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 June 30, 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 June 30, 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 June 30, 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 and six months ended June 30, 2024, to the three and six months ended June 30, 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 as of June 30, 2024. TDS provides wireless services through its 82%-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.
During the second quarter of 2024, TDS and UScellular modified their reporting structure due to the planned disposal of the UScellular wireless operations and, as a result, disaggregated the UScellular operations into two reportable segments - Wireless and Towers. This presentation reflects how TDS' and UScellular's chief operating decision maker allocates resources and evaluates operating performance following this strategic shift. Prior periods have been updated to conform to the new reportable segments. See Note 12 — 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 people, 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. In the second quarter of 2024, TDS reset its approach to capital allocation and declared dividends at approximately 20% of the previous level for TDS Common and Series A shares. This shift in approach is expected to free up additional capital that can be used to support TDS' fiber program, among other purposes.
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 seeks to grow revenue in its Towers segment primarily through increasing third-party colocations on existing towers through providing unique tower locations, attractive terms and streamlined implementation to third-party wireless operators.
▪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.
Announced Transaction and Strategic Alternatives Review
On August 4, 2023, TDS and UScellular announced that the Boards of Directors of both companies decided to initiate a process to explore a range of strategic alternatives for UScellular. On May 28, 2024, UScellular announced that its Board of Directors unanimously approved the execution of a Securities Purchase Agreement (Securities Purchase Agreement) by and among TDS, UScellular, T-Mobile US, Inc. (T-Mobile) and USCC Wireless Holdings, LLC, pursuant to which, among other things, UScellular agreed to sell its wireless operations and select spectrum assets to T-Mobile for a purchase price, subject to adjustment as specified in the Securities Purchase Agreement, of $4,400 million, which is payable in a combination of cash and the assumption of up to approximately $2,000 million in debt. The transaction is expected to close in mid-2025, subject to the receipt of regulatory approvals and the satisfaction of customary closing conditions.
The strategic alternatives review process is ongoing as UScellular seeks to opportunistically monetize its spectrum assets that are not subject to the Securities Purchase Agreement. During the three and six months ended June 30, 2024, TDS incurred third-party expenses of $21 million and $33 million, respectively, related to the strategic alternatives review.
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.
▪Alternative Connect America Cost Model (ACAM) – a USF support mechanism for certain carriers, which provides revenue support through 2028. This support comes with an obligation to build defined broadband speeds to a certain number of locations.
▪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.
▪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.
▪Colocations – represents instances where a third-party wireless carrier rents or leases space on a company-owned tower.
▪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.
▪Tower Tenancy Rate – average number of tenants that lease space on company-owned towers, measured on a per-tower basis.
▪Universal Service Fund (USF) – a system of telecommunications collected fees and support payments managed by the Federal Communications Commission (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 and six months ended June 30, 2024, to the three and six months ended June 30, 2023.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 vs. 2023 | 2024 | 2023 | 2024 vs. 2023 | ||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||
| Operating revenues | |||||||||||||||||||||||||||||||||||
| UScellular | $ | 927 | $ | 957 | (3) | % | $ | 1,877 | $ | 1,942 | (3) | % | |||||||||||||||||||||||
| TDS Telecom | 267 | 257 | 4 | % | 534 | 510 | 5 | % | |||||||||||||||||||||||||||
All other1 | 44 | 53 | (19) | % | 89 | 118 | (24) | % | |||||||||||||||||||||||||||
| Total operating revenues | 1,238 | 1,267 | (2) | % | 2,500 | 2,570 | (3) | % | |||||||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||||
| UScellular | 891 | 923 | (3) | % | 1,789 | 1,881 | (5) | % | |||||||||||||||||||||||||||
| TDS Telecom | 248 | 251 | (1) | % | 488 | 496 | (1) | % | |||||||||||||||||||||||||||
All other1 | 60 | 60 | (2) | % | 117 | 131 | (11) | % | |||||||||||||||||||||||||||
| Total operating expenses | 1,199 | 1,234 | (3) | % | 2,394 | 2,508 | (5) | % | |||||||||||||||||||||||||||
| Operating income (loss) | |||||||||||||||||||||||||||||||||||
| UScellular | 36 | 34 | 6 | % | 88 | 61 | 44 | % | |||||||||||||||||||||||||||
| TDS Telecom | 19 | 7 | N/M | 46 | 15 | N/M | |||||||||||||||||||||||||||||
All other1 | (16) | (8) | N/M | (28) | (14) | N/M | |||||||||||||||||||||||||||||
| Total operating income | 39 | 33 | 17 | % | 106 | 62 | 72 | % | |||||||||||||||||||||||||||
| Investment and other income (expense) | |||||||||||||||||||||||||||||||||||
| Equity in earnings of unconsolidated entities | 39 | 38 | 3 | % | 82 | 82 | — | ||||||||||||||||||||||||||||
| Interest and dividend income | 7 | 6 | 28 | % | 12 | 11 | 13 | % | |||||||||||||||||||||||||||
| Interest expense | (73) | (62) | (18) | % | (131) | (116) | (14) | % | |||||||||||||||||||||||||||
| Other, net | 1 | — | N/M | 2 | 1 | N/M | |||||||||||||||||||||||||||||
| Total investment and other expense | (26) | (18) | (42) | % | (35) | (22) | (62) | % | |||||||||||||||||||||||||||
| Income before income taxes | 13 | 15 | (13) | % | 71 | 40 | 77 | % | |||||||||||||||||||||||||||
| Income tax expense | 6 | 15 | (57) | % | 26 | 28 | (8) | % | |||||||||||||||||||||||||||
| Net income | 7 | — | N/M | 45 | 12 | N/M | |||||||||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interests, net of tax | 4 | 2 | N/M | 13 | 6 | N/M | |||||||||||||||||||||||||||||
| Net income attributable to TDS shareholders | 3 | (2) | N/M | 32 | 6 | N/M | |||||||||||||||||||||||||||||
| TDS Preferred Share dividends | 17 | 17 | — | 35 | 35 | — | |||||||||||||||||||||||||||||
| Net income (loss) attributable to TDS common shareholders | $ | (14) | $ | (19) | 24 | % | $ | (3) | $ | (29) | 91 | % | |||||||||||||||||||||||
Adjusted OIBDA (Non-GAAP)2 | $ | 310 | $ | 263 | 18 | % | $ | 629 | $ | 534 | 18 | % | |||||||||||||||||||||||
Adjusted EBITDA (Non-GAAP)2 | $ | 357 | $ | 307 | 17 | % | $ | 725 | $ | 628 | 15 | % | |||||||||||||||||||||||
Capital expenditures3 | $ | 244 | $ | 278 | (12) | % | $ | 464 | $ | 621 | (25) | % | |||||||||||||||||||||||
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 $17 million and $18 million for the three months ended June 30, 2024 and 2023, respectively and $33 million and $38 million for the six months ended June 30, 2024 and 2023, respectively. See Note 8 — Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.
Interest expense
Interest expense increased for the three and six months ended June 30, 2024 due primarily to an increase in borrowings under the TDS term loan agreements, partially offset by a decrease in the average principal balance outstanding on the receivables securitization agreement. See Market Risk for additional information regarding maturities of long-term debt and weighted average interest rates.
Income tax expense
Income tax expense decreased for the three months ended June 30, 2024 due primarily to state valuation allowance adjustments recorded in the second quarter of 2023 that reduced the net value of deferred tax assets.
Income tax expense decreased for the six months ended June 30, 2024 due primarily to state valuation allowance adjustments recorded in the second quarter of 2023 that reduced the net value of deferred tax assets, partially offset by an increase in Income before income taxes.
TDS calculated income taxes for the three and six months ended June 30, 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 primarily to fluctuations in Income before income taxes, as well as tax impacts of sales of businesses expected to close later in 2024.
Net income attributable to noncontrolling interests, net of tax
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| UScellular noncontrolling public shareholders’ | $ | 3 | $ | 1 | $ | 6 | $ | 3 | |||||||||||||||
| Noncontrolling shareholders’ or partners’ | 1 | 1 | 7 | 3 | |||||||||||||||||||
| Net income attributable to noncontrolling interests, net of tax | $ | 4 | $ | 2 | $ | 13 | $ | 6 | |||||||||||||||
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.
5
Earnings
(Dollars in millions)
Three Months Ended
Net income increased due primarily to lower operating and income tax expenses, partially offset by lower operating revenues and higher interest expense. Adjusted EBITDA increased due primarily to lower operating expenses, partially offset by lower operating revenues.
Six Months Ended
Net income increased due primarily to lower operating expenses, partially offset by lower operating revenues and higher interest expense. 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.
6
 | UScellular OPERATIONS | ||||
Business Overview
UScellular provides wireless service throughout its footprint, and leases tower space to third-party carriers on UScellular-owned towers. 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. UScellular is an 82%-owned subsidiary of TDS.
OPERATIONS
▪Serves customers with 4.5 million retail connections including approximately 4.0 million postpaid and 0.4 million prepaid connections
▪Operates in 21 states
▪Employs approximately 4,300 associates
▪Owns 4,388 towers
▪Operates 6,990 cell sites in service
7
Financial Overview — UScellular
The following discussion and analysis compares financial results for the three and six months ended June 30, 2024 to the three and six months ended June 30, 2023.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 vs. 2023 | 2024 | 2023 | 2024 vs. 2023 | ||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||
| Operating Revenues | |||||||||||||||||||||||||||||||||||
| Wireless | $ | 902 | $ | 932 | (3) | % | $ | 1,826 | $ | 1,892 | (3) | % | |||||||||||||||||||||||
| Towers | 58 | 57 | 3 | % | 116 | 113 | 3 | % | |||||||||||||||||||||||||||
| Intra-company eliminations | (33) | (32) | (4) | % | (65) | (63) | (3) | % | |||||||||||||||||||||||||||
| Total operating revenues | 927 | 957 | (3) | % | 1,877 | 1,942 | (3) | % | |||||||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||||
| Wireless | 885 | 916 | (3) | % | 1,779 | 1,868 | (5) | % | |||||||||||||||||||||||||||
| Towers | 39 | 39 | 1 | % | 75 | 76 | (1) | % | |||||||||||||||||||||||||||
| Intra-company eliminations | (33) | (32) | (4) | % | (65) | (63) | (3) | % | |||||||||||||||||||||||||||
| Total operating expenses | 891 | 923 | (3) | % | 1,789 | 1,881 | (5) | % | |||||||||||||||||||||||||||
| Operating income | $ | 36 | $ | 34 | 6 | % | $ | 88 | $ | 61 | 44 | % | |||||||||||||||||||||||
| Net income | $ | 18 | $ | 5 | N/M | $ | 42 | $ | 20 | N/M | |||||||||||||||||||||||||
Adjusted OIBDA (Non-GAAP)1 | $ | 227 | $ | 198 | 14 | % | $ | 456 | $ | 404 | 13 | % | |||||||||||||||||||||||
Adjusted EBITDA (Non-GAAP)1 | $ | 268 | $ | 239 | 13 | % | $ | 542 | $ | 491 | 10 | % | |||||||||||||||||||||||
Capital expenditures2 | $ | 165 | $ | 143 | 15 | % | $ | 295 | $ | 351 | (16) | % | |||||||||||||||||||||||
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
Wireless Operations
| As of June 30, | 2024 | 2023 | |||||||||||||||
| Retail Connections – End of Period | |||||||||||||||||
| Postpaid | 4,027,000 | 4,194,000 | |||||||||||||||
| Prepaid | 439,000 | 462,000 | |||||||||||||||
| Total | 4,466,000 | 4,656,000 | |||||||||||||||
| Q2 2024 | Q2 2023 | Q2 2024 vs. Q2 2023 | YTD 2024 | YTD 2023 | YTD 2024 vs. YTD 2023 | |||||||||||||||||||||||||||
| Postpaid Activity and Churn | ||||||||||||||||||||||||||||||||
| Gross Additions | ||||||||||||||||||||||||||||||||
| Handsets | 73,000 | 83,000 | (12) | % | 136,000 | 176,000 | (23) | % | ||||||||||||||||||||||||
| Connected Devices | 44,000 | 42,000 | 5 | % | 87,000 | 85,000 | 2 | % | ||||||||||||||||||||||||
| Total Gross Additions | 117,000 | 125,000 | (6) | % | 223,000 | 261,000 | (15) | % | ||||||||||||||||||||||||
| Net Additions (Losses) | ||||||||||||||||||||||||||||||||
| Handsets | (29,000) | (29,000) | — | (76,000) | (54,000) | (41) | % | |||||||||||||||||||||||||
| Connected Devices | 5,000 | 1,000 | N/M | 9,000 | 1,000 | N/M | ||||||||||||||||||||||||||
| Total Net Additions (Losses) | (24,000) | (28,000) | 14 | % | (67,000) | (53,000) | (26) | % | ||||||||||||||||||||||||
| Churn | ||||||||||||||||||||||||||||||||
| Handsets | 0.97 | % | 1.01 | % | 1.00 | % | 1.03 | % | ||||||||||||||||||||||||
| Connected Devices | 2.47 | % | 2.65 | % | 2.50 | % | 2.72 | % | ||||||||||||||||||||||||
| Total Churn | 1.16 | % | 1.21 | % | 1.19 | % | 1.24 | % | ||||||||||||||||||||||||
N/M - Percentage change not meaningful
Total postpaid handset net losses were flat for the three months ended June 30, 2024, when compared to the same period last year due to lower gross additions as a result of a decrease in the pool of available customers and continued aggressive industry-wide competition. This was offset by lower defections as a result of improvements in churn.
Total postpaid handset net losses increased for the six months ended June 30, 2024 when compared to the same period last year due to lower gross additions as a result of a decrease in the pool of available customers and continued aggressive industry-wide competition.
Total postpaid connected device net additions increased for the three and six months ended June 30, 2024, when compared to the same period last year due to higher demand for fixed wireless home internet as well as a decrease in tablet, hotspot and home phone defections as a result of improvements in churn.
Postpaid Revenue
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 vs. 2023 | 2024 | 2023 | 2024 vs. 2023 | ||||||||||||||||||||||||||||||
Average Revenue Per User (ARPU) | $ | 51.45 | $ | 50.64 | 2 % | $ | 51.69 | $ | 50.64 | 2 % | |||||||||||||||||||||||||
Average Revenue Per Account (ARPA) | $ | 130.41 | $ | 130.19 | — | $ | 131.18 | $ | 130.49 | 1 % | |||||||||||||||||||||||||
Postpaid ARPU increased for the three and six months ended June 30, 2024, when compared to the same period last year, due to favorable plan and product offering mix and an increase in cost recovery surcharges.
Postpaid ARPA increased slightly for the three and six months ended June 30, 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.
9
Financial Overview — Wireless
The following discussion and analysis compares financial results for the three and six months ended June 30, 2024 to the three and six months ended June 30, 2023.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 vs. 2023 | 2024 | 2023 | 2024 vs. 2023 | ||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||
| Retail service | $ | 666 | $ | 686 | (3) | % | $ | 1,344 | $ | 1,378 | (2) | % | |||||||||||||||||||||||
| Other | 52 | 49 | 7 | % | 102 | 99 | 3 | % | |||||||||||||||||||||||||||
| Service revenues | 718 | 735 | (2) | % | 1,446 | 1,477 | (2) | % | |||||||||||||||||||||||||||
| Equipment sales | 184 | 197 | (6) | % | 380 | 415 | (9) | % | |||||||||||||||||||||||||||
| Total operating revenues | 902 | 932 | (3) | % | 1,826 | 1,892 | (3) | % | |||||||||||||||||||||||||||
| System operations (excluding Depreciation, amortization and accretion reported below) | 194 | 203 | (4) | % | 390 | 398 | (2) | % | |||||||||||||||||||||||||||
| Cost of equipment sold | 211 | 228 | (7) | % | 427 | 480 | (11) | % | |||||||||||||||||||||||||||
| Selling, general and administrative | 313 | 333 | (6) | % | 637 | 670 | (5) | % | |||||||||||||||||||||||||||
| Depreciation, amortization and accretion | 154 | 149 | 3 | % | 308 | 307 | — | ||||||||||||||||||||||||||||
| (Gain) loss on asset disposals, net | 5 | 3 | 40 | % | 10 | 13 | (23) | % | |||||||||||||||||||||||||||
| (Gain) loss on license sales and exchanges, net | 8 | — | N/M | 7 | — | N/M | |||||||||||||||||||||||||||||
| Total operating expenses | 885 | 916 | (3) | % | 1,779 | 1,868 | (5) | % | |||||||||||||||||||||||||||
| Operating income | $ | 17 | $ | 16 | 5 | % | $ | 47 | $ | 24 | 97 | % | |||||||||||||||||||||||
Adjusted OIBDA (Non-GAAP)1 | $ | 196 | $ | 168 | 16 | % | $ | 392 | $ | 344 | 14 | % | |||||||||||||||||||||||
Adjusted EBITDA (Non-GAAP)1 | $ | 196 | $ | 168 | 16 | % | $ | 392 | $ | 344 | 14 | % | |||||||||||||||||||||||
Capital expenditures2 | $ | 160 | $ | 140 | 13 | % | $ | 286 | $ | 346 | (17) | % | |||||||||||||||||||||||
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.
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Operating Revenues
Three Months Ended June 30, 2024 and 2023
(Dollars in millions)
Operating Revenues
Six Months Ended June 30, 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
▪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 and six months ended June 30, 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 and six months ended June 30, 2024, due primarily to a decline in smartphone devices sold due to lower upgrade and gross additions, 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.
11
Total operating expenses
Total operating expenses for the six months ended June 30, 2023 include $9 million of severance and related expenses associated with a reduction in workforce that was recorded in the first quarter of 2023. These severance expenses are included in System operations expenses and Selling, general and administrative expenses.
System operations expenses
System operations expenses decreased for the three and six months ended June 30, 2024, due primarily to decreases in customer usage and maintenance, utilities, and cell site expenses, partially offset by an increase in roaming expense primarily driven by an increase in outbound roaming usage.
Cost of equipment sold
Cost of equipment sold decreased for the three and six months ended June 30, 2024, due primarily to a decline in smartphone upgrades and gross additions, partially offset by a higher average cost per unit sold.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased for the three and six months ended June 30, 2024, due to decreases in various general and administrative expenses, sales related expenses and bad debts expense, partially offset by an increase related to the strategic alternatives review expenses of $12 million and $20 million, respectively.
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Towers Operations
| As of June 30, | 2024 | 2023 | 2024 vs. 2023 | ||||||||||||||
| Owned towers | 4,388 | 4,341 | 1 | % | |||||||||||||
| Number of colocations | 2,392 | 2,458 | (3) | % | |||||||||||||
| Tower tenancy rate | 1.55 | 1.57 | (1) | % | |||||||||||||
Number of colocations
Number of colocations decreased for the period ended June 30, 2024 when compared to the same period last year due to an increase in terminations, partially offset by new tenant and equipment change executions.
Financial Overview — Towers
The following discussion and analysis compares financial results for the three and six months ended June 30, 2024 to the three and six months ended June 30, 2023.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 vs. 2023 | 2024 | 2023 | 2024 vs. 2023 | ||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||
| Third-party revenues | $ | 25 | $ | 25 | 1 | % | $ | 51 | $ | 50 | 2 | % | |||||||||||||||||||||||
| Intra-company revenues | 33 | 32 | 4 | % | 65 | 63 | 3 | % | |||||||||||||||||||||||||||
| Total tower revenues | 58 | 57 | 3 | % | 116 | 113 | 3 | % | |||||||||||||||||||||||||||
| System operations (excluding Depreciation, amortization and accretion reported below) | 19 | 19 | (1) | % | 37 | 37 | 1 | % | |||||||||||||||||||||||||||
| Selling, general and administrative | 9 | 8 | 8 | % | 16 | 16 | (3) | % | |||||||||||||||||||||||||||
| Depreciation, amortization and accretion | 11 | 12 | (5) | % | 21 | 23 | (5) | % | |||||||||||||||||||||||||||
| (Gain) loss on asset disposals, net | — | — | N/M | 1 | — | N/M | |||||||||||||||||||||||||||||
| Total operating expenses | 39 | 39 | 1 | % | 75 | 76 | (1) | % | |||||||||||||||||||||||||||
| Operating income | $ | 19 | $ | 18 | 7 | % | $ | 41 | $ | 37 | 10 | % | |||||||||||||||||||||||
Adjusted OIBDA (Non-GAAP)1 | $ | 31 | $ | 30 | 6 | % | $ | 64 | $ | 60 | 7 | % | |||||||||||||||||||||||
Adjusted EBITDA (Non-GAAP)1 | $ | 31 | $ | 30 | 6 | % | $ | 64 | $ | 60 | 7 | % | |||||||||||||||||||||||
| Capital expenditures | $ | 5 | $ | 3 | N/M | $ | 9 | $ | 5 | 89 | % | ||||||||||||||||||||||||
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.
Key components of changes in the statement of operations line items were as follows:
Intra-company revenues
Intra-company revenues increased for the three and six months ended June 30, 2024, primarily as a result of an increase in the intra-company rate charged by Towers to Wireless.
Upon closing of the transaction to dispose of the wireless operations and select spectrum assets to T-Mobile, UScellular expects an increase in Third-party revenues that will be recognized under the Master License Agreement that will go into effect under the Securities Purchase Agreement. However, at such time Intra-company revenues would cease, resulting in significantly lower Total tower revenues in periods following the close.
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Total operating expenses
Total operating expenses were relatively flat for the three and six months ended June 30, 2024.
Upon closing of the transaction to dispose of the wireless operations and select spectrum assets to T-Mobile, UScellular expects expenses may be incurred to effect the separation including costs to decommission certain towers and record remaining ground lease obligations on such decommissioned towers. These factors and other uncertainties in how the ongoing tower operations will be supported in the long-term may significantly impact operating expenses recorded in periods following the close.
14
 | 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
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Operational Overview — TDS Telecom
Total Service Address Mix
As of June 30,
TDS Telecom increased its service addresses 10% from a year ago to 1.7 million as of June 30, 2024 through network expansion.
TDS Telecom offers 1Gig+ service to 73% of its total footprint as of June 30, 2024, compared to 68% a year ago.
As of June 30, | 2024 | 2023 | 2024 vs. 2023 | ||||||||||||||
| Residential connections | |||||||||||||||||
| Broadband | |||||||||||||||||
| Incumbent | 243,700 | 249,200 | (2) | % | |||||||||||||
| Expansion | 107,800 | 70,200 | 53 | % | |||||||||||||
| Cable | 198,500 | 204,200 | (3) | % | |||||||||||||
| Total Broadband | 550,000 | 523,600 | 5 | % | |||||||||||||
| Video | 124,800 | 132,300 | (6) | % | |||||||||||||
| Voice | 275,600 | 288,200 | (4) | % | |||||||||||||
| Total Residential Connections | 950,400 | 944,100 | 1 | % | |||||||||||||
| Commercial connections | 201,500 | 223,300 | (10) | % | |||||||||||||
| Total connections | 1,152,000 | 1,167,400 | (1) | % | |||||||||||||
Numbers may not foot due to rounding.
Total connections decreased due to legacy voice, video, and competitive local exchange carrier (CLEC) connections declines, partially offset by broadband connection growth.
Many of TDS Telecom's residential customers take advantage of bundling options as 53% of customers subscribe to more than one service.
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Residential Broadband Connections by Speed
As of June 30,
Residential broadband customers continue to choose higher speeds with 79% taking speeds of 100 Mbps or greater and 19% choosing 1Gig+.
Residential Revenue per Connection
Total residential revenue per connection increased 5% for the three months ended June 30, 2024, and 6% for the six months ended June 30, 2024 due primarily to price increases.
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Financial Overview — TDS Telecom
The following discussion and analysis compares financial results for the three and six months ended June 30, 2024, to the three and six months ended June 30, 2023.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 vs. 2023 | 2024 | 2023 | 2024 vs. 2023 | ||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||
| Residential | |||||||||||||||||||||||||||||||||||
| Incumbent | $ | 90 | $ | 89 | 1 | % | $ | 180 | $ | 175 | 3 | % | |||||||||||||||||||||||
| Expansion | 28 | 18 | 60 | % | 54 | 33 | 65 | % | |||||||||||||||||||||||||||
| Cable | 69 | 68 | 1 | % | 138 | 136 | 2 | % | |||||||||||||||||||||||||||
| Total residential | 186 | 175 | 7 | % | 372 | 344 | 8 | % | |||||||||||||||||||||||||||
| Commercial | 37 | 39 | (6) | % | 74 | 80 | (8) | % | |||||||||||||||||||||||||||
| Wholesale | 44 | 43 | 2 | % | 88 | 86 | 2 | % | |||||||||||||||||||||||||||
| Total service revenues | 267 | 257 | 4 | % | 534 | 510 | 5 | % | |||||||||||||||||||||||||||
| Equipment revenues | — | — | 19 | % | — | — | (12) | % | |||||||||||||||||||||||||||
| Total operating revenues | 267 | 257 | 4 | % | 534 | 510 | 5 | % | |||||||||||||||||||||||||||
| Cost of services (excluding Depreciation, amortization and accretion reported below) | 98 | 108 | (9) | % | 196 | 212 | (8) | % | |||||||||||||||||||||||||||
| Cost of equipment and products | — | — | (28) | % | — | — | (7) | % | |||||||||||||||||||||||||||
| Selling, general and administrative | 80 | 81 | (2) | % | 155 | 162 | (4) | % | |||||||||||||||||||||||||||
| Depreciation, amortization and accretion | 67 | 60 | 11 | % | 131 | 119 | 10 | % | |||||||||||||||||||||||||||
| (Gain) loss on asset disposals, net | 4 | 2 | N/M | 6 | 3 | N/M | |||||||||||||||||||||||||||||
| Total operating expenses | 248 | 251 | (1) | % | 488 | 496 | (1) | % | |||||||||||||||||||||||||||
| Operating income | $ | 19 | $ | 7 | N/M | $ | 46 | $ | 15 | N/M | |||||||||||||||||||||||||
| Net income | $ | 18 | $ | 7 | N/M | $ | 42 | $ | 15 | N/M | |||||||||||||||||||||||||
Adjusted OIBDA (Non-GAAP)1 | $ | 89 | $ | 68 | 31 | % | $ | 183 | $ | 136 | 34 | % | |||||||||||||||||||||||
Adjusted EBITDA (Non-GAAP)1 | $ | 91 | $ | 70 | 32 | % | $ | 187 | $ | 139 | 35 | % | |||||||||||||||||||||||
Capital expenditures2 | $ | 78 | $ | 132 | (41) | % | $ | 164 | $ | 262 | (37) | % | |||||||||||||||||||||||
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.
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Operating Revenues
Three Months Ended June 30, 2024 and 2023
(Dollars in millions)
Operating Revenues
Six Months Ended June 30, 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 and six months ended June 30, 2024, due primarily to price increases and growth in broadband connections, partially offset by a decline in video and voice connections.
Commercial revenues decreased for the three and six months ended June 30, 2024, due primarily to declining connections in CLEC markets.
Cost of services
Cost of services decreased for the three and six months ended June 30, 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 and six months ended June 30, 2024, due primarily to a decrease in employee-related expenses and lower advertising and marketing costs.
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Depreciation, amortization and accretion
Depreciation, amortization and accretion increased for the three and six months ended June 30, 2024, due primarily to capital expenditures on new fiber assets.
20
Liquidity and Capital Resources
Sources of Liquidity
TDS and its subsidiaries operate capital-intensive businesses. 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 has incurred negative free cash flow at times in past periods, and this could occur in future periods.
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 at TDS Telecom 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, 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. Specifically, TDS Telecom has elected to divest of certain non-strategic assets as well as 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.
21
In addition to Cash and cash equivalents, TDS and UScellular had available undrawn borrowing capacity from the following debt facilities at June 30, 2024. See the Financing section below for further details.
| TDS | UScellular | ||||||||||
| (Dollars in millions) | |||||||||||
| Revolving Credit Agreement | $ | 399 | $ | 300 | |||||||
| Term Loan Agreements | 75 | — | |||||||||
| Receivables Securitization Agreement | — | 448 | |||||||||
| Total available undrawn borrowing capacity | $ | 474 | $ | 748 | |||||||
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 six months ended June 30, 2024, TDS borrowed $100 million and repaid $200 million under the agreement. As of June 30, 2024, there were no outstanding borrowings and the unused borrowing capacity was $399 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 six months ended June 30, 2024, UScellular borrowed $40 million and repaid $188 million under the agreement. As of June 30, 2024, the outstanding borrowings under the agreement were $2 million and the unused borrowing capacity was $448 million, subject to sufficient collateral to satisfy the asset borrowing base provisions of 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: 4.00 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 June 30, 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. TDS believes that it was in compliance as of June 30, 2024 with such financial covenant.
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 9 — Debt in the Notes to Consolidated Financial Statements for additional information related to the financing agreements.
Credit Ratings
Following the execution of the Securities Purchase Agreement in May 2024, Moody’s placed TDS and UScellular's issuer credit ratings on a review for downgrade. There was no change to the Ba1 rating issued by Moody’s in October 2023. At the same time, Fitch Ratings placed TDS and UScellular’s issuer credit ratings on rating watch negative. There was no change to the BB+ rating issued by Fitch Ratings in October 2023. There was no change to the Standard & Poor’s credit ratings or outlook.
22
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 six months ended June 30, 2024 and 2023, were as follows:
Capital Expenditures
(Dollars in millions)
UScellular’s capital expenditures for the six months ended June 30, 2024 and 2023, were $295 million and $351 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 network deployment that uses 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 six months ended June 30, 2024 and 2023, were $164 million and $262 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 and Divestitures
TDS may be engaged in negotiations (subject to all applicable regulations) relating to the acquisition and divestiture of companies, properties, assets and other possible businesses. In general, TDS does not disclose such transactions until there is a definitive agreement.
See Note 7 — Divestitures in the Notes to Consolidated Financial Statements for additional information related to divestitures.
The strategic alternatives review process is ongoing as UScellular seeks to opportunistically monetize its spectrum assets that are not subject to the Securities Purchase Agreement.
Other Obligations
TDS will require capital for future spending on existing contractual obligations, including long-term debt obligations; preferred stock 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.
23
Variable Interest Entities
TDS consolidates certain “variable interest entities” as defined under GAAP. See Note 10 — 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.
24
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 and Note 7 — Divestitures in the Notes to Consolidated Financial Statements 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 six months ended June 30, 2024 and 2023.
2024 Commentary
TDS’ Cash, cash equivalents and restricted cash increased $76 million. Net cash provided by operating activities was $626 million due to net income of $45 million adjusted for non-cash items of $509 million, distributions received from unconsolidated entities of $80 million, including $37 million in distributions from the LA Partnership, and changes in working capital items which decreased net cash by $8 million. The working capital changes were primarily driven by payment of associate bonuses and timing of vendor payments, partially offset by reduced inventory balances.
Cash flows used for investing activities were $465 million, due primarily to payments for property, plant and equipment of $451 million.
Cash flows used for financing activities were $85 million, due primarily to $300 million borrowed under TDS term loan agreements, $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 $200 million in repayments on the TDS revolving credit agreement, $188 million in repayments on the UScellular receivables securitization agreement, the payment of $61 million in dividends and cash paid for software license agreements of $21 million.
2023 Commentary
TDS’ Cash, cash equivalents and restricted cash decreased $106 million. Net cash provided by operating activities was $514 million due to net income of $12 million adjusted for non-cash items of $483 million, distributions received from unconsolidated entities of $78 million, including $37 million in distributions from the LA Partnership, and changes in working capital items which decreased net cash by $59 million. The working capital changes were primarily driven by timing of vendor payments and payment of associate bonuses, partially offset by a federal income tax refund of $57 million received during the second quarter, reduced inventory purchases and timing of collection on receivables.
Cash flows used for investing activities were $629 million, due primarily to payments for property, plant and equipment of $629 million.
Cash flows provided by financing activities were $9 million, due primarily to $115 million borrowed under the UScellular receivables securitization agreement, $175 million borrowed under the TDS revolving credit agreement, and $100 million borrowed under the TDS export credit agreement. These were mostly offset by a $150 million repayment on the UScellular receivables securitization agreement, a $60 million repayment on the UScellular EIP receivables repurchase agreement, a $50 million repayment on the TDS revolving credit agreement, the payment of $76 million in dividends and cash paid for software license agreements of $20 million.
25
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:
Inventory, net
Inventory, net decreased $60 million due primarily to the sell through of inventory on hand which was elevated at the end of 2023 to support holiday promotions and ensure adequate device supply.
Assets held for sale
Assets held for sale increased $105 million due primarily to the expected sale of OneNeck IT Solutions LLC and OneNeck Data Center Holdings LLC. See Note 7 — Divestitures in the Notes to Consolidated Financial Statements for additional information.
Accrued compensation
Accrued compensation decreased $55 million due primarily to associate bonus payments in March 2024.
Liabilities held for sale
Liabilities held for sale increased $34 million due primarily to the expected sale of OneNeck IT Solutions LLC and OneNeck Data Center Holdings LLC. See Note 7 — Divestitures in the Notes to Consolidated Financial Statements for additional information.
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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 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 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 non-recurring, 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 12 — 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/or Operating income. Income and expense items below Operating income are not provided at the individual segment level for UScellular Wireless and UScellular Towers; therefore, the reconciliations begin with EBITDA and the most directly comparable GAAP measure is Operating income rather than Net income at the segment level.
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| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| TDS - CONSOLIDATED | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Net income (GAAP) | $ | 7 | $ | — | $ | 45 | $ | 12 | |||||||||||||||
| Add back: | |||||||||||||||||||||||
| Income tax expense | 6 | 15 | 26 | 28 | |||||||||||||||||||
| Interest expense | 73 | 62 | 131 | 116 | |||||||||||||||||||
| Depreciation, amortization and accretion | 233 | 225 | 467 | 456 | |||||||||||||||||||
| EBITDA (Non-GAAP) | 319 | 302 | 669 | 612 | |||||||||||||||||||
| Add back or deduct: | |||||||||||||||||||||||
| Expenses related to strategic alternatives review | 21 | — | 33 | — | |||||||||||||||||||
| (Gain) loss on asset disposals, net | 9 | 5 | 16 | 16 | |||||||||||||||||||
| (Gain) loss on license sales and exchanges, net | 8 | — | 7 | — | |||||||||||||||||||
| Adjusted EBITDA (Non-GAAP) | 357 | 307 | 725 | 628 | |||||||||||||||||||
| Deduct: | |||||||||||||||||||||||
| Equity in earnings of unconsolidated entities | 39 | 38 | 82 | 82 | |||||||||||||||||||
| Interest and dividend income | 7 | 6 | 12 | 11 | |||||||||||||||||||
| Other, net | 1 | — | 2 | 1 | |||||||||||||||||||
| Adjusted OIBDA (Non-GAAP) | 310 | 263 | 629 | 534 | |||||||||||||||||||
| Deduct: | |||||||||||||||||||||||
| Depreciation, amortization and accretion | 233 | 225 | 467 | 456 | |||||||||||||||||||
| Expenses related to strategic alternatives review | 21 | — | 33 | — | |||||||||||||||||||
| (Gain) loss on asset disposals, net | 9 | 5 | 16 | 16 | |||||||||||||||||||
| (Gain) loss on license sales and exchanges, net | 8 | — | 7 | — | |||||||||||||||||||
| Operating income (GAAP) | $ | 39 | $ | 33 | $ | 106 | $ | 62 | |||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| UScellular | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Net income (GAAP) | $ | 18 | $ | 5 | $ | 42 | $ | 20 | |||||||||||||||
| Add back: | |||||||||||||||||||||||
| Income tax expense | 14 | 19 | 41 | 29 | |||||||||||||||||||
| Interest expense | 45 | 51 | 91 | 99 | |||||||||||||||||||
| Depreciation, amortization and accretion | 165 | 161 | 329 | 330 | |||||||||||||||||||
| EBITDA (Non-GAAP) | 242 | 236 | 503 | 478 | |||||||||||||||||||
| Add back or deduct: | |||||||||||||||||||||||
| Expenses related to strategic alternatives review | 13 | — | 21 | — | |||||||||||||||||||
| (Gain) loss on asset disposals, net | 5 | 3 | 11 | 13 | |||||||||||||||||||
| (Gain) loss on license sales and exchanges, net | 8 | — | 7 | — | |||||||||||||||||||
| Adjusted EBITDA (Non-GAAP) | 268 | 239 | 542 | 491 | |||||||||||||||||||
| Deduct: | |||||||||||||||||||||||
| Equity in earnings of unconsolidated entities | 38 | 38 | 80 | 82 | |||||||||||||||||||
| Interest and dividend income | 3 | 3 | 6 | 5 | |||||||||||||||||||
| Adjusted OIBDA (Non-GAAP) | 227 | 198 | 456 | 404 | |||||||||||||||||||
| Deduct: | |||||||||||||||||||||||
| Depreciation, amortization and accretion | 165 | 161 | 329 | 330 | |||||||||||||||||||
| Expenses related to strategic alternatives review | 13 | — | 21 | — | |||||||||||||||||||
| (Gain) loss on asset disposals, net | 5 | 3 | 11 | 13 | |||||||||||||||||||
| (Gain) loss on license sales and exchanges, net | 8 | — | 7 | — | |||||||||||||||||||
| Operating income (GAAP) | $ | 36 | $ | 34 | $ | 88 | $ | 61 | |||||||||||||||
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| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| UScellular Wireless | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| EBITDA (Non-GAAP) | $ | 171 | $ | 165 | $ | 355 | $ | 331 | |||||||||||||||
| Add back or deduct: | |||||||||||||||||||||||
| Expenses related to strategic alternatives review | 12 | — | 20 | — | |||||||||||||||||||
| (Gain) loss on asset disposals, net | 5 | 3 | 10 | 13 | |||||||||||||||||||
| (Gain) loss on license sales and exchanges, net | 8 | — | 7 | — | |||||||||||||||||||
| Adjusted EBITDA and Adjusted OIBDA (Non-GAAP) | 196 | 168 | 392 | 344 | |||||||||||||||||||
| Deduct: | |||||||||||||||||||||||
| Depreciation, amortization and accretion | 154 | 149 | 308 | 307 | |||||||||||||||||||
| Expenses related to strategic alternatives review | 12 | — | 20 | — | |||||||||||||||||||
| (Gain) loss on asset disposals, net | 5 | 3 | 10 | 13 | |||||||||||||||||||
| (Gain) loss on license sales and exchanges, net | 8 | — | 7 | — | |||||||||||||||||||
| Operating income (GAAP) | $ | 17 | $ | 16 | $ | 47 | $ | 24 | |||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| UScellular Towers | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| EBITDA (Non-GAAP) | $ | 30 | $ | 30 | $ | 62 | $ | 60 | |||||||||||||||
| Add back or deduct: | |||||||||||||||||||||||
| Expenses related to strategic alternatives review | 1 | — | 1 | — | |||||||||||||||||||
| (Gain) loss on asset disposals | — | — | 1 | — | |||||||||||||||||||
| Adjusted EBITDA and Adjusted OIBDA (Non-GAAP) | 31 | 30 | 64 | 60 | |||||||||||||||||||
| Deduct: | |||||||||||||||||||||||
| Depreciation, amortization and accretion | 11 | 12 | 21 | 23 | |||||||||||||||||||
| Expenses related to strategic alternatives review | 1 | — | 1 | — | |||||||||||||||||||
| (Gain) loss on asset disposals, net | — | — | 1 | — | |||||||||||||||||||
| Operating income (GAAP) | $ | 19 | $ | 18 | $ | 41 | $ | 37 | |||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
TDS TELECOM | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||
Net income (GAAP) | $ | ||||||||||||||||||||||