cash and money market investments. The primary objective of TDS’ Cash and cash equivalents investment activities is to preserve principal. TDS does not have direct access to UScellular cash.
Cash and Cash Equivalents
(Dollars in millions)
The majority of TDS’ Cash and cash equivalents are held in bank deposit accounts and in money market funds that purchase only debt issued by the U.S. Treasury or U.S. government agencies. Refer to the Consolidated Cash Flow Analysis for additional information related to changes in Cash and cash equivalents.
16
In addition to Cash and cash equivalents, TDS and UScellular had available undrawn borrowing capacity from the following debt facilities at March 31, 2024. See the Financing section below for further details.
| TDS | UScellular | ||||||||||
| (Dollars in millions) | |||||||||||
| Revolving Credit Agreement | $ | 199 | $ | 300 | |||||||
| Receivables Securitization Agreement | — | 310 | |||||||||
| Total available undrawn borrowing capacity | $ | 199 | $ | 610 | |||||||
Financing
Revolving Credit Agreements
TDS has a revolving credit agreement with maximum borrowing capacity of $400 million. Amounts under the agreement may be borrowed, repaid and reborrowed from time to time until maturity in July 2026. During the three months ended March 31, 2024, TDS borrowed $100 million under the agreement. As of March 31, 2024, the outstanding borrowings under the agreement were $200 million, and the unused borrowing capacity was $199 million.
Receivables Securitization Agreement
UScellular, through its subsidiaries, has a receivables securitization agreement that permits securitized borrowings using its equipment installment plan receivables. Amounts under the agreement may be borrowed, repaid and reborrowed from time to time until September 2025. Unless the agreement is amended to extend the maturity date, repayments based on receivable collections commence in October 2025. During the three months ended March 31, 2024, UScellular borrowed $40 million and repaid $50 million under the agreement. As of March 31, 2024, the outstanding borrowings under the agreement were $140 million and the unused borrowing capacity was $310 million, subject to sufficient collateral to satisfy the asset borrowing base provisions of the agreement.
In April 2024, UScellular repaid an additional $75 million under the agreement.
Term Loan Agreement
In May 2024, TDS entered into a $375 million unsecured term loan credit agreement. At closing, $300 million was drawn, less original issue discount, and the remaining $75 million may be drawn until November 2025. The maturity date of the agreement is May 2029.
Debt Covenants
The TDS and UScellular revolving credit agreements, term loan agreements including the secured term loan, export credit financing agreements and the UScellular receivables securitization agreement require TDS or UScellular, as applicable, to comply with certain affirmative and negative covenants, which include certain financial covenants that may restrict the borrowing capacity available. TDS and UScellular are required to maintain the Consolidated Leverage Ratio as of the end of any fiscal quarter at a level not to exceed the following: 4.25 to 1.00 from January 1, 2023 through March 31, 2024; 4.00 to 1.00 from April 1, 2024 through March 31, 2025; 3.75 to 1.00 from April 1, 2025 and thereafter. TDS and UScellular are also required to maintain the Consolidated Interest Coverage Ratio at a level not lower than 3.00 to 1.00 as of the end of any fiscal quarter. TDS and UScellular believe that they were in compliance as of March 31, 2024 with all such financial covenants.
The term loan agreement entered into in May 2024 requires TDS to comply with certain affirmative and negative covenants, which includes a financial covenant that may restrict the borrowing capacity available. TDS is required to maintain the Consolidated Leverage Ratio as of the end of any fiscal quarter at a level not to exceed the following: 4.50 to 1.00 from April 1, 2024 through March 31, 2025; 4.25 to 1.00 from April 1, 2025 and thereafter.
Other Long-Term Financing
TDS has an effective shelf registration statement on Form S-3 to issue senior or subordinated securities, common shares, preferred shares and depositary shares.
UScellular has an effective shelf registration statement on Form S-3 to issue senior or subordinated debt securities, preferred shares and depositary shares.
See Note 7 — Debt in the Notes to Consolidated Financial Statements for additional information related to the financing agreements.
17
Capital Expenditures
Capital expenditures (i.e., additions to property, plant and equipment and system development expenditures; excludes wireless spectrum license additions), which include the effects of accruals and capitalized interest, for the three months ended March 31, 2024 and 2023, were as follows:
Capital Expenditures
(Dollars in millions)
UScellular’s capital expenditures for the three months ended March 31, 2024 and 2023, were $131 million and $208 million, respectively.
Capital expenditures for the full year 2024 are expected to be between $550 million and $650 million. These expenditures are expected to be used principally for the following purposes:
▪Enhance and maintain UScellular's network capacity and coverage, including continued deployment of 5G with a focus on mid-band spectrum to provide additional speed and capacity to accommodate increased data usage by current customers; and
▪Invest in information technology to support existing and new services and products.
TDS Telecom’s capital expenditures for the three months ended March 31, 2024 and 2023, were $87 million and $130 million, respectively.
Capital expenditures for the full year 2024 are expected to be between $310 million and $340 million. These expenditures are expected to be used principally for the following purposes:
▪Continue to expand fiber deployment primarily in expansion markets;
▪Support broadband growth and success-based spending; and
▪Maintain and enhance existing infrastructure including build-out requirements of state broadband and E-ACAM programs.
TDS intends to finance its capital expenditures for 2024 using primarily Cash flows from operating activities, existing cash balances and additional debt financing from its existing agreements and/or other forms of available financing.
Acquisitions, Divestitures and Exchanges
TDS may be engaged in negotiations (subject to all applicable regulations) relating to the acquisition, divestiture or exchange of companies, properties, assets, wireless spectrum licenses and other possible businesses. In general, TDS may not disclose such transactions until there is a definitive agreement.
Other Obligations
TDS will require capital for future spending on existing contractual obligations, including long-term debt obligations; dividend obligations; lease commitments; commitments for device purchases, network facilities and transport services; agreements for software licensing; long-term marketing programs; and other agreements to purchase goods or services. TDS has taken and expects to continue to take steps to reduce and defer capital expenditures to lower its funding needs. Refer to Liquidity and Capital Resources within this MD&A for additional information.
Variable Interest Entities
TDS consolidates certain “variable interest entities” as defined under GAAP. See Note 8 — Variable Interest Entities in the Notes to Consolidated Financial Statements for additional information related to these variable interest entities. TDS may elect to make additional capital contributions and/or advances to these variable interest entities in future periods to fund their operations.
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Consolidated Cash Flow Analysis
TDS operates a capital-intensive business. TDS makes substantial investments to acquire wireless spectrum licenses and properties and to construct and upgrade communications networks and facilities with a goal of creating long-term value for shareholders. In recent years, rapid changes in technology and new opportunities have required substantial investments in potentially revenue‑enhancing and cost-saving upgrades to TDS’ networks. Revenues from certain of these investments are long-term and in some cases are uncertain. To meet its cash-flow needs, TDS may need to delay or reduce certain investments, dividend payments or sell assets. Refer to Liquidity and Capital Resources within this MD&A for additional information. Cash flows may fluctuate from quarter to quarter and year to year due to seasonality, timing and other factors. The following discussion summarizes TDS' cash flow activities for the three months ended March 31, 2024 and 2023.
2024 Commentary
TDS’ Cash, cash equivalents and restricted cash increased $8 million. Net cash provided by operating activities was $224 million due to net income of $38 million adjusted for non-cash items of $258 million, distributions received from unconsolidated entities of $22 million, and changes in working capital items which decreased net cash by $94 million. The working capital changes were primarily driven by payment of associate bonuses and timing of vendor payments, partially offset by reduced receivable and inventory balances.
Cash flows used for investing activities were $246 million, due primarily to payments for property, plant and equipment of $235 million.
Cash flows provided by financing activities were $30 million, due primarily to $100 million borrowed under the TDS revolving credit agreement and a $40 million borrowing under the UScellular receivables securitization agreement. These were partially offset by $57 million in repayments on the UScellular receivables securitization agreement and the TDS and UScellular term loan agreements, the payment of $39 million in dividends and cash paid for software license agreements of $9 million.
2023 Commentary
TDS’ Cash, cash equivalents and restricted cash decreased $90 million. Net cash provided by operating activities was $46 million due to net income of $12 million adjusted for non-cash items of $240 million, distributions received from unconsolidated entities of $20 million, and changes in working capital items which decreased net cash by $226 million. The working capital changes were primarily driven by timing of vendor payments and payment of associate bonuses, partially offset by a decrease in customer and agent receivable balances.
Cash flows used for investing activities were $334 million, which included payments for property, plant and equipment of $331 million.
Cash flows provided by financing activities were $198 million, due primarily to $115 million borrowed under the UScellular receivables securitization agreement, $100 million borrowed under the TDS revolving credit agreement, and $100 million borrowed under the TDS export credit agreement. These were partially offset by a $60 million repayment on the UScellular EIP receivables repurchase agreement, the payment of $38 million in dividends and cash paid for software license agreements of $8 million.
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Consolidated Balance Sheet Analysis
The following discussion addresses certain captions in the consolidated balance sheet and changes therein. This discussion is intended to highlight the significant changes and is not intended to fully reconcile the changes. Notable balance sheet changes during 2024 were as follows:
Accounts payable
Accounts payable decreased $58 million due primarily to vendor payment timing differences.
Accrued compensation
Accrued compensation decreased $90 million due primarily to associate bonus payments in March 2024.
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Supplemental Information Relating to Non-GAAP Financial Measures
TDS sometimes uses information derived from consolidated financial information but not presented in its financial statements prepared in accordance with GAAP to evaluate the performance of its business. Specifically, TDS has referred to the following measures in this report:
▪EBITDA
▪Adjusted EBITDA
▪Adjusted OIBDA
▪Free cash flow
These measures are considered “non-GAAP financial measures” under U.S. Securities and Exchange Commission Rules. Following are explanations of each of these measures.
EBITDA, Adjusted EBITDA and Adjusted OIBDA
EBITDA, Adjusted EBITDA and Adjusted OIBDA are defined as Net income (loss) adjusted for the items set forth in the reconciliation below. EBITDA, Adjusted EBITDA and Adjusted OIBDA are not measures of financial performance under GAAP and should not be considered as alternatives to Net income (loss) or Cash flows from operating activities, as indicators of cash flows or as measures of liquidity. TDS does not intend to imply that any such items set forth in the reconciliation below are infrequent or unusual; such items may occur in the future.
Adjusted EBITDA is a segment measure reported to the chief operating decision maker for purposes of assessing the segments' performance. See Note 10 — Business Segment Information in the Notes to Consolidated Financial Statements for additional information.
Management uses Adjusted EBITDA and Adjusted OIBDA as measurements of profitability, and therefore reconciliations to applicable GAAP income measures are deemed appropriate. Management believes Adjusted EBITDA and Adjusted OIBDA are useful measures of TDS’ operating results before significant recurring non-cash charges, nonrecurring expenses, gains and losses, and other items as presented below as they provide additional relevant and useful information to investors and other users of TDS’ financial data in evaluating the effectiveness of its operations and underlying business trends in a manner that is consistent with management’s evaluation of business performance. Adjusted EBITDA shows adjusted earnings before interest, taxes, depreciation, amortization and accretion, gains and losses, and expenses related to the strategic alternatives review of UScellular, while Adjusted OIBDA reduces this measure further to exclude Equity in earnings of unconsolidated entities and Interest and dividend income in order to more effectively show the performance of operating activities excluding investment activities. The following tables reconcile EBITDA, Adjusted EBITDA and Adjusted OIBDA to the corresponding GAAP measures, Net income and Operating income.
| Three Months Ended March 31, | |||||||||||
| TDS - CONSOLIDATED | 2024 | 2023 | |||||||||
| (Dollars in millions) | |||||||||||
| Net income (GAAP) | $ | 38 | $ | 12 | |||||||
| Add back: | |||||||||||
| Income tax expense | 20 | 13 | |||||||||
| Interest expense | 57 | 53 | |||||||||
| Depreciation, amortization and accretion | 234 | 232 | |||||||||
| EBITDA (Non-GAAP) | 349 | 310 | |||||||||
| Add back or deduct: | |||||||||||
| Expenses related to strategic alternatives review | 11 | — | |||||||||
| (Gain) loss on asset disposals, net | 7 | 11 | |||||||||
| (Gain) loss on license sales and exchanges, net | (1) | — | |||||||||
| Adjusted EBITDA (Non-GAAP) | 366 | 321 | |||||||||
| Deduct: | |||||||||||
| Equity in earnings of unconsolidated entities | 42 | 44 | |||||||||
| Interest and dividend income | 5 | 5 | |||||||||
| Other, net | 1 | — | |||||||||
| Adjusted OIBDA (Non-GAAP) | 318 | 272 | |||||||||
| Deduct: | |||||||||||
| Depreciation, amortization and accretion | 234 | 232 | |||||||||
| Expenses related to strategic alternatives review | 11 | — | |||||||||
| (Gain) loss on asset disposals, net | 7 | 11 | |||||||||
| (Gain) loss on license sales and exchanges, net | (1) | — | |||||||||
| Operating income (GAAP) | $ | 67 | $ | 29 | |||||||
21
| Three Months Ended March 31, | |||||||||||
| UScellular | 2024 | 2023 | |||||||||
| (Dollars in millions) | |||||||||||
| Net income (GAAP) | $ | 24 | $ | 14 | |||||||
| Add back: | |||||||||||
| Income tax expense | 28 | 11 | |||||||||
| Interest expense | 43 | 47 | |||||||||
| Depreciation, amortization and accretion | 165 | 170 | |||||||||
| EBITDA (Non-GAAP) | 260 | 242 | |||||||||
| Add back or deduct: | |||||||||||
| Expenses related to strategic alternatives review | 7 | — | |||||||||
| (Gain) loss on asset disposals, net | 6 | 10 | |||||||||
| (Gain) loss on license sales and exchanges, net | (1) | — | |||||||||
| Adjusted EBITDA (Non-GAAP) | 272 | 252 | |||||||||
| Deduct: | |||||||||||
| Equity in earnings of unconsolidated entities | 42 | 44 | |||||||||
| Interest and dividend income | 2 | 2 | |||||||||
| Adjusted OIBDA (Non-GAAP) | 228 | 206 | |||||||||
| Deduct: | |||||||||||
| Depreciation, amortization and accretion | 165 | 170 | |||||||||
| Expenses related to strategic alternatives review | 7 | — | |||||||||
| (Gain) loss on asset disposals, net | 6 | 10 | |||||||||
| (Gain) loss on license sales and exchanges, net | (1) | — | |||||||||
| Operating income (GAAP) | $ | 51 | $ | 26 | |||||||
| Three Months Ended March 31, | |||||||||||
TDS TELECOM | 2024 | 2023 | |||||||||
(Dollars in millions) | |||||||||||
Net income (GAAP) | $ | 24 | $ | 8 | |||||||
| Add back: | |||||||||||
| Income tax expense | 7 | 3 | |||||||||
| Interest expense | (2) | (2) | |||||||||
| Depreciation, amortization and accretion | 65 | 59 | |||||||||
| EBITDA (Non-GAAP) | 93 | 68 | |||||||||
| Add back or deduct: | |||||||||||
| (Gain) loss on asset disposals, net | 2 | 1 | |||||||||
| Adjusted EBITDA (Non-GAAP) | 95 | 69 | |||||||||
| Deduct: | |||||||||||
| Interest and dividend income | 1 | 1 | |||||||||
| Other, net | 1 | — | |||||||||
| Adjusted OIBDA (Non-GAAP) | 93 | 68 | |||||||||
| Deduct: | |||||||||||
| Depreciation, amortization and accretion | 65 | 59 | |||||||||
| (Gain) loss on asset disposals, net | 2 | 1 | |||||||||
Operating income (GAAP) | $ | 27 | $ | 8 | |||||||
Numbers may not foot due to rounding.
22
Free Cash Flow
The following table presents Free cash flow, which is defined as Cash flows from operating activities less Cash paid for additions to property, plant and equipment and Cash paid for software license agreements. Free cash flow is a non-GAAP financial measure which TDS believes may be useful to investors and other users of its financial information in evaluating liquidity, specifically, the amount of net cash generated by business operations after deducting Cash paid for additions to property, plant and equipment and Cash paid for software license agreements.
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| (Dollars in millions) | |||||||||||
| Cash flows from operating activities (GAAP) | $ | 224 | $ | 46 | |||||||
| Cash paid for additions to property, plant and equipment | (235) | (331) | |||||||||
| Cash paid for software license agreements | (9) | (8) | |||||||||
| Free cash flow (Non-GAAP) | $ | (20) | $ | (293) | |||||||
23
Application of Critical Accounting Policies and Estimates
TDS prepares its consolidated financial statements in accordance with GAAP. TDS’ significant accounting policies are discussed in detail in Note 1 — Summary of Significant Accounting Policies, Note 2 — Revenue Recognition and Note 10 — Leases in the Notes to Consolidated Financial Statements included in TDS' Form 10-K for the year ended December 31, 2023. TDS’ application of critical accounting policies and estimates is discussed in detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in TDS’ Form 10-K for the year ended December 31, 2023.
24
Private Securities Litigation Reform Act of 1995
Safe Harbor Cautionary Statement
This Form 10-Q, including exhibits, contains statements that are not based on historical facts and represent forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, that address activities, events or developments that TDS intends, expects, projects, believes, estimates, plans or anticipates will or may occur in the future are forward-looking statements. The words “believes,” “anticipates,” “estimates,” “expects,” “plans,” “intends,” “projects” and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, but are not limited to, those set forth below, as more fully described under “Risk Factors” in TDS’ Form 10-K for the year ended December 31, 2023 and in this Form 10-Q. Each of the following risks could have a material adverse effect on TDS’ business, financial condition or results of operations. However, such factors are not necessarily all of the important factors that could cause actual results, performance or achievements to differ materially from those expressed in, or implied by, the forward-looking statements contained in this document. Other unknown or unpredictable factors also could have material adverse effects on future results, performance or achievements. TDS undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. You should carefully consider the Risk Factors in TDS’ Form 10-K for the year ended December 31, 2023, the following factors and other information contained in, or incorporated by reference into, this Form 10-Q to understand the material risks relating to TDS’ business, financial condition or results of operations.
Operational Risk Factors
▪Intense competition involving products, services, pricing, promotions and network speed and technologies could adversely affect TDS’ revenues or increase its costs to compete.
▪Changes in roaming practices or other factors could cause TDS’ roaming revenues to decline from current levels, roaming expenses to increase from current levels and/or impact TDS’ ability to service its customers in geographic areas where TDS does not have its own network, which could have an adverse effect on TDS’ business, financial condition or results of operations.
▪An inability to attract diverse people of outstanding talent throughout all levels of the organization, to develop their potential through education and assignments, and to retain them by keeping them engaged, challenged and properly rewarded could have an adverse effect on TDS' business, financial condition or results of operations.
▪TDS’ smaller scale relative to larger competitors that may have greater financial and other resources than TDS could cause TDS to be unable to compete successfully, which could adversely affect its business, financial condition or results of operations.
▪Changes in various business factors, including changes in demand, consumer preferences and perceptions, price competition, churn from customer switching activity and other factors, could have an adverse effect on TDS’ business, financial condition or results of operations.
▪A failure by TDS to obtain access to adequate radio spectrum to meet current or anticipated future needs and/or to accurately predict future needs for radio spectrum could have an adverse effect on TDS’ business, financial condition or results of operations.
▪Advances or changes in technology could render certain technologies used by TDS obsolete, could put TDS at a competitive disadvantage, could reduce TDS’ revenues or could increase its costs of doing business.
▪Complexities associated with deploying new technologies present substantial risk and TDS’ investments in unproven technologies may not produce the benefits that TDS expects.
▪Costs, integration problems or other factors associated with acquisitions, divestitures or exchanges of properties or wireless spectrum licenses and/or expansion of TDS’ businesses could have an adverse effect on TDS’ business, financial condition or results of operations.
▪A failure by TDS to complete significant network construction and systems implementation activities as part of its plans to improve the quality, coverage, capabilities and capacity of its network, support and other systems and infrastructure could have an adverse effect on its operations.
▪Difficulties involving third parties with which TDS does business, including changes in TDS’ relationships with or financial or operational difficulties, including supply chain disruptions, of key suppliers or independent agents and third-party national retailers who market TDS’ services, could adversely affect TDS’ business, financial condition or results of operations.
▪A failure by TDS to maintain flexible and capable telecommunication networks or information technologies, or a material disruption thereof, could have an adverse effect on TDS’ business, financial condition or results of operations.
25
Financial Risk Factors
▪Uncertainty in TDS’ or UScellular's future cash flow and liquidity or the inability to access capital, deterioration in the capital markets, changes in interest rates, other changes in TDS’ or UScellular's performance or market conditions, changes in TDS’ or UScellular's credit ratings or other factors could limit or restrict the availability of financing on terms and prices acceptable to TDS, which has required and is expected in the future to require TDS to reduce or delay its construction, development or acquisition programs, reduce the amount of wireless spectrum licenses acquired, divest assets or businesses, and/or reduce or cease share repurchases and/or the payment of common shareholder dividends.
▪TDS has a significant amount of indebtedness which could adversely affect its financial performance and in turn adversely affect its ability to make payments on its indebtedness, comply with terms of debt covenants and incur additional debt.
▪TDS has entered into a Senior Secured Credit Agreement that imposes certain restrictions on its business and operations that may affect its ability to operate its business and make payments on its indebtedness.
▪TDS’ assets and revenue are concentrated primarily in the U.S. telecommunications industry. Consequently, its operating results may fluctuate based on factors related primarily to conditions in this industry.
▪TDS has significant investments in entities that it does not control. Losses in the value of such investments could have an adverse effect on TDS’ financial condition or results of operations.
Regulatory, Legal and Governance Risk Factors
▪TDS and UScellular have initiated a process to explore a range of strategic alternatives for UScellular and there can be no assurance that any strategic alternative will be successfully identified or completed, that any such strategic alternative will result in additional value for TDS and its shareholders, or that the process will not have an adverse impact on TDS' business or financial statements.
▪Failure by TDS to timely or fully comply with any existing applicable legislative and/or regulatory requirements or changes thereto could adversely affect TDS’ business, financial condition or results of operations.
▪TDS receives significant regulatory support, and is also subject to numerous surcharges and fees from federal, state and local governments – the applicability and the amount of the support and fees are subject to great uncertainty, including the ability to pass through certain fees to customers, and this uncertainty could have an adverse effect on TDS’ business, financial condition or results of operations.
▪Settlements, judgments, restraints on its current or future manner of doing business and/or legal costs resulting from pending and future litigation could have an adverse effect on TDS’ business, financial condition or results of operations.
▪The possible development of adverse precedent in litigation or conclusions in professional or environmental studies to the effect that potentially harmful emissions from devices or network equipment, including but not limited to radio frequencies emitted by wireless signals or due to contamination from network cabling, may cause harmful health or environmental consequences, including cancer, tumors or otherwise harmful impacts, or may interfere with various electronic medical devices or frequencies used by other industries, could have an adverse effect on TDS’ wireless and/or wireline business, financial condition or results of operations.
▪Claims of infringement of intellectual property and proprietary rights of others, primarily involving patent infringement claims, could prevent TDS from using necessary technology to provide products or services or subject TDS to expensive intellectual property litigation or monetary penalties, which could have an adverse effect on TDS’ business, financial condition or results of operations.
▪Certain matters, such as control by the TDS Voting Trust and provisions in the TDS Restated Certificate of Incorporation, may serve to discourage or make more difficult a change in control of TDS or have other consequences.
General Risk Factors
▪TDS has experienced, and in the future expects to experience, cyber-attacks or other breaches of network or information technology security of varying degrees on a regular basis, which could have an adverse effect on TDS' business, financial condition or results of operations.
▪Disruption in credit or other financial markets, a deterioration of U.S. or global economic conditions or other events could, among other things, impede TDS’ access to or increase the cost of financing its operating and investment activities and/or result in reduced revenues and lower operating income and cash flows, which would have an adverse effect on TDS’ business, financial condition or results of operations.
▪The impact of public health emergencies on TDS' business is uncertain, but depending on duration and severity could have a material adverse effect on TDS' business, financial condition or results of operations.
26
Risk Factors
In addition to the information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in TDS’ Form 10-K for the year ended December 31, 2023, which could materially affect TDS’ business, financial condition or future results. The risks described in this Form 10-Q and the Form 10-K for the year ended December 31, 2023, may not be the only risks that could affect TDS. Additional unidentified or unrecognized risks and uncertainties could materially adversely affect TDS’ business, financial condition and/or operating results. Subject to the foregoing, TDS has not identified for disclosure any material changes to the risk factors as previously disclosed in TDS’ Form 10-K for the year ended December 31, 2023.
Quantitative and Qualitative Disclosures about Market Risk
Market Risk
As of March 31, 2024, approximately 50% of TDS' long-term debt was in fixed-rate senior notes and approximately 50% in variable-rate debt. Fluctuations in market interest rates can lead to volatility in the fair value of fixed-rate notes and interest expense on variable-rate debt.
The following table presents the scheduled principal payments on long-term debt, lease obligations, and the related weighted average interest rates by maturity dates at March 31, 2024.
| Principal Payments Due by Period | |||||||||||
Long-Term Debt Obligations1 | Weighted-Avg. Interest Rates on Long-Term Debt Obligations2 | ||||||||||
| (Dollars in millions) | |||||||||||
| Remainder of 2024 | $ | 26 | 7.2 | % | |||||||
| 2025 | 26 | 7.2 | % | ||||||||
| 2026 | 772 | 7.1 | % | ||||||||
| 2027 | 319 | 7.0 | % | ||||||||
| 2028 | 481 | 7.4 | % | ||||||||
| Thereafter | 2,499 | 6.3 | % | ||||||||
| Total | $ | 4,123 | 6.7 | % | |||||||
1The total long-term debt obligation differs from Long-term debt in the Consolidated Balance Sheet due to unamortized debt issuance costs on all non-revolving debt instruments, unamortized discounts related to UScellular's 6.7% Senior Notes, and outstanding borrowings under the receivables securitization agreement, which principal repayments are not scheduled but are instead based on actual receivable collections.
2Represents the weighted average stated interest rates at March 31, 2024, for debt maturing in the respective periods.
See Note 3 — Fair Value Measurements in the Notes to Consolidated Financial Statements for additional information related to the fair value of TDS’ Long-term debt as of March 31, 2024.
27
Financial Statements
Telephone and Data Systems, Inc.
Consolidated Statement of Operations
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| (Dollars and shares in millions, except per share amounts) | |||||||||||
| Operating revenues | |||||||||||
| Service | $ | $ | |||||||||
| Equipment and product sales | |||||||||||
| Total operating revenues | |||||||||||
| Operating expenses | |||||||||||
| Cost of services (excluding Depreciation, amortization and accretion reported below) | |||||||||||
| Cost of equipment and products | |||||||||||
| Selling, general and administrative | |||||||||||
| Depreciation, amortization and accretion | |||||||||||
| (Gain) loss on asset disposals, net | |||||||||||
| (Gain) loss on license sales and exchanges, net | ( | ||||||||||
| Total operating expenses | |||||||||||
| Operating income | |||||||||||
| Investment and other income (expense) | |||||||||||
| Equity in earnings of unconsolidated entities | |||||||||||
| Interest and dividend income | |||||||||||
| Interest expense | ( | ( | |||||||||
| Other, net | |||||||||||
| Total investment and other expense | ( | ( | |||||||||
| Income before income taxes | |||||||||||
| Income tax expense | |||||||||||
| Net income | |||||||||||
| Less: Net income attributable to noncontrolling interests, net of tax | |||||||||||
| Net income attributable to TDS shareholders | |||||||||||
| TDS Preferred Share dividends | |||||||||||
| Net income (loss) attributable to TDS common shareholders | $ | $ | ( | ||||||||
| Basic weighted average shares outstanding | |||||||||||
| Basic earnings (loss) per share attributable to TDS common shareholders | $ | $ | ( | ||||||||
| Diluted weighted average shares outstanding | |||||||||||
| Diluted earnings (loss) per share attributable to TDS common shareholders | $ | $ | ( | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
28
Telephone and Data Systems, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| (Dollars in millions) | |||||||||||
| Cash flows from operating activities | |||||||||||
| Net income | $ | $ | |||||||||
| Add (deduct) adjustments to reconcile net income to net cash flows from operating activities | |||||||||||
| Depreciation, amortization and accretion | |||||||||||
| Bad debts expense | |||||||||||
| Stock-based compensation expense | |||||||||||
| Deferred income taxes, net | |||||||||||
| Equity in earnings of unconsolidated entities | ( | ( | |||||||||
| Distributions from unconsolidated entities | |||||||||||
| (Gain) loss on asset disposals, net | |||||||||||
| (Gain) loss on license sales and exchanges, net | ( | ||||||||||
| Other operating activities | |||||||||||
| Changes in assets and liabilities from operations | |||||||||||
| Accounts receivable | |||||||||||
| Equipment installment plans receivable | |||||||||||
| Inventory | |||||||||||
| Accounts payable | ( | ( | |||||||||
| Customer deposits and deferred revenues | ( | ||||||||||
| Accrued taxes | |||||||||||
| Accrued interest | |||||||||||
| Other assets and liabilities | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities | |||||||||||
| Cash paid for additions to property, plant and equipment | ( | ( | |||||||||
| Cash paid for intangible assets | ( | ( | |||||||||
| Other investing activities | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities | |||||||||||
| Issuance of long-term debt | |||||||||||
| Repayment of long-term debt | ( | ( | |||||||||
| Repayment of short-term debt | ( | ||||||||||
| Tax payments for TDS stock-based compensation awards | ( | ( | |||||||||
| Repurchase of TDS Common Shares | ( | ||||||||||
| Dividends paid to TDS shareholders | ( | ( | |||||||||
| Distributions to noncontrolling interests | ( | ( | |||||||||
| Cash paid for software license agreements | ( | ( | |||||||||
| Other financing activities | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash | |||||||||||
| Beginning of period | |||||||||||
| End of period | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
29
Telephone and Data Systems, Inc.
Consolidated Balance Sheet — Assets
(Unaudited)
| March 31, 2024 | December 31, 2023 | ||||||||||
| (Dollars in millions) | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable | |||||||||||
Customers and agents, less allowances of $ | |||||||||||
Other, less allowances of $ | |||||||||||
| Inventory, net | |||||||||||
| Prepaid expenses | |||||||||||
| Income taxes receivable | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Assets held for sale | |||||||||||
| Licenses | |||||||||||
Other intangible assets, net of accumulated amortization of $ | |||||||||||
| Investments in unconsolidated entities | |||||||||||
| Property, plant and equipment | |||||||||||
| In service and under construction | |||||||||||
| Less: Accumulated depreciation and amortization | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Other assets and deferred charges | |||||||||||
Total assets1 | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
30
Telephone and Data Systems, Inc.
Consolidated Balance Sheet — Liabilities and Equity
(Unaudited)
| March 31, 2024 | December 31, 2023 | ||||||||||
| (Dollars and shares in millions, except per share amounts) | |||||||||||
| Current liabilities | |||||||||||
| Current portion of long-term debt | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Customer deposits and deferred revenues | |||||||||||
| Accrued interest | |||||||||||
| Accrued taxes | |||||||||||
| Accrued compensation | |||||||||||
| Short-term operating lease liabilities | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Deferred liabilities and credits | |||||||||||
| Deferred income tax liability, net | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Other deferred liabilities and credits | |||||||||||
| Long-term debt, net | |||||||||||
| Commitments and contingencies | |||||||||||
| Noncontrolling interests with redemption features | |||||||||||
| Equity | |||||||||||
| TDS shareholders’ equity | |||||||||||
| Series A Common and Common Shares | |||||||||||
Authorized | |||||||||||
Issued | |||||||||||
Outstanding | |||||||||||
Par Value ($ | |||||||||||
| Capital in excess of par value | |||||||||||
Preferred Shares, | |||||||||||
Treasury shares, at cost, | ( | ( | |||||||||
| Accumulated other comprehensive income | |||||||||||
| Retained earnings | |||||||||||
| Total TDS shareholders' equity | |||||||||||
| Noncontrolling interests | |||||||||||
| Total equity | |||||||||||
Total liabilities and equity1 | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
1The consolidated total assets as of March 31, 2024 and December 31, 2023, include assets held by consolidated variable interest entities (VIEs) of $1,115 million and $1,188 million, respectively, which are not available to be used to settle the obligations of TDS. The consolidated total liabilities as of March 31, 2024 and December 31, 2023, include certain liabilities of consolidated VIEs of $23
31
Telephone and Data Systems, Inc.
Consolidated Statement of Changes in Equity
(Unaudited)
| TDS Shareholders | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Series A Common and Common shares | Capital in excess of par value | Preferred Shares | Treasury shares | Accumulated other comprehensive income | Retained earnings | Total TDS shareholders' equity | Noncontrolling interests | Total equity | |||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions, except per share amounts) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2023 | $ | $ | $ | $ | ( | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to TDS shareholders | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interests classified as equity | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
TDS Common and Series A Common share dividends ($ | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
TDS Preferred share dividends ($ | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Dividend reinvestment plan | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Incentive and compensation plans | — | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Adjust investment in subsidiaries for issuances and other compensation plans | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2024 | $ | $ | $ | $ | ( | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
32
Telephone and Data Systems, Inc.
Consolidated Statement of Changes in Equity
(Unaudited)
| TDS Shareholders | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Series A Common and Common shares | Capital in excess of par value | Preferred Shares | Treasury shares | Accumulated other comprehensive income | Retained earnings | Total TDS shareholders' equity | Noncontrolling interests | Total equity | |||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions, except per share amounts) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | $ | $ | $ | $ | ( | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to TDS shareholders | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interests classified as equity | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
TDS Common and Series A Common share dividends ($ | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
TDS Preferred share dividends ($ | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of Common Shares | — | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
Dividend reinvestment plan | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
Incentive and compensation plans | — | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2023 | $ | $ | $ | $ | ( | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
33
Telephone and Data Systems, Inc.
Notes to Consolidated Financial Statements
Note 1 Basis of Presentation
The accounting policies of Telephone and Data Systems, Inc. (TDS) conform to accounting principles generally accepted in the United States of America (GAAP) as set forth in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). Unless otherwise specified, references to accounting provisions and GAAP in these notes refer to the requirements of the FASB ASC. The consolidated financial statements include the accounts of TDS and subsidiaries in which it has a controlling financial interest, including TDS’ 83 %-owned subsidiary, United States Cellular Corporation (UScellular) and TDS’ wholly-owned subsidiary, TDS Telecommunications LLC (TDS Telecom). In addition, the consolidated financial statements include certain entities in which TDS has a variable interest that requires consolidation into the TDS financial statements under GAAP. Intercompany accounts and transactions have been eliminated.
TDS’ business segments reflected in this Quarterly Report on Form 10-Q for the period ended March 31, 2024, are UScellular and TDS Telecom. TDS’ non-reportable other business activities are presented as “Corporate, Eliminations and Other”, which includes the operations of TDS’ wholly-owned hosted and managed services (HMS) subsidiary, which operates under the OneNeck IT Solutions brand, and its wholly-owned subsidiary Suttle-Straus, Inc. (Suttle-Straus). HMS’ and Suttle-Straus’ financial results were not significant to TDS’ operations. All of TDS’ segments operate only in the United States. See Note 10 — Business Segment Information for summary financial information on each business segment.
Certain numbers included herein are rounded to millions for ease of presentation; however, certain calculated amounts and percentages are determined using the unrounded numbers. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in TDS’ Annual Report on Form 10-K (Form 10-K) for the year ended December 31, 2023.
The accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring items, unless otherwise disclosed) necessary for the fair statement of TDS’ financial position as of March 31, 2024 and December 31, 2023, its results of operations, cash flows and changes in equity for the three months ended March 31, 2024 and 2023. The Consolidated Statement of Comprehensive Income was not included because comprehensive income for the three months ended March 31, 2024 and 2023, equaled net income. These results are not necessarily indicative of the results to be expected for the full year. TDS has not changed its significant accounting and reporting policies from those disclosed in its Form 10-K for the year ended December 31, 2023.
Software License Agreements
Certain software licenses are recorded as acquisitions of property, plant and equipment and the incurrence of a liability to the extent that the license fees are not fully paid at acquisition, and are treated as non-cash activity in the Consolidated Statement of Cash Flows. Such acquisitions of software licenses that are not reflected as Cash paid for additions to property, plant and equipment were $4 million and $5 million for the three months ended March 31, 2024 and 2023, respectively.
Restricted Cash
TDS presents restricted cash with cash and cash equivalents in the Consolidated Statement of Cash Flows. Restricted cash primarily consists of balances required under the receivables securitization agreement. See Note 7 — Debt for additional information related to the receivables securitization agreement. The following table provides a reconciliation of Cash and cash equivalents and restricted cash reported in the Consolidated Balance Sheet to the total of the amounts in the Consolidated Statement of Cash Flows.
| March 31, 2024 | December 31, 2023 | ||||||||||
| (Dollars in millions) | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash included in Other current assets | |||||||||||
| Cash, cash equivalents and restricted cash in the statement of cash flows | $ | $ | |||||||||
Strategic Alternatives Review
On August 4, 2023, TDS and UScellular announced that the Boards of Directors of both companies have decided to initiate a process to explore a range of strategic alternatives for UScellular. During the three months ended March 31, 2024, TDS incurred third-party expenses of $11 million related to the strategic alternatives review, which are included in Selling, general and administrative expenses. At this time, TDS cannot predict the ultimate outcome of such process or estimate the potential impact of such process on the financial statements.
34
Note 2 Revenue Recognition
Disaggregation of Revenue
In the following table, TDS' revenues are disaggregated by type of service, which represents the relevant categorization of revenues for TDS' reportable segments, and timing of recognition. Service revenues are recognized over time and Equipment and product sales are recognized at a point in time.
| Three Months Ended March 31, 2024 | UScellular | TDS Telecom | Corporate, Eliminations and Other | Total | |||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Revenues from contracts with customers: | |||||||||||||||||||||||
| Type of service: | |||||||||||||||||||||||
| Retail service | $ | $ | $ | $ | |||||||||||||||||||
| Residential | |||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||
| Wholesale | |||||||||||||||||||||||
| Other service | |||||||||||||||||||||||
| Service revenues from contracts with customers | |||||||||||||||||||||||
| Equipment and product sales | |||||||||||||||||||||||
| Total revenues from contracts with customers | |||||||||||||||||||||||
| Operating lease income | |||||||||||||||||||||||
| Total operating revenues | $ | $ | $ | $ | |||||||||||||||||||
| Three Months Ended March 31, 2023 | UScellular | TDS Telecom | Corporate, Eliminations and Other | Total | |||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Revenues from contracts with customers: | |||||||||||||||||||||||
| Type of service: | |||||||||||||||||||||||
| Retail service | $ | $ | $ | $ | |||||||||||||||||||
| Residential | |||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||
| Wholesale | |||||||||||||||||||||||
| Other service | |||||||||||||||||||||||
| Service revenues from contracts with customers | |||||||||||||||||||||||
| Equipment and product sales | |||||||||||||||||||||||
| Total revenues from contracts with customers | |||||||||||||||||||||||
| Operating lease income | |||||||||||||||||||||||
| Total operating revenues | $ | $ | $ | $ | |||||||||||||||||||
Numbers may not foot due to rounding.
35
Contract Balances
The following table provides balances for contract assets from contracts with customers, which are recorded in Other current assets and Other assets and deferred charges in the Consolidated Balance Sheet, and contract liabilities from contracts with customers, which are recorded in Customer deposits and deferred revenues and Other deferred liabilities and credits in the Consolidated Balance Sheet.
| March 31, 2024 | December 31, 2023 | ||||||||||
| (Dollars in millions) | |||||||||||
| Contract assets | $ | $ | |||||||||
| Contract liabilities | $ | $ | |||||||||
Revenue recognized related to contract liabilities existing at January 1, 2024 was $151 million for the three months ended March 31, 2024.
Transaction price allocated to the remaining performance obligations
The following table includes estimated service revenues expected to be recognized related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period. These estimates represent service revenues to be recognized when services are delivered to customers pursuant to service plan contracts and under certain roaming agreements with other carriers. These estimates are based on contracts in place as of March 31, 2024 and may vary from actual results. As practical expedients, revenue related to contracts of less than one year, generally month-to-month contracts, and contracts with a fixed per-unit price and variable quantity, are excluded from these estimates.
| Service Revenues | |||||
| (Dollars in millions) | |||||
| Remainder of 2024 | $ | ||||
| 2025 | |||||
| Thereafter | |||||
Total | $ | ||||
Contract Cost Assets
| March 31, 2024 | December 31, 2023 | ||||||||||
| (Dollars in millions) | |||||||||||
| Costs to obtain contracts | |||||||||||
| Sales commissions | $ | $ | |||||||||
| Fulfillment costs | |||||||||||
| Installation costs | |||||||||||
| Total contract cost assets | $ | $ | |||||||||
Amortization of contract cost assets was $25 million and $28 million for the three months ended March 31, 2024, and 2023 respectively, and was included in Selling, general and administrative expenses and Cost of services expenses.
Note 3 Fair Value Measurements
As of March 31, 2024 and December 31, 2023, TDS did not have any material financial or nonfinancial assets or liabilities that were required to be recorded at fair value in its Consolidated Balance Sheet in accordance with GAAP.
The provisions of GAAP establish a fair value hierarchy that contains three levels for inputs used in fair value measurements. Level 1 inputs include quoted market prices for identical assets or liabilities in active markets. Level 2 inputs include quoted market prices for similar assets and liabilities in active markets or quoted market prices for identical assets and liabilities in inactive markets. Level 3 inputs are unobservable. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. A financial instrument’s level within the fair value hierarchy is not representative of its expected performance or its overall risk profile and, therefore Level 3 assets are not necessarily higher risk than Level 2 assets or Level 1 assets.
36
TDS has applied the provisions of fair value accounting for purposes of computing the fair value of financial instruments for disclosure purposes as displayed below.
| Level within the Fair Value Hierarchy | March 31, 2024 | December 31, 2023 | |||||||||||||||||||||||||||
| Book Value | Fair Value | Book Value | Fair Value | ||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||
| Long-term debt | |||||||||||||||||||||||||||||
| Retail | 2 | $ | $ | $ | $ | ||||||||||||||||||||||||
| Institutional | 2 | ||||||||||||||||||||||||||||
| Other | 2 | ||||||||||||||||||||||||||||
Long-term debt excludes lease obligations, the current portion of Long-term debt and debt financing costs. The fair value of “Retail” Long-term debt was estimated using market prices for UScellular Senior Notes, which are traded on the New York Stock Exchange. TDS’ “Institutional” debt consists of UScellular’s 6.7 % Senior Notes which are traded over the counter. TDS’ “Other” debt consists of term loan credit agreements, receivables securitization agreement and export credit financing agreements. TDS estimated the fair value of its Institutional and Other debt through a discounted cash flow analysis using the interest rates or estimated yield to maturity for each borrowing, which ranged from 3.52 % to 7.93 % and 3.52 % to 7.96 % at March 31, 2024 and December 31, 2023, respectively.
The fair values of Cash and cash equivalents, restricted cash and short-term debt approximate their book values due to the short-term nature of these financial instruments.
Note 4 Equipment Installment Plans
UScellular sells devices to customers under equipment installment plans over a specified time period. For certain equipment installment plans, after a specified period of time or amount of payments, the customer may have the right to upgrade to a new device and have the remaining unpaid equipment installment contract balance waived, subject to certain conditions, including trading in the original device in good working condition and signing a new equipment installment contract.
The following table summarizes equipment installment plan receivables.
| March 31, 2024 | December 31, 2023 | ||||||||||
| (Dollars in millions) | |||||||||||
| Equipment installment plan receivables, gross | $ | $ | |||||||||
| Allowance for credit losses | ( | ( | |||||||||
| Equipment installment plan receivables, net | $ | $ | |||||||||
| Net balance presented in the Consolidated Balance Sheet as: | |||||||||||
| Accounts receivable — Customers and agents (Current portion) | $ | $ | |||||||||
| Other assets and deferred charges (Non-current portion) | |||||||||||
| Equipment installment plan receivables, net | $ | $ | |||||||||
UScellular uses various inputs to evaluate the credit profiles of its customers, including internal data, information from credit bureaus and other sources. From this evaluation, a credit class is assigned to the customer that determines the number of eligible lines, the amount of credit available, and the down payment requirement, if any. These credit classes are grouped into four credit categories: lowest risk, lower risk, slight risk and higher risk. A customer's assigned credit class is reviewed periodically and a change is made, if appropriate. An equipment installment plan billed amount is considered past due if not paid within 30 days. The balance and aging of the equipment installment plan receivables on a gross basis by credit category were as follows:
| March 31, 2024 | December 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Lowest Risk | Lower Risk | Slight Risk | Higher Risk | Total | Lowest Risk | Lower Risk | Slight Risk | Higher Risk | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unbilled | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| Billed — current | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Billed — past due | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
37
The balance of the equipment installment plan receivables as of March 31, 2024 on a gross basis by year of origination were as follows:
| 2021 | 2022 | 2023 | 2024 | Total | |||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||
| Lowest Risk | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Lower Risk | |||||||||||||||||||||||||||||
| Slight Risk | |||||||||||||||||||||||||||||
| Higher Risk | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
The write-offs, net of recoveries for the three months ended March 31, 2024 on a gross basis by year of origination were as follows:
| 2021 | 2022 | 2023 | Total | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Write-offs, net of recoveries | $ | $ | $ | $ | |||||||||||||||||||
Activity for the three months ended March 31, 2024 and 2023, in the allowance for credit losses for equipment installment plan receivables was as follows:
| March 31, 2024 | March 31, 2023 | ||||||||||
| (Dollars in millions) | |||||||||||
| Allowance for credit losses, beginning of period | $ | $ | |||||||||
| Bad debts expense | |||||||||||
| Write-offs, net of recoveries | ( | ( | |||||||||
| Allowance for credit losses, end of period | $ | $ | |||||||||
Note 5 Earnings Per Share
Basic earnings (loss) per share attributable to TDS common shareholders is computed by dividing Net income (loss) attributable to TDS common shareholders by the weighted average number of Common Shares outstanding during the period. Diluted earnings (loss) per share attributable to TDS common shareholders is computed by dividing Net income (loss) attributable to TDS common shareholders by the weighted average number of Common Shares outstanding during the period adjusted to include the effects of potentially dilutive securities. Potentially dilutive securities primarily include incremental shares issuable upon the exercise of outstanding stock options and the vesting of performance and restricted stock units, as calculated using the treasury stock method.
The amounts used in computing basic and diluted earnings (loss) per share attributable to TDS common shareholders were as follows:
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| (Dollars and shares in millions, except per share amounts) | |||||||||||
| Net income (loss) attributable to TDS common shareholders | $ | $ | ( | ||||||||
| Weighted average number of shares used in basic earnings (loss) per share: | |||||||||||
| Common Shares | |||||||||||
| Series A Common Shares | |||||||||||
| Total | |||||||||||
| Effects of dilutive securities | |||||||||||
| Weighted average number of shares used in diluted earnings (loss) per share | |||||||||||
| Basic earnings (loss) per share attributable to TDS common shareholders | $ | $ | ( | ||||||||
| Diluted earnings (loss) per share attributable to TDS common shareholders | $ | $ | ( | ||||||||
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Certain Common Shares issuable upon the exercise of stock options or vesting of performance and restricted stock units were not included in weighted average diluted shares outstanding for the calculation of Diluted earnings (loss) per share attributable to TDS common shareholders because their effects were antidilutive. The number of such Common Shares excluded was 2 million and 4 million for the three months ended March 31, 2024 and 2023, respectively.
Note 6 Investments in Unconsolidated Entities
Investments in unconsolidated entities consist of amounts invested in entities in which TDS holds a noncontrolling interest. TDS’ Investments in unconsolidated entities are accounted for using the equity method, measurement alternative method or net asset value practical expedient method as shown in the table below. The carrying value of measurement alternative method investments represents cost minus any impairments plus or minus any observable price changes.
| March 31, 2024 | December 31, 2023 | ||||||||||
| (Dollars in millions) | |||||||||||
| Equity method investments | $ | $ | |||||||||
| Measurement alternative method investments | |||||||||||
| Investments recorded using the net asset value practical expedient | |||||||||||
| Total investments in unconsolidated entities | $ | $ | |||||||||
The following table, which is based on unaudited information provided in part by third parties, summarizes the combined results of operations of TDS’ equity method investments.
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| (Dollars in millions) | |||||||||||
| Revenues | $ | $ | |||||||||
| Operating expenses | |||||||||||
| Operating income | |||||||||||
| Other income (expense), net | ( | ( | |||||||||
| Net income | $ | $ | |||||||||
Note 7 Debt
Revolving Credit Agreements
TDS has a revolving credit agreement with maximum borrowing capacity of $400 million. Amounts under the agreement may be borrowed, repaid and reborrowed from time to time until maturity in July 2026. During the three months ended March 31, 2024, TDS borrowed $100 million under its revolving credit agreement. Borrowings under the TDS revolving credit agreement bear interest at a rate of Secured Overnight Financing Rate (SOFR) plus 1.60 %. As of March 31, 2024, the outstanding borrowings under the agreement were $200 million, and the unused borrowing capacity was $199 million.
Receivables Securitization Agreement
UScellular, through its subsidiaries, has a receivables securitization agreement that permits securitized borrowings using its equipment installment plan receivables. Amounts under the agreement may be borrowed, repaid and reborrowed from time to time until September 2025. Unless the agreement is amended to extend the maturity date, repayments based on receivable collections commence in October 2025. The outstanding borrowings bear interest at a rate of the lender's cost of funds (which has historically tracked closely to SOFR) plus 1.15 %. During the three months ended March 31, 2024, UScellular borrowed $40 million and repaid $50 million under its receivables securitization agreement. As of March 31, 2024, the outstanding borrowings under the agreement were $140 million and the unused borrowing capacity was $310 million, subject to sufficient collateral to satisfy the asset borrowing base provisions of the agreement. As of March 31, 2024, the USCC Master Note Trust held $233 million of assets available to be pledged as collateral for the receivables securitization agreement.
In April 2024, UScellular repaid an additional $75 million under the agreement.
39
Term Loan Agreement
In May 2024, TDS entered into a $375 million unsecured term loan credit agreement. At closing, $300 million was drawn, less original issue discount, and the remaining $75 million may be drawn until November 2025. The maturity date of the agreement is May 2029. The agreement requires TDS to make prepayments of the outstanding borrowings to the extent TDS receives cash proceeds in excess of prescribed thresholds from certain transactions as more fully described in the agreement. Borrowings under the agreement bear interest at a rate of SOFR plus 7.00 %. Quarterly payments of the outstanding borrowings multiplied by 0.25 % are required beginning in September 2024, with the amount increasing if the remaining available capacity is drawn.
Debt Covenants
The TDS and UScellular revolving credit agreements, term loan agreements including the secured term loan, export credit financing agreements and the UScellular receivables securitization agreement require TDS or UScellular, as applicable, to comply with certain affirmative and negative covenants, which include certain financial covenants that may restrict the borrowing capacity available. TDS and UScellular are required to maintain the Consolidated Leverage Ratio as of the end of any fiscal quarter at a level not to exceed the following: 4.25 to 1.00 from January 1, 2023 through March 31, 2024; 4.00 to 1.00 from April 1, 2024 through March 31, 2025; 3.75 to 1.00 from April 1, 2025 and thereafter. TDS and UScellular are also required to maintain the Consolidated Interest Coverage Ratio at a level not lower than 3.00 to 1.00 as of the end of any fiscal quarter. TDS and UScellular believe they were in compliance as of March 31, 2024 with all such financial covenants.
The term loan agreement entered into in May 2024 requires TDS to comply with certain affirmative and negative covenants, which includes a financial covenant that may restrict the borrowing capacity available. TDS is required to maintain the Consolidated Leverage Ratio as of the end of any fiscal quarter at a level not to exceed the following: 4.50 to 1.00 from April 1, 2024 through March 31, 2025; 4.25 to 1.00 from April 1, 2025 and thereafter.
Note 8 Variable Interest Entities
Consolidated VIEs
TDS consolidates VIEs in which it has a controlling financial interest as defined by GAAP and is therefore deemed the primary beneficiary. TDS reviews the criteria for a controlling financial interest at the time it enters into agreements and subsequently when events warranting reconsideration occur. These VIEs have risks similar to those described in the “Risk Factors” in this Form 10-Q and TDS’ Form 10-K for the year ended December 31, 2023.
UScellular formed USCC EIP LLC (Seller/Sub-Servicer), USCC Receivables Funding LLC (Transferor) and the USCC Master Note Trust (Trust), collectively the special purpose entities (SPEs), to facilitate a securitized borrowing using its equipment installment plan receivables. Under a Receivables Sale Agreement, UScellular wholly-owned, majority-owned and unconsolidated entities, collectively referred to as “affiliated entities”, transfer device equipment installment plan contracts to the Seller/Sub-Servicer. The Seller/Sub-Servicer aggregates device equipment installment plan contracts, and performs servicing, collection and all other administrative activities related to accounting for the equipment installment plan contracts. The Seller/Sub-Servicer sells the eligible equipment installment plan receivables to the Transferor, a bankruptcy remote entity, which subsequently sells the receivables to the Trust. The Trust, which is bankruptcy remote and isolated from the creditors of UScellular, will be responsible for issuing asset-backed variable funding notes (Notes), which are collateralized by the equipment installment plan receivables owned by the Trust. Given that UScellular has the power to direct the activities of these SPEs, and that these SPEs lack sufficient equity to finance their activities, UScellular is deemed to have a controlling financial interest in the SPEs, and therefore consolidates them. All transactions with third parties (e.g., issuance of the asset-backed variable funding notes) will be accounted for as a secured borrowing due to the pledging of equipment installment plan contracts as collateral, significant continuing involvement in the transferred assets, subordinated interests of the cash flows, and continued evidence of control of the receivables.
The following VIEs were formed to participate in FCC auctions of wireless spectrum licenses and to fund, establish, and provide wireless service with respect to any FCC wireless spectrum licenses won in the auctions:
▪Advantage Spectrum, L.P. (Advantage Spectrum) and Sunshine Spectrum, Inc., the general partner of Advantage Spectrum; and
▪King Street Wireless, L.P. (King Street Wireless) and King Street Wireless, Inc., the general partner of King Street Wireless.
These particular VIEs are collectively referred to as designated entities. The power to direct the activities that most significantly impact the economic performance of these VIEs is shared. Specifically, the general partner of these VIEs has the exclusive right to manage, operate and control the limited partnerships and make all decisions to carry on the business of the partnerships. The general partner of each partnership needs the consent of the limited partner, an indirect TDS subsidiary, to sell or lease certain wireless spectrum licenses, to make certain large expenditures, admit other partners or liquidate the limited partnerships. Although the power to direct the activities of these VIEs is shared, TDS has the most significant level of exposure to the variability associated with the economic performance of the VIEs, indicating that TDS is the primary beneficiary of the VIEs. Therefore, in accordance with GAAP, these VIEs are consolidated into the TDS financial statements.
40
TDS also consolidates other VIEs that are limited partnerships that provide wireless service. A limited partnership is a variable interest entity unless the limited partners hold substantive participating rights or kick-out rights over the general partner. For certain limited partnerships, UScellular is the general partner and manages the operations. In these partnerships, the limited partners do not have substantive kick-out or participating rights and, further, such limited partners do not have the authority to remove the general partner. Therefore, these limited partnerships also are recognized as VIEs and are consolidated into the TDS financial statements under the variable interest model.
The following table presents the classification and balances of the consolidated VIEs’ assets and liabilities in TDS’ Consolidated Balance Sheet.
| March 31, 2024 | December 31, 2023 | ||||||||||
| (Dollars in millions) | |||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable | |||||||||||
| Inventory, net | |||||||||||
| Other current assets | |||||||||||
| Licenses | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Other assets and deferred charges | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities | |||||||||||
| Current liabilities | $ | $ | |||||||||
| Long-term operating lease liabilities | |||||||||||
| Other deferred liabilities and credits | |||||||||||
Total liabilities1 | $ | $ | |||||||||
1 Total liabilities does not include amounts borrowed under the receivables securitization agreement. See Note 7 – Debt for additional information.
Unconsolidated VIEs
TDS manages the operations of and holds a variable interest in certain other limited partnerships, but is not the primary beneficiary of these entities, and therefore does not consolidate them into the TDS financial statements under the variable interest model.
TDS’ total investment in these unconsolidated entities was $6
Other Related Matters
TDS made contributions, loans or advances to its VIEs totaling $207 187 million in 2024 and $193 million in 2023, are related to USCC EIP LLC as discussed above. TDS may agree to make additional capital contributions and/or advances to these or other VIEs and/or to their general partners to provide additional funding for their operations or the development of wireless spectrum licenses granted in various auctions. TDS may finance such amounts with a combination of cash on hand, borrowings under its revolving credit or receivables securitization agreements and/or other long-term debt. There is no assurance that TDS will be able to obtain additional financing on commercially reasonable terms or at all to provide such financial support.
The limited partnership agreement of Advantage Spectrum also provides the general partner with a put option whereby the general partner may require the limited partner, a subsidiary of UScellular, to purchase its interest in the limited partnership. The put option has not been exercised.
41
Note 9 Noncontrolling Interests
The following schedule discloses the effects of Net income attributable to TDS shareholders and changes in TDS’ ownership interest in UScellular on TDS’ equity:
| Three Months Ended March 31, | 2024 | 2023 | |||||||||
| (Dollars in millions) | |||||||||||
| Net income attributable to TDS shareholders | $ | $ | |||||||||
| Transfers (to) from noncontrolling interests | |||||||||||
| Change in TDS' Capital in excess of par value from UScellular's issuance of UScellular shares | ( | ( | |||||||||
| Net transfers (to) from noncontrolling interests | ( | ( | |||||||||
| Net income attributable to TDS shareholders after transfers (to) from noncontrolling interests | $ | $ | |||||||||
42
Note 10 Business Segment Information
UScellular and TDS Telecom are billed for services they receive from TDS, consisting primarily of information processing, accounting, finance, and general management services. Such billings are based on expenses specifically identified to UScellular and TDS Telecom and on allocations of common expenses. Management believes the method used to allocate common expenses is reasonable and that all expenses and costs applicable to UScellular and TDS Telecom are reflected in the accompanying business segment information.
Financial data for TDS’ reportable segments for the three month periods ended, or as of March 31, 2024 and 2023, is as follows. See Note 1 — Basis of Presentation for additional information.
| Three Months Ended or as of March 31, 2024 | UScellular | TDS Telecom | Corporate, Eliminations and Other | Total | |||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Operating revenues | |||||||||||||||||||||||
| Service | $ | $ | $ | $ | |||||||||||||||||||
| Equipment and product sales | |||||||||||||||||||||||
| Total operating revenues | |||||||||||||||||||||||
Cost of services (excluding Depreciation, amortization and accretion reported below) | |||||||||||||||||||||||
| Cost of equipment and products | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Depreciation, amortization and accretion | |||||||||||||||||||||||
| (Gain) loss on asset disposals, net | ( | ||||||||||||||||||||||
| (Gain) loss on license sales and exchanges, net | ( | ( | |||||||||||||||||||||
| Operating income (loss) | ( | ||||||||||||||||||||||
| Equity in earnings of unconsolidated entities | |||||||||||||||||||||||
| Interest and dividend income | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ||||||||||||||||||||
| Other, net | |||||||||||||||||||||||
| Income (loss) before income taxes | ( | ||||||||||||||||||||||
| Income tax expense (benefit) | ( | ||||||||||||||||||||||
| Net income (loss) | ( | ||||||||||||||||||||||
| Add back: | |||||||||||||||||||||||
| Depreciation, amortization and accretion | |||||||||||||||||||||||
| Expenses related to strategic alternatives review | |||||||||||||||||||||||
| (Gain) loss on asset disposals, net | ( | ||||||||||||||||||||||
| (Gain) loss on license sales and exchanges, net | ( | ( | |||||||||||||||||||||
| Interest expense | ( | ||||||||||||||||||||||
| Income tax expense (benefit) | ( | ||||||||||||||||||||||
Adjusted EBITDA1 | $ | $ | $ | ( | $ | ||||||||||||||||||
| Investments in unconsolidated entities | $ | $ | $ | $ | |||||||||||||||||||
| Total assets | $ | $ | $ | $ | |||||||||||||||||||
| Capital expenditures | $ | $ | $ | $ | |||||||||||||||||||
43
| Three Months Ended or as of March 31, 2023 | UScellular | TDS Telecom | Corporate, Eliminations and Other | Total | |||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Operating revenues | |||||||||||||||||||||||
| Service | $ | $ | $ | $ | |||||||||||||||||||
| Equipment and product sales | |||||||||||||||||||||||
| Total operating revenues | |||||||||||||||||||||||
| Cost of services (excluding Depreciation, amortization and accretion reported below) | |||||||||||||||||||||||
| Cost of equipment and products | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Depreciation, amortization and accretion | |||||||||||||||||||||||
| (Gain) loss on asset disposals, net | |||||||||||||||||||||||
| Operating income (loss) | ( | ||||||||||||||||||||||
| Equity in earnings of unconsolidated entities | |||||||||||||||||||||||
| Interest and dividend income | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ||||||||||||||||||||
| Income (loss) before income taxes | ( | ||||||||||||||||||||||
| Income tax expense (benefit) | ( | ||||||||||||||||||||||
| Net income (loss) | ( | ||||||||||||||||||||||
| Add back: | |||||||||||||||||||||||
| Depreciation, amortization and accretion | |||||||||||||||||||||||
| (Gain) loss on asset disposals, net | |||||||||||||||||||||||
| Interest expense | ( | ||||||||||||||||||||||
| Income tax expense | ( | ||||||||||||||||||||||
Adjusted EBITDA1 | $ | $ | $ | $ | |||||||||||||||||||
| Investments in unconsolidated entities | $ | $ | $ | $ | |||||||||||||||||||
| Total assets | $ | $ | $ | $ | |||||||||||||||||||
| Capital expenditures | $ | $ | $ | $ | |||||||||||||||||||
Numbers may not foot due to rounding.
1Adjusted earnings before interest, taxes, depreciation, amortization and accretion (Adjusted EBITDA) is a segment measure reported to the chief operating decision maker for purposes of assessing the segments' performance. Adjusted EBITDA is defined as net income, adjusted for the items set forth in the reconciliation above. TDS believes Adjusted EBITDA is a useful measure of TDS’ operating results before significant recurring non-cash charges, gains and losses, and other items as presented above as it provides additional relevant and useful information to investors and other users of TDS' financial data in evaluating the effectiveness of its operations and underlying business trends in a manner that is consistent with management's evaluation of business performance.
44
Telephone and Data Systems, Inc.
Additional Required Information
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
TDS maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) that are designed to ensure that information required to be disclosed in its reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to TDS’ management, including its principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
As required by SEC Rules 13a-15(b), TDS carried out an evaluation, under the supervision and with the participation of management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of TDS’ disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on this evaluation, TDS’ principal executive officer and principal financial officer concluded that TDS' disclosure controls and procedures were effective as of March 31, 2024, at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal controls over financial reporting that have occurred during the three months ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, TDS’ internal control over financial reporting.
Legal Proceedings
Refer to the disclosure under Legal Proceedings in TDS’ Form 10-K for the year ended December 31, 2023. There have been no material changes to such information since December 31, 2023.
45
Unregistered Sales of Equity Securities and Use of Proceeds
On August 2, 2013, the Board of Directors of TDS authorized, and TDS announced by Form 8-K, a $250 million stock repurchase program for TDS Common Shares. Depending on market conditions, such shares may be repurchased in compliance with Rule 10b-18 of the Exchange Act, pursuant to Rule 10b5-1 under the Exchange Act, or pursuant to accelerated share repurchase arrangements, prepaid share repurchases, private transactions or as otherwise authorized. This authorization does not have an expiration date. TDS did not determine to terminate the foregoing Common Share repurchase program, or cease making further purchases thereunder, during the first quarter of 2024.
The maximum dollar value of shares that may yet be purchased under this program was $132 million as of March 31, 2024. There were no purchases made by or on behalf of TDS, and no open market purchases made by any "affiliated purchaser" (as defined by the SEC) of TDS, of TDS Common Shares during the quarter covered by this Form 10-Q.
Other Information
Term Loan Agreement
On May 1, 2024 (Effective Date), Telephone and Data Systems, Inc. (TDS) entered into a $375 million unsecured Credit Agreement (Credit Agreement) among TDS as Borrower, the lenders from time to time party thereto, Oaktree Fund Administration, LLC, as Administrative Agent, and Oaktree Capital Management, L.P., as sole lead arranger and sole bookrunner.
The Credit Agreement provides TDS with an initial loan of $300 million, less original issue discount, on the Effective Date (the Initial Loan) and a delayed draw term loan credit facility, available until November 3, 2025, in an aggregate principal amount at any time outstanding not to exceed $75 million. The proceeds will be used for general corporate purposes including the advancement of TDS Telecom's fiber build program. Borrowings under the delayed draw term loan credit facility are available for up to 18 months after the effective date of the Credit Agreement, subject to TDS’ Consolidated Leverage Ratio (as described below) being equal to or less than 4.00 to 1.00 after giving effect to such loans on a pro forma basis.
Borrowings under the Credit Agreement bear interest at a secured overnight financing rate (SOFR) plus 7.00%. Prepayments of the loans under the Credit Agreement are subject to the payment of the then applicable prepayment fee amount.
As more fully described in the Credit Agreement, the financial covenant described below is included in the Credit Agreement:
•Consolidated Leverage Ratio (the ratio of Consolidated Funded Indebtedness to Consolidated EBITDA) may not be greater than the following as of the end of any fiscal quarter:
◦April 1, 2024 through and including March 31, 2025: 4.50 to 1.00
◦April 1, 2025 and thereafter: 4.25 to 1.00
The indebtedness under the Credit Agreement is unsecured and is not guaranteed by any subsidiary of TDS. The Credit Agreement includes representations and warranties, covenants, events of default and other terms and conditions that are substantially similar to TDS' existing term loan and revolving credit agreements or otherwise customary for similar unsecured credit facilities.
The Credit Agreement requires TDS to make prepayments of the outstanding indebtedness thereunder to the extent of the net cash proceeds from the receipt of cash dividends or distributions in excess of $1,000,000,000 resulting from any disposition by United States Cellular Corporation or any of United States Cellular Corporation’s subsidiaries, subject to certain limitations and exceptions.
Upon the occurrence and during the continuance of an event of default under the Credit Agreement, including upon the occurrence of a Change of Control, as such term is defined in the Credit Agreement, of TDS, the required lenders and the Administrative Agent may require all borrowings outstanding under the Credit Agreement to be repaid.
Quarterly principal payments of the outstanding borrowings on the Initial Loan amount multiplied by 0.25% are required beginning in September 2024. Commencing with the first full fiscal quarter following the initial borrowing of the delayed draw amount, quarterly principal payments of the outstanding borrowings on the delayed draw multiplied by 0.25% will be required. The maturity date of the Credit Agreement is May 1, 2029.
The foregoing brief description does not purport to be complete and is qualified in its entirety by reference to the copy of the Credit Agreement attached hereto as Exhibit 4.1, which is incorporated herein by reference.
Rule 10b5-1 Trading Arrangements
During the three months ended March 31, 2024, none of TDS’ directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) has adopted terminated
46
Exhibits
| Exhibit Number | Description of Documents | ||||
| Exhibit 4.1 | |||||
| Exhibit 10.1 | |||||
| Exhibit 10.2 | |||||
| Exhibit 10.3 | |||||
| Exhibit 31.1 | |||||
| Exhibit 31.2 | |||||
| Exhibit 32.1 | |||||
| Exhibit 32.2 | |||||
| Exhibit 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||||
| Exhibit 101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||||
| Exhibit 101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document | ||||
| Exhibit 101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document | ||||
| Exhibit 101.LAB | Inline XBRL Taxonomy Label Linkbase Document | ||||
| Exhibit 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||
| Exhibit 104 | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the inline document. | ||||
47
Form 10-Q Cross Reference Index
| Item Number | Page No. | ||||||||||||||||
| Part I. | Financial Information | ||||||||||||||||
| - | |||||||||||||||||
| - | |||||||||||||||||
| - | |||||||||||||||||
| Part II. | Other Information | ||||||||||||||||
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| TELEPHONE AND DATA SYSTEMS, INC. | |||||||||||||||||
| (Registrant) | |||||||||||||||||
| Date: | May 3, 2024 | /s/ LeRoy T. Carlson, Jr. | |||||||||||||||
| LeRoy T. Carlson, Jr. President and Chief Executive Officer (principal executive officer) | |||||||||||||||||
| Date: | May 3, 2024 | /s/ Vicki L. Villacrez | |||||||||||||||
| Vicki L. Villacrez Executive Vice President and Chief Financial Officer (principal financial officer) | |||||||||||||||||
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