(Exact name of Registrant as specified in its charter)
iDelaware
i36-2669023
(State
or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
i30 North LaSalle Street, Suite 4000, iChicago, iIllinoisi60602
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code: i(312)i630-1900
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol
Name of each exchange on which registered
iCommon Shares, $.01 par value
iTDS
iNew
York Stock Exchange
iDepository Shares each representing a 1/1000th interest in a share of 6.625% Series UU Cumulative Redeemable Perpetual Preferred Stock $.01 par value
iTDSPrU
iNew
York Stock Exchange
iDepository Shares each representing a 1/1000th interest in a share of 6.000% Series VV Cumulative Redeemable Perpetual Preferred Stock $.01 par value
iTDSPrV
iNew
York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
iYes
☒
No
☐
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
☐
iNo
☒
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.
iYes
☒
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).
iYes
☒
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.
iLarge accelerated filer
☒
Accelerated
filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
i☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether
the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
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Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).
☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
i☐
No
☒
As of June 30, 2022, the aggregate market values of the
registrant’s Common Shares and Series A Common Shares held by non-affiliates were approximately $i2 billion and less than $i1 million, respectively. For purposes hereof, Telephone and Data Systems, Inc.
(TDS) has assumed that each director and executive officer is an affiliate, and no party who has filed a Schedule 13G is an affiliate. The June 30, 2022 closing price of the Common Shares was $i15.79 as reported by the New York Stock Exchange. Because trading in the Series A Common Shares is infrequent, the registrant has assumed for purposes hereof that each Series A Common Share has a market value equal to one Common Share because the Series A Common Shares are convertible on a share-for-share basis into
Common Shares.
The number of shares outstanding of each of the registrant’s classes of common stock, as of January 31, 2023, is i105,050,300 Common Shares, $.01 par value, and i7,411,300
Series A Common Shares, $.01 par value.
Those sections or portions of the registrant’s Notice of Annual Meeting of Shareholders and Proxy Statement (Proxy Statement) to be filed prior to April 30, 2023, for the 2023 Annual Meeting of Shareholders scheduled to be held May 18, 2023, are herein incorporated by reference into Parts II and III of this report.
Telephone and Data Systems, Inc. (TDS) provides high-quality communications services to customers with 4.7 million retail wireless connections and 1.2 million broadband, video and voice connections at December 31, 2022. TDS conducts all of its wireless operations through its majority-owned subsidiary, United States Cellular Corporation (UScellular). As of December 31, 2022, TDS owned 84% of the combined total of the outstanding Common Shares and Series A Common Shares of UScellular and controlled 96% of the combined voting power of both classes of UScellular common stock. TDS provides
broadband, video and voice services through its wholly-owned subsidiary TDS Telecommunications LLC (TDS Telecom). TDS Common Shares trade under the ticker symbol “TDS” on the New York Stock Exchange (NYSE). UScellular Common Shares trade on the NYSE under the ticker symbol “USM.”
Under listing standards of the NYSE, TDS is a “controlled company” as such term is defined by the NYSE. TDS is a controlled company because over 50% of the voting power for the election of directors of TDS is held by the trustees of the TDS Voting Trust.
TDS has two business segments: UScellular and TDS Telecom. TDS operations also include the operations of its 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. TDS operates entirely in the United States. See Note 19 — Business Segment Information in the Notes to Consolidated Financial Statements for additional information about TDS' segments.
The map below highlights TDS’ consolidated areas of operations:
UScellular
provides wireless telecommunications services to customers with 4.7 million retail connections in portions of 21 states collectively representing a total population of 32 million. UScellular operates in one reportable segment, and all of its wireless operating markets are in the United States.
Operating Strategy and Community Focus
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 operates a regional wireless network. UScellular’s interests in wireless spectrum licenses include both direct interests whereby UScellular is the licensee and investment interests in entities which are licensees; together, these direct and investment interests involve operating and non-operating
wireless spectrum licenses covering portions of 30 states and a total population of approximately 51 million at December 31, 2022.
As part of its business development strategy, UScellular may periodically be engaged in negotiations relating to strategic partnerships and/or the acquisition, exchange or disposition of companies, strategic properties, investment interests or wireless spectrum, including through Federal Communications Commission (FCC) auctions. The FCC conducts auctions through which additional spectrum is made available for the provision of wireless services. Historically, UScellular has participated in certain FCC auctions both directly and indirectly through its limited partnership interests.
UScellular has a longstanding commitment to supporting its local communities through donations and volunteerism. UScellular focuses
its Corporate Social Responsibility program on addressing gaps in STEM (Science, Technology, Engineering and Math) education and connecting tomorrow’s innovators with the resources they need today to help shape their future opportunities. UScellular serves its local communities through exclusive partnerships with acclaimed national nonprofit partners. In 2022, UScellular continued exploring ways to leverage its assets, brand, partnerships, and resources to close the digital divide with a focus on helping to ensure youth in its markets have reliable and fast internet access in school and at home through the After School Access Project. In addition, UScellular continues to contribute to the TDS Environmental, Social and Governance (ESG) program. UScellular believes in serving as a good steward of the environment and enacting governance practices that align with its corporate values and commitment to its customers, associates and its communities.
Customers,
Services, Products and Seasonality
Customers. UScellular focuses on consumer, business and government customers located in its operating markets. These customers are served primarily through UScellular’s retail, digital platform, as well as its direct and indirect sales channels.
Services. UScellular provides a wide variety of wireless services accessible on a broad range of devices. Customers can obtain wireless services on a postpaid or prepaid basis. A single account may include monthly wireless services for a variety of handsets, connected devices and IoT Solutions. A postpaid connection represents an individual line of service for a device for which a customer is generally billed one month in advance for a monthly access charge in return for access to and usage of network services. UScellular’s prepaid service enables individuals
to obtain services without credit verification by paying for all services in advance. Approximately 90% of retail connections were postpaid connections as of December 31, 2022.
UScellular offers various service plans with nationwide coverage tailored to the needs of customers. Depending on those needs, service plans may include features related to, among other items: unlimited or metered voice and data; high definition video features; the ability to use a device as a Wi-Fi hotspot; international voice, text, and data; and varying data rates depending on the plan and usage on that plan. Service offerings vary from time to time based on customer needs, technology changes and market conditions - and may be provided as standard plans or as part of limited time promotional offers.
UScellular offers home and business internet throughout the
footprint via fixed wireless access. Options include an in-home self-installed device and externally-mounted professionally-installed equipment with an internal router. Additional routers are available for a whole-home Wi-Fi experience. In addition to selling direct to businesses and residential homes, UScellular works with several municipalities to bring broadband internet to underserved communities.
UScellular offers advanced wireless solutions to consumers and business and government customers including "home and business internet", a fast-growing and expansive suite of connected Internet of things (IoT) solutions and software applications across the categories of monitor and control (e.g., sensors and cameras), business automation/operations (e.g., e-forms, office solutions), communication (e.g., enterprise messaging, primary and back-up internet connectivity for business continuity), fleet and asset management,
smart water solutions, private cellular networks and custom, bespoke end-to-end IoT solutions et al. Additionally, for first responders, UScellular offers a suite of critical connectivity solutions that includes Wireless Priority Services (WPS) and Quality Priority and Preemption (QPP) options. UScellular intends to continue to further enhance these offerings in 2023 and beyond.
Products. UScellular offers a comprehensive range of devices such as smartphones and other handsets, tablets, wearables, mobile hotspots, fixed wireless home internet, and IoT devices. In addition, UScellular also offers a wide range of accessories,
including wireless essentials such as cases, screen protectors, chargers, memory cards and consumer electronics such as audio, home automation and networking products. UScellular allows customers to purchase certain devices and accessories on installment plans, allowing for customers to pay over a specified period of time.
UScellular also offers services that enable customers to replace or repair their devices, including the Device Protection+ program, which provides as soon as next-day delivery of a replacement device for damaged, lost and stolen devices, and AppleCare services for Apple iOS customers. UScellular's Device Protection+ Advanced program also includes local or on-demand repair for eligible devices. In addition, UScellular offers a Trade-In program through which UScellular buys customers' used equipment.
UScellular purchases devices and accessory products from a number
of original equipment manufacturers and distributors. UScellular manages relationships with its suppliers to ensure its customers have access to the industry's latest devices, to obtain best possible pricing, and to identify opportunities for promotional support from its suppliers. UScellular contracts with third party providers for the majority of its product warehousing, distribution and direct customer fulfillment activities. UScellular also contracts with third party providers for its device service programs.
Seasonality. Seasonality in operating expenses may cause operating income to vary from quarter to quarter. UScellular’s operating expenses tend to be higher in the fourth quarter due to increased marketing and promotional
activities during the holiday season.
Sales and Distribution Channels
UScellular supports a multi-faceted distribution program, including retail sales, direct sales, telesales, ecommerce, indirect sales, independent agents and third-party national retailers.
Company retail store locations are designed to market wireless services and products to the consumer and small business segments in a setting familiar to these types of customers. Direct sales representatives and the indirect channel sell traditional wireless services as well as IoT and other specialized products and solutions to medium and large-sized businesses and governmental entities. Additionally, the telesales and ecommerce channels enable customers to purchase services and devices via phone and online, respectively.
UScellular has relationships
with exclusive and non-exclusive agents (collectively “agents”), which are independent businesses that obtain customers for UScellular on a commission basis. UScellular’s agents are generally in the business of selling wireless devices, wireless service plans and other related products. UScellular provides support and training to its agents to increase customer satisfaction and to ensure a consistent customer experience.
In order to expand its retail presence, UScellular also maintains relationships with national retailers, primarily selling prepaid devices.
Competition
The wireless telecommunication industry is highly competitive. UScellular competes directly with several wireless service providers in each of its markets. In general, there are between three and four competitors in each wireless market in which UScellular provides service,
excluding resellers and mobile virtual network operators (MVNOs). In its footprint, UScellular competes to varying degrees against each of the national wireless companies: Verizon, AT&T, T-Mobile USA, and an emerging Dish as the fourth national carrier, in addition to smaller regional carriers, cable and other MVNOs in specific areas of its footprint. In addition, UScellular competes with other companies that use alternative communication technology and services to provide similar services and products.
Since each of these competitors operates on systems using spectrum licensed by the FCC and has comparable technology and facilities, competition among wireless service providers for customers is principally on the basis of types of services and products, price, brand, size of area covered, network quality, network speed and responsiveness of customer service. Types of services and products include non–wireless related services
such as content offerings that are bundled with wireless services.
Network
Network Technology. Wireless telecommunication systems transmit voice and data signals over networks of radio towers using radio spectrum licensed by the FCC. Access to local, regional, national and worldwide telecommunications networks is provided through system interconnections. A high-quality network, supported by continued investments in that network, is an important factor for UScellular to remain competitive.
5G technology helps address customers’ growing demand for data services and enhances services, including high-speed fixed wireless home internet services, requiring high speed and reliability as well as low latency. UScellular's low-band and high-band spectrum is currently supporting mobility and fixed wireless services. UScellular
has acquired mid-band spectrum which it will deploy in the future to further enable the delivery of 5G services. UScellular has launched commercial 5G services in portions of substantially all of its markets and will continue to launch in additional areas in the coming years.
UScellular also operates a VoLTE network. VoLTE technology allows customers to utilize a 4G LTE and 5G network for voice and 4G LTE data services which offers enhanced services such as high definition voice and simultaneous voice and data sessions.
Roaming. Inter-carrier roaming agreements are negotiated between wireless operators to enable customers to use wireless services outside of their home service area. UScellular has entered into roaming agreements with a number of wireless companies in order to offer its customers nationwide services, including 4G LTE, VoLTE and 5G, as well as a
variety of international roaming options.
Towers. UScellular owns and leases cell towers to provide service to its customers throughout its footprint. In addition, UScellular receives tower rental revenues when another carrier leases tower space on a UScellular owned tower. As of December 31, 2022, there were 6,945 cell sites in service and UScellular owned 4,336 towers.
TDS Telecom provides communications services to 1.2 million connections in 32 states through its high-quality fiber, coaxial and copper networks. TDS Telecom operates in one reportable segment, and its operating markets are located in a mix of rural and suburban communities throughout the United States.
Operating Strategy and Community Focus
TDS Telecom’s strategic goal is to be the preferred broadband provider in the markets it serves. TDS Telecom invests in high-quality networks, services and products, with the constant focus on delivering a best-in-class customer experience. Through its investments, TDS Telecom intends to grow its broadband services in its incumbent markets and by extending its footprint
into new expansion markets. TDS Telecom will augment that broadband growth by bundling with video, voice and other value-added services.
A key strategic initiative for TDS Telecom is investing in fiber to provide broadband speeds of up to 8 Gigabits per second (Gbps). Fiber builds in strategically selected locations allow TDS Telecom to deliver more robust residential and commercial products in its incumbent markets that have historically utilized copper and coaxial cable technologies and to target growth in attractive, growing markets to increase its total footprint. TDS Telecom continues to scale up its fiber market expansions in Wisconsin and the Pacific Northwest. TDS Telecom may also seek to grow its operations through the acquisition of and/or partnership with businesses that support and complement its existing markets or by creating entirely new clusters of markets in attractive locations.
TDS
Telecom believes that being a good corporate citizen is fundamental to its long-term success. TDS Telecom is committed to growing with its communities and meeting the needs of customers through great products and services, sponsorships, fundraising, and volunteering. TDS Telecom serves its local communities by financially supporting local projects to serve those in need and by providing TDS Telecom associates with paid time off each year to volunteer. TDS Telecom believes serving its local communities through donations and volunteerism aligns with its corporate values and commitments to its customers, associates, and communities.
Technology
TDS Telecom continues to upgrade and enhance its networks by utilizing various technologies to improve levels of performance and provide additional speed and security to increase value for its customers. The TDS network consists of a highly reliable
IP-based broadband network to facilitate the integration of broadband, video and voice services.
In order to provide IP-based services, TDS Telecom has developed and deployed an inter-regional data routing infrastructure using owned and leased fiber capacity which allows it to leverage its 100-gigabit core network. This configuration, along with the continued development of an IP network that interconnects substantially all the existing service territories, provides redundancy and allows for next generation IP service offerings.
TDS Telecom utilizes centralized monitoring and management of its core network to reduce costs and improve service reliability. TDS Telecom continues to standardize equipment and processes to increase efficiency in maintaining its network. Network standardization has aided TDS Telecom in operating its 24-hours-a-day/7-days-per-week Network Management Centers,
which continuously monitor the network to proactively identify, minimize, and correct network faults prior to any customer impact.
Customers, Services and Products
Residential. TDS Telecom residential customer operations provide high-speed broadband, video, and voice services. These services are bundled at competitive prices to encourage cross-selling within the customer base and to attract new customers. Approximately 60% of residential customers have at least two services.
•Broadband: TDS Telecom offers reliable high-speed internet connections and all-home Wi-Fi. Fiber technology is being deployed to select markets to provide internet speeds of up to 8 Gbps. In certain non-fiber markets, TDS Telecom is deploying fiber-to-the-node and copper-based vectoring/pair bonding technology to increase
data speeds reaching up to 100 Mbps. DOCSIS 3.1 technology is utilized across nearly all cable markets and offers speeds of up to 1 Gbps. Premium Wi-Fi security and support services are available to enhance customers’ high-speed internet experience.
•Video: TDS Telecom provides advanced home TV entertainment that includes basic channels and premium programming available in high-definition television combined with a digital video recording (DVR) service. TDS Telecom offers an integrated cloud television platform called TDS TV+ which enhances the customer experience by combining linear and non-linear programming, adding interfaces to mobile devices, personalized content recommendations, and network-based DVR functionality. TDS TV+ offers video content and features not available on existing TDS platforms. In certain markets, TDS Telecom partners with a satellite TV provider to offer digital television.
•Voice:
Call plans include local and long-distance telephone service, Voice over Internet Protocol (VoIP) and enhanced services like Find-Me/Follow-Me, collaboration, instant messaging and more. Many features are bundled with calling plans to give customers the best value. Voice offerings continue to be impacted by the industry-wide decline in access lines and TDS Telecom expects to continue to experience erosion in voice connections due to competition from alternative technologies.
Commercial. TDS Telecom commercial customer operations provide secure and reliable broadband, IP-based services, and hosted voice and video collaboration
services to small- and medium-sized businesses. TDS Telecom's commercial service focus is to lead with broadband bundled with a voice product and video solution.
Wholesale. TDS Telecom’s wholesale operations include carrying data and voice traffic on TDS Telecom's networks from other interexchange carriers. Federal Connect America Fund (CAF), including A-CAM, and state Universal Service Fund (USF) revenues, which support the cost of providing communication services in underserved high- cost areas, are also included in wholesale service revenues.
Marketing, Sales and Distribution Channels and Customer Service
Marketing. TDS Telecom’s marketing plan is focused on acquiring, retaining and growing customer relationships by maintaining a high-quality network, providing outstanding customer service,
and offering a comprehensive portfolio of services and products built around customer needs with a local focus. TDS Telecom uses door-to-door selling, digital marketing, targeted mailings and mass advertising to market services and products. TDS Telecom differentiates itself from competitors using a hyper-localized and community-based sales and marketing effort to maximize broadband penetration.
Sales and Distribution Channels. TDS Telecom operates and uses sales contact centers, direct sales forces, retail stores, sales agents and an online platform to sell services and products.
Customer Service. TDS Telecom manages customer retention by focusing on outstanding customer service through extensive training of front-line sales and support associates.
Competition
TDS
Telecom faces broadband, video, and voice competition from wireline providers, cable providers, fiber overbuilders, VoIP providers, satellite providers, wireless providers and providers using other emerging technologies.
TDS Telecom continues to develop and maintain an efficient cost structure to ensure that it can compete with price-based initiatives from competitors. In addition to price, TDS Telecom competes based on a variety of factors including the reliability of its network, faster broadband speeds, the diversity and range of its product offerings and its exceptional customer service. Finally, TDS Telecom is selecting expansion markets in order to grow in areas where it has determined customers are underserved in terms of these criteria.
TDS’ operations are subject to federal, state and local regulation. Key regulatory considerations are discussed below.
UScellular
The construction, operation and transfer of wireless systems in the United States are regulated to varying degrees by the FCC pursuant to the Communications Act of 1934, as amended (Communications Act). The FCC currently does not require wireless carriers to comply with a number of statutory provisions otherwise applicable to common carriers that provide, originate or terminate interstate or international telecommunications. However, the FCC has enacted regulations governing construction and operation of wireless systems, licensing (including renewal of wireless spectrum licenses) and technical standards for the provision of wireless
services under the Communications Act.
Wireless spectrum licenses segmented by geographic areas are granted by the FCC. The completion of acquisitions, involving the transfer of control of all or a portion of a wireless system, requires prior FCC approval. The FCC determines on a case-by-case basis whether an acquisition of wireless spectrum licenses is in the public interest. Wireless spectrum licenses are granted generally for a ten-year term or, in some cases, for a twelve-year or fifteen-year term. The FCC establishes the standards for conducting comparative renewal proceedings between a wireless license holder seeking renewal of its license and challengers filing competing applications. All of UScellular’s wireless spectrum licenses for which it applied for renewal since 1995 have been renewed. UScellular expects to continue to meet the criteria of the FCC’s license renewal process.
As
part of its data services, UScellular provides internet access. Such internet access services may be subject to different regulatory requirements than other wireless services.
Although the Communications Act generally pre-empts state and local governments from regulating the entry of, or the rates charged by wireless carriers, certain state and local governments regulate other terms and conditions of wireless services, including billing, termination of service arrangements, imposition of early termination fees, advertising, network outages, the use of handsets while driving, zoning, land use, privacy, data security and consumer protection. Further, the Federal Aviation Administration also regulates the siting, lighting and construction of transmitter towers and antennae.
TDS Telecom
The FCC generally exercises jurisdiction over all facilities
of, and services offered by, TDS Telecom’s Incumbent Local Exchange Carriers (ILEC) as telecommunications common carriers, to the extent they provide, originate or terminate interstate or international telecommunications. State public utility commissions generally exercise jurisdiction over intrastate telecommunications facilities and services. In addition, the ILECs are subject to various other state and local laws, including laws relating to privacy, data security and consumer protection.
The Communications Act requires, among other things, that telecommunications common carriers offer interstate services when requested at just and reasonable rates at terms and conditions that are non-discriminatory. Maximum rates for regulated interstate services are prescribed by the FCC. In many states, local rates paid by end user customers and intrastate access charges paid by carriers continue to be subject to state commission approval.
The FCC regulations also cover matters such as technical operations, administrative requirements, consumer protection, access by people with disabilities, customer privacy and content.
TDS Telecom’s Competitive Local Exchange Carriers (CLEC), expansion and cable operations are subject to similar but reduced regulation compared to ILECs.
Providing video services requires TDS Telecom to obtain franchises from state or local governmental authorities to occupy public rights of way with network facilities. These franchises are nonexclusive and typically limited in time, contain various conditions and limitations, and provide for the payment of fees to the local authority, determined generally as a standard percentage of revenues. TDS Telecom expects to continue to meet the criteria of the state or local government authorities' franchise renewal process.
General
Reference
is made to Item 7 of this Form 10-K under “Regulatory Matters” for information regarding any other significant recent developments and proposals relating to regulatory matters.
TDS had approximately 9,300 full-time and part-time associates as of December 31, 2022. The culture at TDS is based upon the fundamental belief that TDS’ long-term success is inextricably tied to associate engagement and high ethical standards.
TDS’ Code of Conduct sets forth expectations for ethical behavior across the enterprise and provides the guiding principles by which all associates must abide in all business activities. TDS provides a competitive wage and benefits package, a safe workplace, and an environment where associates feel engaged and included. TDS regularly surveys its associates - those surveys have consistently shown that associates have strong engagement and high overall job satisfaction.
TDS strives to build a diverse and inclusive workforce, which leads to broader diversity of thoughts, ideas and the innovation needed to move the business forward. TDS wants its associates to feel supported without regard to race, color, religion, national origin, age, genetic information, sex, gender identity or expression, sexual orientation, marital status, disability, protected veteran status, or any other characteristics protected by applicable federal, state
or local law. TDS is committed to demonstrating equity and fairness through the inclusion of diverse associates, customers, and suppliers. Additionally, TDS supports numerous associate resource groups to promote diverse and inclusive experiences that align with TDS’ vision and values, increase associate engagement and empowerment, and support professional development.
Since its founding, TDS has been committed to associate development, which is critical to its success. TDS provides job specific, diversity and inclusion, safety, and fraud awareness training for all associates – and also offers programs to further develop its associates including educational assistance, developmental assignments, and mentoring programs.
TDS is committed to supporting and enhancing the communities it serves through local and philanthropic initiatives that enrich the lives of those living where it operates
and where its associates live, work and play. TDS encourages associates to volunteer and support local organizations and community groups. Local communities are at the center of TDS’ businesses, and it takes great pride in giving back to the people and places that contribute to its sustainability and long-term success.
TDS — OTHER ITEMS
Company Information
TDS’ website address is www.tdsinc.com. TDS files with, or furnishes to, the Securities and Exchange Commission (SEC) annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, as well as various other information. Investors may access, free of charge, through the Investor Relations portion of the website, TDS' annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), as soon as reasonably practical after such material is filed electronically with the SEC. The public may also view electronic filings of TDS by accessing SEC filings at www.sec.gov.
UScellular’s website address is www.uscellular.com.
UScellular files with, or furnishes to, the SEC annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, as well as various other information. Investors may access, free of charge, through the Investor Relations portion of the website, UScellular’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practical after such material is filed electronically with the SEC. The public may also view electronic filings of UScellular by accessing SEC filings at www.sec.gov.
This Annual Report on Form 10-K, 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 those set forth below under “Risk Factors” in this Form 10-K. 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. The reader should carefully consider the following risk factors and other information contained in, or incorporated by reference into, this Form 10-K to understand the material risks relating to TDS’ business.
Operational Risk Factors
1)Intense competition involving products, services, pricing, promotions and network speed and technologies could adversely affect TDS’ revenues or increase its costs to compete.
Competition in the wireless industry is intense and is expected to remain intense in the future due to multiple factors such as increasing market penetration, introduction
of new products, new competitors, increasing promotional aggressiveness and changing prices. There is competition in service plan pricing; handsets and other devices; promotional discounts; network quality, coverage, speed and technologies, including 5G technology; distribution; new entrants; bundled services and products, such as content; and other categories. In particular, wireless competition includes aggressive service plan and device pricing, including pricing for unlimited plans, which could result in switching activity and churn and limit TDS’ ability to monetize future growth in data usage. In addition, competition based on network speed may increase as customer demand for higher speeds increases. TDS anticipates that these competitive factors may continue to result in losses of retail connections, and may cause the prices for services and products to decline and the costs to compete to increase.
TDS’ primary wireless
competitors are national or global telecommunications and cable companies that are larger than TDS, possess greater financial and other resources, possess more extensive coverage areas and more spectrum within their coverage areas, and market other services with their communications services that TDS does not offer. TDS and its competitors are actively marketing their deployment of 5G and, as a result, are raising consumer awareness of the technology. If TDS cannot keep pace with its competitors in deploying 5G or other comparable offerings, or if TDS' deployment of 5G technology does not result in significant incremental revenues, TDS' financial condition, results of operations or ability to do business could continue to be adversely affected. In addition, new technologies, services and products that are more commercially effective than the technologies, services and products offered by TDS may be developed and create new sources of competition. Further, new technologies
may be proprietary such that TDS is not able to adopt such technologies. There can be no assurance that TDS will be able to compete successfully in this environment.
Sources of competition to TDS’ wireless business typically include three to four competing wireless telecommunications service providers in each market, wireline telecommunications service providers, cable companies, resellers (including MVNOs), and providers of alternative telecommunications services. Competition from cable companies has increased in recent periods, as they have continued to expand their presence in the wireless industry and have offered more competitive pricing. Many of TDS’ wireless competitors and other competitors have substantially greater financial, technical, marketing, sales, purchasing and distribution resources than TDS.
Competition in the wireline industry is intensified with the increasing
deployment of broadband technologies and enhanced video services. Incumbent carriers are upgrading existing networks with higher speed broadband services and overbuilders are deploying broadband to compete with legacy incumbent carriers. Overbuilding activity is increasing with investments by venture capital and private equity and with additional access to state and federal funding. Sources of competition to TDS’ wireline and cable businesses include, but are not limited to, resellers of local exchange services, interexchange carriers, incumbent carriers, satellite broadband providers, wireless communications providers, other cable companies, access providers, fiber overbuilders, VoIP providers and providers using other emerging technologies. Customers may choose to substitute their wireline services using satellite, wireless and other technologies, which may be preferred to technologies offered by TDS. Customers may demand the bundling of wireline and wireless services.
If TDS cannot keep pace with its competition in deploying higher speed technologies, offering competitive products and services at competitive prices and providing attractive video content options, TDS' financial condition, results of operations or ability to do business could be adversely affected.
2)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.
TDS’ revenues include roaming revenues related to the use of TDS’ network by other wireless carriers’ customers who travel within TDS’ coverage areas. Changes in FCC rules or actions, industry practices or the network footprints of carriers due to mergers, acquisitions or network expansions could have an adverse effect on TDS’ roaming revenues. For example, consolidation among other carriers which have network footprints that currently overlap TDS’ network, the expansion of other carriers' network coverage in TDS' footprint, and/or lower roaming rates with other carriers are expected to continue to decrease future roaming revenues for TDS.
Similarly, TDS’ wireless customers can access another carrier’s network automatically only if the other carrier allows TDS’ customers to roam on its network. TDS relies on roaming agreements with other
carriers to provide roaming capability to its customers and expand its product offerings in areas of the U.S. and internationally outside of its service areas and to improve coverage within selected areas of TDS’ network footprint. Although TDS has entered into roaming agreements with national carriers, there is no assurance that TDS will be able to maintain these agreements and/or enter into new agreements with other carriers to provide roaming services or that it will be able to do so on reasonable or cost-effective terms.
Some competitors may be able to obtain lower roaming rates than TDS is able to obtain because they have larger data usage or call volumes or may be able to reduce roaming charges by providing service principally over their own networks. In addition, the quality and availability of services that a wireless carrier delivers to a TDS customer while roaming may be inferior or limited in comparison to the service
TDS provides. TDS’ rate of adoption of new technologies, such as those enabling high-speed data and voice services, could affect its ability to enter into or maintain roaming agreements with other carriers. In addition, TDS’ wireless technology may not be compatible with technologies used by other carriers, which may limit the ability of TDS to enter into voice or data roaming agreements with such other carriers. Carriers whose customers roam on TDS’ network could switch their business to new operators, limit their high-speed usage or, over time, move traffic to their own networks. Changes in roaming usage patterns, rates for roaming usage, or roaming relationships with other carriers could continue to have an adverse effect on TDS’ roaming revenues and/or expenses.
To the extent that other carriers expand their networks in TDS’ service areas, the roaming arrangements between TDS and these other carriers could become less strategic
for them. That is, these other carriers will have fewer or less extensive geographic areas where roaming services are required by their customers and, as a result, the roaming arrangements could become less critical to serving their customer base. This presents a risk to TDS in that, to the extent TDS is not able to enter into economically viable roaming arrangements with these other carriers, this could impact TDS’ ability to service its customers in geographic areas where TDS does not have its own network.
3)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.
TDS’ wireless business depends on the ability to use portions of the radio spectrum licensed by
the FCC. TDS could fail to obtain access to sufficient spectrum capacity, including spectrum needed to support 5G technology, in new or existing markets, whether through FCC auctions or other transactions, in order to meet the anticipated spectrum requirements associated with increased demand for existing services, especially increases in customer demand for data services and network speed, and to enable deployment of next-generation services. TDS believes that this increased demand for data services and network speed reflects a trend that will continue for the foreseeable future. Data usage, including usage under unlimited plans, could exceed current forecasts resulting in a need for increased investment in spectrum or other network components. TDS could fail to accurately forecast its future spectrum requirements considering changes in plan offerings, customer usage patterns, technology requirements and the expanded demands of new services. Such a failure could have
an adverse impact on the quality of TDS’ services or TDS’ ability to roll out such future services in some markets, could require that TDS curtail existing services in order to make spectrum available for next-generation services, or TDS could be effectively capped in increasing market share. As spectrum constrained providers gain customers, they use up their network capacity. Since they lack spectrum, they can respond to demand only by adding cell sites, which is capital intensive, adds fixed operating costs, is limited by zoning considerations, and ultimately may not be cost effective. Further, a spectrum constrained provider will generally not be able to achieve the data speeds that other competitors with more spectrum are able to provide.
TDS may acquire access to spectrum through a number of alternatives, including acquisitions, exchanges and participation in spectrum auctions. TDS may participate in spectrum auctions conducted
by the FCC in the future. As required by law, the FCC has conducted auctions for wireless spectrum licenses to use some parts of the radio spectrum. The decision to conduct auctions, and the determination of what spectrum frequencies will be made available for auction and the determination of geographic size of wireless spectrum licenses, are made by the FCC pursuant to laws that it administers. The FCC may not be able to allocate spectrum sufficient to meet the demands of all those wishing to obtain wireless spectrum licenses for new market entry or to expand their spectrum holdings to meet the expanding demand for data services or to address other spectrum constraints. Due to factors such as geographic size of wireless spectrum licenses and auction bidders that may raise prices beyond acceptable levels, TDS may not be successful in FCC auctions in obtaining access to the spectrum that it believes is necessary to implement its business and technology strategies.
Access to wireless spectrum licenses won in FCC auctions may not be available on a timely basis. Such access is dependent upon the FCC actually granting wireless spectrum licenses won, which can be rescinded or delayed for various reasons, including but not limited to exceeding spectrum ownership and attribution limits, and safety concerns due to interference with other spectrum bands. Furthermore, newly licensed spectrum may not be available for immediate use since the radio operations of incumbent users, including in some cases government agencies, may need to be relocated to other portions of the radio spectrum, and/or the newly licensed spectrum may be subject to sharing and coordination obligations. TDS also may seek to acquire radio spectrum through purchases and exchanges with other spectrum licensees. However, TDS may not be able to acquire sufficient spectrum through these types of transactions,
and TDS may not be able to complete any of these transactions on favorable terms.
4)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’ businesses are highly technical and competition for skilled talent in the telecommunications industry is intense. Due to competition, limited supply, and/or rising wage levels for qualified management, technical, sales and other personnel, there can be no assurance that TDS will be able to continue to attract and/or retain people of outstanding potential for the development of its business. In addition, a remote or hybrid working model and
applicability of health protocols could negatively affect talent acquisition and retention. The loss of existing key personnel due to competition, wage levels and/or retirements, the failure to recruit highly skilled and diverse personnel in a timely and cost-effective manner, the inability to foster and maintain a diverse and inclusive work environment, or failure to maintain its commitment to environmental and social responsibility could have an adverse effect on TDS’ business, financial condition or results of operations.
The market for highly skilled leaders in the telecommunications industry also is extremely competitive. The future success of TDS and its businesses depends in substantial part on TDS’ ability to recruit, hire, motivate, develop, and retain talented and highly skilled leaders for all areas of its organization. The loss of any of TDS’ key leaders could have an adverse effect on its business, financial condition
or results of operations. Effective succession planning is also important to TDS’ long-term success. Failure to ensure effective transfer of knowledge and smooth transition involving key employees could also adversely affect TDS’ business, financial condition and results of operations.
5)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.
There has been a trend in the telecommunications and related industries towards consolidation of service providers through acquisitions, reorganizations and joint ventures. This trend could continue, leading to larger competitors over time. TDS has smaller scale efficiencies compared to larger competitors. TDS may be unable
to compete successfully with larger companies that have substantially greater financial, technical, marketing, sales, purchasing and distribution resources or that offer more services than TDS, which could adversely affect TDS’ revenues and costs of doing business. Specifically, TDS’ smaller scale relative to most of its competitors could have the following impacts, among others:
▪Low profit margins and returns on investment that are below TDS’ cost of capital;
▪Increased operating costs due to lack of leverage with vendors;
▪Inability to timely and successfully deploy 5G or other wireless technologies, execute on fiber expansion plans, or to realize significant incremental revenues from their deployment;
▪Limited
opportunities for strategic partnerships as potential partners are focused on wireless, wireline and cable companies with greater scale and scope;
▪Limited access to content, as well as limited ability to obtain acceptably priced content and programming;
▪Limited access to devices as larger competitors enter into exclusive device arrangements;
▪Consumer expectations that TDS provides lower-priced wireless offerings relative to larger competitors;
▪Limited ability to influence industry standards;
▪Reduced ability to invest in research and development of new services and products;
▪Lower
risk tolerance when evaluating new markets;
▪Vendors may deem TDS non-strategic and not develop or sell services and products to TDS, particularly where technical requirements differ from those of larger companies;
▪Limited access to intellectual property; and
▪Other limited opportunities such as for software development or third-party distribution.
TDS’ businesses depend on access to content for data and access to new wireless devices being developed by vendors. TDS’ ability to obtain such access depends in part on other parties. If TDS is unable to obtain timely access to new content or wireless devices being developed by vendors, its business, financial condition or results of operations could be adversely
affected.
6)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.
Changes in any of several factors could have an adverse effect on TDS’ business, financial condition or results of operations. These factors include, but are not limited to:
▪Demand for or usage of services, particularly data services;
▪Consumer
preferences, including internet speed and type of wireless devices;
▪Consumer perceptions of network quality and performance;
▪Consumer expectations for self-service options through digital means;
▪Competitive pressure to deliver higher speed;
▪Competitive pressure from promotional activity;
▪The pricing of services, including an increase in price-based competition;
▪Inflationary pressures on costs without corresponding price increases for TDS' services;
▪Access
to and cost of programming;
▪The overall size and growth rate of TDS’ customer base;
▪Penetration rates;
▪Churn rates;
▪Selling expenses;
▪Net customer acquisition and retention costs;
▪Customers’ ability to pay for services and the potential impact on bad debts expense;
▪Roaming agreements and rates;
▪Third-party vendor support;
▪Capacity
constraints;
▪The mix of services and products offered by TDS and purchased by customers; and
▪The costs of providing services and products.
7)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.
The telecommunications industry is experiencing significant changes in technologies and services expected by customers, as evidenced by evolving industry standards, ongoing improvements in the capacity and quality of digital technology, shorter development cycles for new services and products, and enhancements and changes in end-user requirements and preferences. Also,
high-speed wireless networks (wireless broadband) represent a product offering and opportunity for TDS’ wireless business, but also represent a risk for TDS’ wireline and cable businesses as customers may elect to substitute their wireline or cable broadband connection with wireless broadband. Further, fixed-mobile convergence services that combine wireline broadband services with mobile services represent a competitive threat. If the trend toward convergence continues, TDS is at a competitive disadvantage to larger competitors, including cable companies, the national wireless carriers and other potential large new entrants with much greater financial and other resources in adapting to such convergence. Future technological changes or advancements may enable other technologies to equal or exceed TDS’ current levels of service and render its system infrastructure obsolete. TDS may not be able to respond to such changes and implement new technology on a timely or cost-effective
basis, which could reduce its revenues or increase its costs of doing business.
8)Complexities associated with deploying new technologies present substantial risk and TDS’ investments in unproven technologies may not produce the benefits that TDS expects.
TDS' wireless business is deploying 5G technology in its network and has launched commercial 5G services in portions of substantially all of its markets. The continued deployment of 5G technology will require substantial additional investments in TDS' wireless networks to remain competitive in the industry. Transition to 5G or other new technologies involves significant time, cost and risk, and anticipated products and revenues may not be realized. Furthermore, the wireless business experiences rapid technology changes and new services and products. If TDS fails to effectively deploy new wireless technologies,
services or products on a timely basis, this could have an adverse impact on TDS’ business, financial condition and results of operations.
Furthermore, it is not certain that TDS’ investments in various new, unproven technologies and the related service and product offerings will be effective. The markets for some of these services, products and solutions may still be emerging and the overall potential for these markets, including revenues to be realized, may be uncertain. If customer demand for these new services, products and solutions does not develop as expected, TDS’ business, financial condition or results of operations could be adversely affected.
9)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.
As part of TDS’ operating strategy, TDS from time to time may be engaged in the acquisition, divestiture or exchange of companies, businesses, strategic properties, wireless spectrum or other assets. TDS may change the markets in which it operates and the services that it provides through such acquisitions, divestitures and/or exchanges. In general, TDS may not disclose the negotiation of such transactions until a definitive agreement has been reached. These transactions commonly involve a number of risks, including:
▪Identification of attractive companies, businesses, properties, spectrum or other assets for acquisition or exchange, and/or the selection of TDS’ businesses or assets for divestiture or exchange;
▪Competition
for acquisition targets and the ability to acquire or exchange businesses at reasonable prices;
▪Inability to make acquisitions that would achieve sufficient scale to be competitive with competitors with greater scale;
▪Possible lack of buyers for businesses or assets that TDS desires to divest and the ability to divest or exchange such businesses or assets at reasonable prices;
▪Ability to negotiate favorable terms and conditions for acquisitions, divestitures and exchanges;
▪Significant expenditures associated with acquisitions, divestitures and exchanges;
▪Risks associated with integrating new businesses
or markets, including risks relating to cybersecurity and privacy;
▪Ability to enter markets in which TDS has limited or no direct prior experience and competitors have stronger positions;
▪Ability to integrate and manage TDS’ different business operations and services, including wireless services, traditional wireline services and cable businesses;
▪Uncertain revenues and expenses associated with acquisitions or the entry into new expansion markets, with the result that
TDS may not realize the growth in revenues, anticipated cost structure, profitability, or return on investment that it expects;
▪Difficulty of integrating the technologies, services, products, operations and personnel of the acquired businesses, or of separating such matters for divested businesses or assets;
▪Diversion of management’s attention;
▪Disruption of ongoing business;
▪Impact on TDS’ cash and available credit lines for use in financing future growth and working capital needs;
▪Inability to retain key personnel;
▪Inability
to successfully incorporate acquired assets and rights into TDS’ service offerings;
▪Inability to maintain uniform standards, controls, procedures and policies;
▪Possible conditions to approval by the FCC, the Federal Trade Commission and/or the Department of Justice; and
▪Impairment of relationships with employees, customers or vendors.
No assurance can be given that TDS will be successful with respect to its acquisition, divestiture or exchange strategies or initiatives.
10)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.
TDS’ business plan includes significant construction activities and enhancements to its network, support and other systems and infrastructure. Additionally, the deployment of new wireless technologies, including 5G, will require substantial investments in TDS' wireless network. As TDS deploys, expands and enhances its wireless network, it may need to acquire additional spectrum. Also, as TDS continues to build out and enhance its network, TDS must, among other things, continue to:
▪Lease, acquire or otherwise obtain rights to cell and switch sites, transport facilities or other facilities;
▪Obtain zoning variances or other local governmental or third-party approvals
or permits for network construction;
▪Complete and update the radio frequency design, including cell site design, frequency planning and network optimization, for each of TDS’ wireless markets; and
▪Improve, expand and maintain customer care, network management, billing and other financial and management systems.
Any difficulties encountered in completing these activities, as well as problems in vendor equipment availability, labor availability, inflation or other pressures on costs, technical resources, system performance or system adequacy, could delay implementation and deployment of new technologies, delay expansion of operations and product capabilities in new or existing markets or result in increased costs. Failure to successfully deploy new technologies, including 5G, and/or
build-out and enhance TDS’ network, support facilities and other systems and infrastructure in a cost-effective manner, and in a manner that satisfies consumers' expectations for quality and coverage, could have an adverse effect on TDS’ business, business prospects, financial condition or results of operations.
TDS’ wireline and cable businesses are devoting an increasing amount of capital for fiber overbuilds and expansion into new markets. TDS is often reliant on third parties for items such as construction, franchises, utility locates and easements, aerial attachments and other permits. Difficulties in gaining acceptance from new market communities or with third party performance could cause delays or additional costs. Any difficulties in supply chain constraints or labor shortages, as well as scaling up project management, engineering and construction resources could delay construction and expansion of operations in new
or existing markets or result in increased costs. Failure to complete its implementation activities or successfully scale up resources could have an adverse effect on TDS’ business, business prospects, financial condition or results of operations.
11)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.
TDS has relationships with independent agents and third-party national retailers who market TDS’ services.
TDS depends upon certain vendors to provide it with equipment, services and content that meet
its quality and cost requirements on a timely basis to continue its network construction and upgrades, and to operate its business. TDS depends upon certain vendors to provide it with wireless devices that meet its quality and cost requirements on a timely basis to support sales. TDS does not have operational or financial control over such key suppliers and has limited influence with respect to the manner in which these key suppliers conduct their businesses. Further, key suppliers may experience supply chain challenges beyond their control that result in difficulties providing the services and products typically requested by TDS on a timely basis. If these key suppliers (i) experience product availability shortages, (ii) require extended lead times to fulfill orders, (iii) experience financial difficulties or file for bankruptcy or experience other operational difficulties or (iv) deem TDS non-strategic and not develop or sell services and products to TDS, particularly
where technical requirements differ from those of larger companies, they may not provide equipment, services or content to TDS on a timely basis, or at all, or they may otherwise fail to honor their obligations to TDS. Furthermore, consolidation among key suppliers may result in less competition, higher prices, the discontinuation of equipment and/or services typically purchased by TDS or the discontinuation of support for equipment owned by TDS.
Operation of TDS’ supply chain and management of its device inventory and network equipment, including customer premise equipment, require accurate forecasting of customer growth and demand. If overall demand
for devices and network equipment or the mix of demand for devices and network equipment is significantly different than TDS’ expectations, TDS could face inadequate or excess supplies of particular models of devices and network equipment. This could result in lost sales opportunities or an excess supply of device inventory or network equipment. If network equipment is not available or requires extended lead times due to supply chain challenges, or if overall demand for services or the mix of demand for services is significantly different than TDS' expectations, TDS may not be able to adequately maintain a network that supports customer demand. Further, TDS' supply chain could be disrupted unexpectedly by raw material shortages, wars, natural disasters, disease or other factors. Supply chain disruptions may result in limited component availability, constraints on certain devices and network equipment, extended lead times, delayed construction and additional uncertainty.
Also,
TDS has other arrangements with third parties, including arrangements pursuant to which TDS outsources certain support functions to third-party vendors. Operational problems associated with such functions, including any failure by the vendor to provide the required level of service under the outsourcing arrangements, including possible cyber-attacks or other breaches of network or information technology security, data protection or privacy, could have adverse effects on TDS’ business, financial condition or results of operations.
12)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.
TDS relies extensively on its telecommunication networks and information technologies to operate
and manage its businesses, process transactions and summarize and report results. These networks and technologies are subject to obsolescence and, consequently, must be upgraded, replaced and/or otherwise enhanced over time. Enhancements must be more flexible and dependable than ever before. All of this is capital intensive and challenging.
The increased provision of data services, including IPTV, has introduced significant demands on TDS’ network and also has increased complexities related to network management. As it relates to wireline networks, the transition to IP-based networks from well-established time-division multiplexing networks requires support tools and technician skills. Further, this transition requires the use of more leased facilities and partnerships which require enhanced network monitoring and controls. The IP-based networks also generally require more electronics on customers’ premises which introduces
more technical risks and makes diagnostics and repairs more difficult.
Further, the increased provision of data services on TDS’ networks has created an increased level of risk related to quality of service and data speeds. This is due to the fact that many customers increasingly rely on data communications to execute and validate transactions. As a result, redundancy and geographical diversity of TDS’ network facilities are critical to providing uninterrupted service. Also, the speed of repair and maintenance procedures in the event of network interruptions is critical to maintaining customer satisfaction. TDS’ ability to maintain high-quality, uninterrupted service to its customers is critical, particularly given the increasingly competitive environment and customers’ ability to choose other service providers.
In addition, TDS’ networks and information technologies and the networks
and information technologies of vendors on which TDS relies are subject to damage or interruption due to various events, including power outages, computer, network and telecommunications failures, computer viruses, security breaches, hackers and other cyber security risks, catastrophic events, natural disasters, severe weather, adverse climate changes, errors or unauthorized actions by employees and vendors, flawed conversion of systems, disruptive technologies and technology changes.
Financial Risk Factors
13)Uncertainty in TDS’ future cash flow and liquidity or the inability to access capital, deterioration in the capital markets, changes in interest rates, other changes in TDS’ performance or market conditions, changes in TDS’ credit ratings or other factors could limit or restrict the availability of financing on terms and prices acceptable to TDS, which
could require TDS to reduce its construction, development or acquisition programs, reduce the amount of wireless spectrum licenses acquired, and/or reduce or cease share repurchases and/or the payment of dividends.
TDS and its subsidiaries operate capital-intensive businesses. Historically, TDS has used internally-generated funds and also has obtained substantial funds from external sources for general corporate purposes. In the past, TDS’ existing cash and investment balances, funds available under its financing agreements, 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 normal day-to-day operating needs and debt service requirements, to finance the build-out and enhancement of markets and
to fund acquisitions. There is no assurance that this will be the case in the future. It may be necessary from time to time to increase the amount of permissible borrowings under its financing agreements, to put in place new credit agreements, or to obtain other forms of financing in order to fund potential expenditures. TDS’ liquidity would be adversely affected if, among other things, TDS is unable to obtain short or long-term financing on acceptable terms, interest rates increase, TDS makes significant spectrum license purchases, TDS makes significant capital investments, TDS makes significant business acquisitions, the Los Angeles SMSA Limited Partnership (LA Partnership) discontinues or significantly reduces distributions compared to historical levels, or Federal USF and/or other regulatory support payments decline.
TDS’ credit rating currently is sub-investment grade. TDS has incurred negative free cash flow (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) at times in the past and this could occur in the future. TDS may require substantial additional capital for, among other uses, funding day-to-day operating needs including working capital, acquisitions of providers of cable, wireless or wireline telecommunications services, or other businesses, spectrum license or system acquisitions, capital expenditures, debt service requirements, the repurchase of shares, the payment of dividends, or making additional investments. There can be no assurance that sufficient funds will continue to be available to TDS or its subsidiaries
on terms or at prices acceptable to TDS. Insufficient cash flows from operating activities, changes in TDS' credit ratings, defaults of the terms of debt or credit agreements, uncertainty of access to capital, deterioration in the capital markets, reduced regulatory capital at banks which in turn limits their ability to borrow and lend, other changes in the performance of TDS or in market conditions or other factors could limit or restrict the availability of financing on terms and prices acceptable to TDS, which could require TDS to reduce its acquisition, capital expenditure and business development programs, reduce the acquisition of wireless spectrum licenses, reduce or cease share repurchases and/or the payment of dividends. TDS cannot provide assurance that circumstances that could have a material adverse effect on its liquidity or capital resources will not occur.
14)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 a significant amount of indebtedness and may need to incur additional indebtedness. TDS’ level of indebtedness could have important consequences. For example, it (i) may limit TDS’ ability to obtain additional financing for working capital, capital expenditures or general corporate purposes, particularly if the ratings assigned to its debt securities by rating organizations are revised downward; (ii) will require TDS to dedicate a substantial portion of its cash flow from operations to the payment of interest and principal on its debt, thereby reducing the funds available to TDS for other purposes including expansion through acquisitions, capital expenditures, acquisition of wireless spectrum licenses, payment
of dividends, marketing spending and expansion of its business; and (iii) may limit TDS’ flexibility to adjust to changing business and market conditions and make TDS more vulnerable to a downturn in general economic conditions as compared to TDS’ competitors. TDS’ ability to make scheduled payments on its indebtedness or to refinance it will depend on its financial and operating performance which, in turn, is subject to prevailing economic and competitive conditions and other factors beyond its control. A substantial portion of TDS' debt is subject to variable interest rates, which has increased interest expense in recent periods and TDS will continue to be vulnerable to unfavorable changes in market interest rates.
The TDS and UScellular revolving credit agreements, the TDS and UScellular term loan agreements, the TDS and UScellular export credit financing agreements and the UScellular receivables securitization agreement
require TDS or UScellular, as applicable, to comply with certain affirmative and negative covenants, including certain financial covenants. Depending on the actual financial performance of TDS and UScellular, there is a risk that TDS and/or UScellular could fail to satisfy the required financial covenants. This risk has increased with TDS' recent financial and operating performance. If TDS or UScellular breach a financial or other covenant of any of these agreements, it would result in a default under that agreement, and could involve a cross-default under other debt instruments. This could in turn cause the affected lenders to accelerate the repayment of principal and accrued interest on any outstanding debt under such agreements and, if they choose, terminate the agreement. If appropriate, TDS and UScellular may request an amendment to one or more credit agreements to adjust financial covenants in order to provide additional financial flexibility to TDS and UScellular,
and may also seek other changes to such agreements. There is no assurance that the lenders will agree to any amendments. If the lenders agree to amendments, this may result in additional payments or higher interest rates payable to the lenders and/or additional restrictions. Restrictions in such debt instruments may limit TDS’ operating and financial flexibility.
As a result, TDS’ level of indebtedness, restrictions contained in debt instruments and/or possible breaches of covenants, defaults, and acceleration of indebtedness could have an adverse effect on TDS’ business, financial condition, revenues, results of operations and cash flows.
15)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.
The
U.S. telecommunications industry is facing significant change and an uncertain operating environment. TDS’ focus on the U.S. telecommunications industry, together with its positioning relative to larger competitors with greater resources within the industry, may represent increased risk for investors due to the lack of diversification. This could have an adverse effect on TDS’ ability to attain and sustain long-term, profitable revenue growth and could have an adverse effect on its business, financial condition or results of operations.
16)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.
TDS has significant investments in entities that it does not control, including equity investments and interests in certain variable
interest entities. TDS’ interests in such entities do not provide TDS with control over the business strategy, financial goals, network build-out plans or other operational aspects of these entities. TDS cannot provide assurance that these entities will operate in a manner that will increase or maintain the value of TDS’ investments, that TDS’ proportionate share of income from these investments will continue at the current level in the future or that TDS will not incur losses from the holding of such investments. Losses in the values of such investments or a reduction in income from these investments could adversely affect TDS’ financial condition or results of operations. In addition, certain investments have historically contributed significant cash flows to TDS and a reduction or suspension of such cash flows could adversely affect TDS’ financial condition.
17)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’ operations are subject to varying degrees of regulation by the FCC, state public utility commissions and other federal, state and local regulatory agencies and legislative bodies. Changes in the administration of the various regulatory agencies and legislative bodies could result in different policies with respect to many federal laws and regulations, including but not limited to changes to fiscal and tax policies, trade policies, tariffs on import goods and climate change. New or amended regulatory requirements could increase
TDS’ costs and divert resources from other initiatives. Adverse decisions, increased regulation, or changes to existing regulation by regulatory bodies could negatively impact TDS’ operations by, among other things, restricting energy consumption or access to grid electricity, permitting greater competition or limiting TDS’ ability to engage in certain sales or marketing activities, or retention and recruitment of skilled resources. New regulatory mandates or enforcement may require unexpected or increased capital expenditures, lost revenues, higher operating expenses or other changes. Court decisions and rulemakings could have a substantial impact on TDS’ operations, including rulemakings on broadband access to the internet, intercarrier access compensation, state and federal support funding, and treatment of VoIP traffic or unbundled network elements. Litigation and different objectives among federal and state regulators could create uncertainty and delay TDS’ ability
to respond to new regulations. Further, wireless spectrum licenses and cable franchise rights are subject to renewal by a granting authority and could be revoked in the event of a violation of applicable laws or regulatory requirements. Also, although FCC rules relating to net neutrality have been repealed, the FCC, and federal and state legislators may seek to reinstate net neutrality in some form and some state legislators and regulators are seeking to or have already enacted state net neutrality laws and regulations. Interpretation and application of these rules, including conflicts between federal and state laws, may result in additional costs for compliance and may limit opportunities to derive profits from certain business practices or resources.
TDS attempts to timely and fully comply with all regulatory requirements. However, TDS is unable to predict the future actions of the various legislative and regulatory bodies
that govern TDS, and such actions could have adverse effects on TDS’ business.
18)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.
Telecommunications companies may be designated by states, or in some cases by the FCC, as an Eligible Telecommunications Carrier (ETC) to receive universal service support payments if they provide specified services in “high-cost” areas. UScellular has been designated as an ETC in certain states and received $92 million in high-cost support for service to high-cost areas
in 2022. While there is uncertainty, UScellular expects that regulatory support payments will likely decline in future periods, and there is no assurance that UScellular will qualify for future regulatory support programs. TDS Telecom also received support under the Connect America Fund support program. The A-CAM program has build-out requirements that if not met, would result in penalties and loss of support. In 2022, TDS Telecom received $111 million under all federal regulatory support programs. There is no assurance that regulatory support payments will continue for TDS Telecom, and no assurance that TDS Telecom will qualify for future regulatory support programs. If regulatory support is discontinued or reduced from current levels, or if receipt of future regulatory support is contingent upon making certain network-related expenditures, this could have an adverse effect on TDS’ business, financial condition or operating results.
Telecommunications
providers pay a variety of surcharges and fees on their gross revenues from interstate and intrastate services, including USF fees and common carrier regulatory fees. The division of services between interstate services and intrastate services, including the divisions associated with Federal USF fees, is a matter of interpretation and in the future may be contested by the FCC or state authorities. The FCC in the future also may change the basis on which Federal USF fees are charged. The Federal government and many states also apply transaction-based taxes to sales of telecommunications services and products and to purchases of telecommunications services from various carriers. In addition, state regulators and local governments have imposed and may continue to impose various surcharges, taxes and fees on telecommunications services. The applicability of these surcharges and fees to TDS’ services is uncertain in many cases and jurisdictions may contest whether TDS has
assessed and remitted those monies correctly. Periodically, state and federal regulators may increase or change the surcharges and fees TDS currently pays. In some instances, TDS passes through these charges to its customers. However, Congress, the FCC, state regulatory agencies or state legislatures may limit the ability to pass through transaction-based tax liabilities, regulatory surcharges and regulatory fees imposed on TDS to customers. TDS may or may not be able to recover some or all of those taxes from its customers and the amount of taxes may deter demand for its services or increase its cost to provide service.
19)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.
TDS
is regularly involved in a number of legal and policy proceedings before the FCC and various state and federal courts. Such legal and policy proceedings can be complex, costly, protracted and highly disruptive to business operations by diverting the attention and energies of management and other key personnel.
The assessment of legal and policy proceedings is a highly subjective process that requires judgments about future events. Additionally, amounts ultimately received or paid upon settlement or resolution of litigation and other contingencies may differ materially from amounts accrued in the financial statements. Depending on a range of factors, these or similar proceedings could impose restraints on TDS’ current or future manner of doing business.
20)The possible development of adverse precedent in litigation or conclusions in professional studies to the effect that radio frequency emissions from wireless devices and/or cell sites cause harmful health consequences, including cancer or tumors, or may interfere with various electronic medical devices or frequencies used by other industries, could have an adverse effect on TDS’ wireless business, financial condition or results of operations.
Media reports and certain professional studies have suggested that certain radio frequency emissions from wireless devices may be linked to various health problems, including cancer or tumors, and may interfere with various electronic medical devices, including hearing aids and pacemakers. There may also be safety concerns related to frequencies used by wireless devices interfering with frequencies
used by other industries, including but not limited to, the concerns of the Federal Aviation Administration regarding potential interference of 5G deployment with altimeters used by aircraft, which could impact deployment of certain wireless spectrum. TDS is a party to and may in the future be a party to lawsuits against wireless carriers and other parties claiming damages for alleged health effects, including cancer or tumors, arising from wireless phones or radio frequency transmitters. Concerns over radio frequency emissions may discourage use of wireless devices or expose TDS to potential litigation. In addition, the FCC or other regulatory authorities may adopt regulations in response to concerns about radio frequency emissions. Any resulting decrease in demand for wireless services, costs of litigation and damage awards or regulation could have an adverse effect on TDS’ business, financial condition or results of operations.
In
addition, some studies have indicated that some aspects of using a wireless device while driving may impair a driver's attention in certain circumstances, making accidents more likely. These concerns could lead to potential litigation relating to accidents, deaths or serious bodily injuries.
21)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.
TDS faces possible effects of industry litigation relating to patents, other intellectual property or otherwise, that may restrict TDS’ access to devices or network equipment critical
to providing services to customers. If technology that TDS uses in products or services were determined by a court to infringe a patent or other intellectual property right held by another person, TDS could be precluded from using that technology and could be required to pay significant monetary damages. TDS also may be required to pay significant royalties to such person to continue to use such technology in the future. The successful enforcement of any intellectual property rights, or TDS’ inability to negotiate a license for such rights on acceptable terms, could force TDS to cease using the relevant technology and offering services incorporating the technology. Any litigation to determine the validity of claims that TDS’ products or services infringe or may infringe intellectual property rights of another, regardless of their merit or resolution, could be costly and divert the effort and attention of TDS’ management and technical personnel. Regardless of the merits
of any specific claim, TDS cannot give assurance that it would prevail in litigation because of the complex technical issues and inherent uncertainties in intellectual property litigation. Although TDS generally seeks to obtain indemnification agreements from vendors that provide it with technology, there can be no assurance that any claim of infringement will be covered by an indemnity or that TDS will be able to recover all or any of its losses and costs under any available indemnity agreements. Any claims of infringement of intellectual property and proprietary rights of others could prevent TDS from using necessary technology to provide its services or subject TDS to expensive intellectual property litigation or monetary penalties.
22)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.
The TDS Restated Certificate of Incorporation and the TDS bylaws contain provisions which may serve to discourage or make more difficult a change in control of TDS without the support of the TDS Voting Trust and the TDS Board of Directors or without meeting various other conditions.
The TDS Restated Certificate of Incorporation authorizes the issuance of different series of common stock, which have different voting rights. The TDS Series A Common Shares have the power to elect approximately 75%
(less one) of the directors and have ten votes per share in matters other than the election of directors. The TDS Common Shares (with one vote per share) vote as a separate group only with respect to the election of 25% (plus one) of the directors. In addition, the total percentages of voting power in matters other than the election of directors of the Series A Common Shares and Common Shares are fixed, at 56.7% and 43.3%, respectively, subject to adjustment due to changes in the number of outstanding Series A Common Shares.
A substantial majority of the outstanding TDS Series A Common Shares are held in the TDS Voting Trust which expires on June 30, 2035. The TDS Voting Trust was created to facilitate the long-standing relationships among the certificate holders. By virtue of the number of shares held by them, the voting trustees have the power to elect eight directors based
on the current TDS Board of Directors’ size of twelve directors, and control a majority of the voting power of TDS with respect to matters other than the election of directors.
The existence of the TDS Voting Trust is likely to deter any potential unsolicited or hostile takeover attempts or other efforts to obtain control of TDS and may make it more difficult for shareholders to sell shares of TDS at higher than market prices. The trustees of the TDS Voting Trust have advised TDS that they intend to maintain the ability to keep or dispose of voting control of TDS.
The TDS Restated Certificate
of Incorporation also authorizes the TDS Board of Directors to designate and issue TDS Undesignated Shares in one or more classes or series of preferred or common stock from time to time. Generally, no further action or authorization by the shareholders is necessary prior to the designation or issuance of the additional TDS Undesignated Shares authorized pursuant to the TDS Restated Certificate of Incorporation unless applicable laws or regulations would require such approval in a given instance. Such TDS Undesignated Shares could be issued in circumstances that would serve to preserve control of TDS’ then existing management.
In addition, the TDS Restated Certificate of Incorporation includes a provision which authorizes the TDS Board of Directors
to consider various factors, including effects on customers, taxes, and the long-term and short-term interests of TDS, in the context of a proposal or offer to acquire or merge the corporation, or to sell its assets, and to reject such offer if the TDS Board of Directors determines that the proposal is not in the best interests of the corporation based on such factors.
The provisions of the TDS Restated Certificate of Incorporation and the TDS bylaws and the existence of various classes of capital stock could prevent shareholders from profiting from an increase in the market value of their shares as a result of a change in control of TDS by delaying or preventing such change in control.
The provisions of the
TDS Restated Certificate of Incorporation and the existence of different classes of capital stock and voting rights could result in the exclusion of TDS Common Shares from certain major stock indices at some point in the future, unless TDS is grandfathered by such stock indices or qualifies for some other exception.
General Risk Factors
23)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.
TDS experiences cyber-attacks of varying degrees on a regular basis. These include cyber-attacks intended to wrongfully
obtain private and valuable information, or cause other types of malicious events, including denial of service attacks which may cause TDS' services to be disrupted or unavailable to customers. The increasing number of associates working remotely increases risks associated with data handling and vulnerability management. TDS maintains administrative, technical and physical controls, as well as other preventative actions, to reduce the risk of security breaches. Although to date TDS has not discovered a material security breach, these efforts may be insufficient to prevent a material security breach stemming from future cyber-attacks including ransomware. If TDS’ or its vendors’ networks and information technology are not adequately adapted to changes in technology or are damaged or fail to function properly, and/or if TDS’ or its vendors’ security is breached or otherwise compromised, TDS could suffer adverse consequences, including theft, destruction or other loss of
critical and private data, including customer and/or employee data, interruptions or delays in its operations, inaccurate billings, inaccurate financial reporting, and significant costs to remedy the problems. If TDS’ or its vendors’ systems become unavailable or suffer a security breach of customer or other data, TDS may be required to expend significant resources and take various actions to address the problems, including notification under data privacy laws and regulations, may be subject to fines, sanctions and litigation, and its reputation and operating results could be adversely affected. TDS continues to experience denial of service attacks. Although TDS has implemented and continues to enhance its protection and recovery measures in response to such attacks, these efforts may be insufficient to prevent a material denial of service attack in the future.
24)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.
Disruptions in the credit and financial markets, declines in consumer confidence, increases in unemployment, declines in economic growth, increased tariffs on import goods, sudden increases in inflation and uncertainty about corporate earnings could have a significant negative impact on the U.S. and global financial and credit markets and the overall economy. Such events could have an adverse impact on financial institutions resulting in limited access to capital and credit for many companies. Furthermore, economic uncertainties make it very difficult to
accurately forecast and plan future business activities. Changes in economic conditions, changes in financial markets, changes in U.S. trade policies, deterioration in the capital markets or other factors could have an adverse effect on TDS’ business, financial condition, revenues, results of operations and cash flows.
25)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.
Public health emergencies pose the risk that TDS or its associates, agents, partners and suppliers may be unable to conduct business activities for an extended period of time and/or provide the level of service expected. TDS' ability to attract customers, maintain an adequate supply chain and execute on its business strategies and initiatives
could be negatively impacted by public health emergencies. Additionally, public health emergencies could cause increased unemployment and an economic downturn, both of which could negatively impact TDS. The extent of the impact of public health emergencies on TDS' business, financial condition and results of operations will depend on the severity and duration of the emergency, actions taken by governmental authorities and other possible direct and indirect consequences, all of which are uncertain and cannot be predicted.
TDS has properties located throughout the United States. As of December 31, 2022, TDS’ gross investment in property, plant and equipment was as follows:
UScellular’s
local business offices, cell sites, cell site equipment, connectivity centers, data centers, call centers and retail stores are located primarily in UScellular’s operating markets. These properties are either owned or leased by UScellular, one of its subsidiaries, or the partnership, limited liability company or corporation which holds the license issued by the FCC.
TDS Telecom owns or leases its physical assets consisting of cable and telephone distribution networks, headends, network electronic equipment, customer premises equipment, land and buildings.
Parent and Other fixed assets consist of assets, which are either owned or leased, at TDS Corporate, HMS, and Suttle-Straus.
As
of December 31, 2022, the gross investment in property, plant and equipment was $9,334 million at UScellular, $5,312 million at TDS Telecom and $325 million at Parent & Other. See Note 9 — Property, Plant and Equipment in the Notes to Consolidated Financial Statements for additional information.
Item
3. Legal Proceedings
TDS is involved or may be involved from time to time in legal proceedings before the FCC, other regulatory authorities, and/or various state and federal courts. If TDS believes that a loss arising from such legal proceedings is probable and can be reasonably estimated, an amount is accrued in the financial statements for the estimated loss. If only a range of loss can be determined, the best estimate within that range is accrued; if none of the estimates within that range is better than another, the low end of the range is accrued. The assessment of the expected outcomes of legal proceedings is a highly subjective process that requires judgments about future events. The legal proceedings are reviewed at least quarterly to determine the adequacy of accruals and related financial statement disclosures. The ultimate outcomes of legal proceedings could differ materially from amounts accrued in the financial
statements. See Note 14 — Commitments and Contingencies in the Notes to Consolidated Financial Statements for further information.
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Information
TDS' Common Shares are listed on the New York Stock Exchange under the symbol “TDS.” As of January 31, 2023, the last trading day of the month, TDS Common Shares were held by 1,599 record owners, and the Series A Common Shares were held by 64 record owners.
TDS paid quarterly dividends per outstanding share of $0.180 in 2022, $0.175 in 2021 and $0.170 in 2020. TDS increased the dividend per share to $0.185 in the first quarter of 2023. TDS has no current plans to change its policy of paying dividends. TDS has paid cash dividends
on its common stock since 1974.
The Common Shares of United States Cellular Corporation, an 84%-owned subsidiary of TDS, are listed on the New York Stock Exchange under the symbol “USM.”
Stock Performance Graph
The following chart provides a comparison of TDS’ cumulative total return to shareholders (stock price appreciation plus dividends) during the previous five years to the returns of the Standard & Poor's 500 Composite Stock Price Index and the Dow Jones U.S. Telecommunications Index.
Note: Cumulative total return assumes reinvestment of dividends.
2017
2018
2019
2020
2021
2022
TDS
Common Shares (NYSE: TDS)
$
100
$
119.58
$
95.69
$
72.43
$
81.18
$
44.43
S&P 500 Index
100
95.62
125.72
148.85
191.58
156.88
Dow
Jones U.S. Telecommunications Index
100
93.27
119.28
112.22
102.50
96.60
The comparison above assumes $100.00 invested at the close of trading on the last trading day of 2017, in TDS Common Shares, S&P 500 Index and the Dow Jones U.S. Telecommunications Index.
TDS’ dividend reinvestment plans provide its common shareholders with a convenient and economical way to participate in the future growth of TDS. Holders of record of ten (10) or more Common Shares may purchase Common Shares with their reinvested dividends at a five percent discount from market price. Common Shares may also be purchased on a monthly basis through optional cash payments by participants in this plan. The initial ten (10) shares cannot be purchased directly from TDS. An authorization card and prospectus will be mailed automatically by the transfer agent to all registered record holders with ten (10) or more shares. Once enrolled in the plan, there are no brokerage commissions or service charges for purchases made under the plan.
Issuer
Purchases of Equity Securities
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 fourth quarter of 2022.
TDS determines whether to repurchase shares from time to time based on many considerations, including cash needed for other known or possible requirements,
the stock price, market conditions, debt rating considerations, business forecasts, business plans, macroeconomic conditions, share issuances under compensation plans, provisions in governing and legal documents and other legal requirements, and other facts and circumstances. Subject to these considerations, TDS may approve the repurchase of its shares from time to time when circumstances warrant.
The following table provides certain information with respect to all purchases made by or on behalf of TDS, and any open market purchases made by any "affiliated purchaser" (as defined by the SEC) of TDS, of TDS Common Shares during the fourth quarter of 2022.
Period
Total
Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
Management’s Discussion and Analysis ofFinancial Condition
and Results of Operations
Executive Overview
The following Management’s Discussion and Analysis (MD&A)
should be read in conjunction with the audited consolidated financial statements and notes of Telephone and Data Systems, Inc. (TDS) for the year ended December 31, 2022, and with the description of TDS’ business included herein. 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, including the words “believes,”“anticipates,”“estimates,”“expects,”“plans,”“intends,”“projects” 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 Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement for additional information.
TDS uses certain “non-GAAP financial measures” and each such measure is identified in the MD&A. A discussion of the reason TDS determines these metrics to be useful and reconciliations of these measures to their most directly comparable measures determined in accordance with accounting principles generally accepted in the United States of America (GAAP) are included in the Supplemental Information Relating to Non-GAAP Financial Measures section within the MD&A of this Form 10-K Report.
The following MD&A omits discussion of 2021 compared to
2020. Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations in TDS' Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 17, 2022, for that discussion.
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 84%-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 19 — Business Segment Information in the
Notes to Consolidated Financial Statements for additional information about TDS' segments.
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. Across all of its businesses, TDS is focused on providing exceptional customer experiences through best-in-class services and products and superior customer service. 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 September 2022.
TDS’ long-term strategy calls for the majority of its operating capital to be reinvested 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.
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.
During 2022, TDS paid regular quarterly cash dividends to common and preferred shareholders of $82 million and $69 million, respectively. TDS increased the dividend per Common Share paid to its investors by 3% in 2022 and in February 2023, TDS increased its quarterly dividend per Common Share another 3%, which marks the 49th consecutive year of dividend increases. During 2022, TDS repurchased 2,754,339 Common Shares for $40 million at an average cost per share of $14.46. As of December 31, 2022, the maximum dollar value of TDS Common Shares that may yet be purchased
under TDS' program was $138 million. There is no assurance that TDS will continue to increase the dividend rate or pay dividends and no assurance that TDS will make any significant amount of share repurchases in the future.
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.
▪Alternative Connect America Cost Model (A-CAM) – 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.
▪Auctions 105, 107, 108 and 110 – Auction 105 was an FCC auction of 3.5 GHz wireless spectrum licenses that started in July 2020 and concluded in September 2020. 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. Auction 110 was an FCC auction of 3.45-3.55 GHz wireless spectrum
licenses that started in October 2021 and concluded in January 2022. Auction 108 is an FCC auction of 2.5 GHz wireless spectrum licenses that started in July 2022 and concluded in August 2022.
▪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.
▪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, and hotspots.
▪Coronavirus Aid, Relief, and Economic Security (CARES) Act – economic relief package signed into law on March 27, 2020 to address the public health and economic impacts of COVID-19, including a variety of tax provisions.
▪DOCSIS – Data Over Cable Service Interface Specification is an international telecommunications standard that permits the addition of high-bandwidth data transfer to an existing cable TV (CATV) system. DOCSIS 3.1 is a system specification that increases data transmission rates.
▪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.
▪Eligible Telecommunications Carrier (ETC) – designation by states for providing specified services in “high cost” areas which enables participation in universal service support mechanisms.
▪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 or cable 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.
▪VoLTE – Voice over Long-Term Evolution is a technology specification that defines
the standards and procedures for delivering voice communications and related services over 4G LTE networks.
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 $65 million and $82 million for 2022 and 2021, respectively. See Note 8 — Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.
Interest expense
Interest expense decreased in 2022 due primarily to $57 million of unamortized debt issuance costs written off during 2021 related to the redemption of Senior Notes. This was partially offset by an increase in interest expense due to additional borrowings and interest rate increases.
Income tax expense
Income tax expense increased in 2022 due primarily to the
2021 reduction of tax accruals resulting from expiration of state statutes of limitations of prior tax years, which did not recur in 2022. This was partially offset by the tax effect of the decrease in Income before income taxes.
In early 2022, TDS received a federal income tax refund of $125 million related to the 2020 net operating loss carryback enabled by the CARES Act.
See Note 5 — Income Taxes in the Notes to Consolidated Financial Statements for additional information.
Net income attributable to noncontrolling interests, net of tax
Net income attributable to noncontrolling interests, net of tax
$
10
$
32
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.
Net
income decreased in 2022 due primarily to higher operating and income tax expenses, partially offset by higher operating revenues and lower interest expense. Adjusted EBITDA decreased in 2022 due primarily to higher operating expenses, partially offset by higher 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.
UScellular owns, operates, and invests in wireless markets throughout the United States. UScellular is an 84%-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 4.7 million retail connections including 4.2 million postpaid and 0.5 million prepaid connections
UScellular’s mission is to connect its customers to what matters most to them. This includes providing exceptional wireless communication services which enhance consumers’ lives, increase the competitiveness of local businesses, and improve the efficiency of government operations in the markets UScellular serves.
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. 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 new services such as fixed wireless home
internet. In addition, UScellular is focused on increasing revenues from prepaid plans, 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 5G deployment is initially focused on mobility services using its low band spectrum. UScellular has acquired high-band and mid-band spectrum, deployed high-band spectrum on a limited basis, and will further deploy high-band and mid-band in the future to further enable the delivery of 5G services. UScellular has launched 5G services in portions of substantially all of its markets and will continue to expand to additional areas in the
coming years.
▪UScellular assesses its existing wireless interests on an ongoing basis with a goal of improving the competitiveness of its operations and maximizing its long-term return on capital. As part of this strategy, UScellular actively seeks attractive opportunities to acquire wireless spectrum, including pursuant to FCC auctions.
Total
postpaid handset net losses increased in 2022 due to lower gross additions and higher defections resulting from aggressive industry-wide competition and an increase in non-pay customers.
Total postpaid connected device net losses in 2022 were largely in-line with prior year, as lower demand for connected watches and tablets were offset by an increase in home internet net additions.
Postpaid
ARPU and Postpaid ARPA increased in 2022, due primarily to (i) favorable plan and product offering mix, (ii) an increase in cost recovery surcharges and (iii) an increase in device protection plan revenues. These increases were partially offset by an increase in promotional discounts. The higher ARPU plan mix in 2022 relative to 2021 was partially driven by device promotions that included requirements for customers to adopt higher rate plans that offer enhanced services and features. UScellular expects the future growth rate of Postpaid ARPU and Postpaid ARPA to decline relative to the growth rate experienced in 2022 due to the impact of pricing and promotions in the continued highly competitive wireless services environment.
2021 Postpaid ARPU and ARPA amounts exclude $9 million of postpaid revenue related to an out-of-period error recorded in the third quarter of 2021. See Note 2 — Revenue Recognition in the Notes to Consolidated
Financial Statements for additional information.
System operations (excluding Depreciation, amortization and accretion reported below)
755
790
(4)
%
Cost
of equipment sold
1,216
1,118
9
%
Selling, general and administrative
1,408
1,345
5
%
Depreciation,
amortization and accretion
700
678
3
%
Loss on impairment of licenses
3
—
N/M
(Gain)
loss on asset disposals, net
19
23
(18)
%
(Gain) loss on sale of business and other exit costs, net
(1)
(2)
52
%
Total
operating expenses
4,100
3,952
4
%
Operating income
$
69
$
170
(59)
%
Net
income
$
35
$
160
(78)
%
Adjusted OIBDA (Non-GAAP)2
$
790
$
869
(9)
%
Adjusted
EBITDA (Non-GAAP)2
$
956
$
1,054
(9)
%
Capital expenditures3
$
717
$
780
(8)
%
N/M
- Percentage change not meaningful
1 For 2021, amounts have been adjusted to reclassify $8 million of Internet of Things (IoT) and Reseller revenues from Retail service to Other service.
2 Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.
3 Refer to Liquidity and Capital Resources within this MD&A for additional information on Capital expenditures.
▪Retail Service – Postpaid and prepaid charges for voice, data and value-added services and cost recovery surcharges
▪Inbound Roaming – Consideration from other wireless carriers whose customers use UScellular’s wireless systems when roaming
▪Other Service – Amounts received from the Federal USF, tower rental
revenues, 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 increased in 2022 primarily as a result of an increase in Postpaid ARPU, partially offset by a decrease in average postpaid connections, as well as a $9 million out-of-period error that increased revenue
recognized in 2021. See Note 2 - Revenue Recognition in the Notes to Consolidated Financial Statements for additional information.
Inbound roaming revenues decreased in 2022, primarily driven by lower data revenues resulting from lower rates and lower usage. UScellular expects inbound roaming revenue to continue to decline during 2023 relative to prior year levels.
Other service revenues increased in 2022, resulting from increases in tower rental revenues, miscellaneous revenues, and IoT revenues.
Equipment sales revenues increased in 2022, due primarily to increased customer upgrades driven by more promotional activity, combined with a higher average price of new smartphone sales.
In recent periods, wireless service providers have increased promotional aggressiveness to attract new customers and
retain existing customers. This has included both traditional carriers and cable companies operating through mobile virtual network operators (MVNOs). This increased aggressiveness has contributed to the loss of 133,000 postpaid connections in 2022. It has also led to increased promotional spending, which negatively impacts both Equipment revenues and Retail service revenues. UScellular expects promotional aggressiveness by its competitors to continue during 2023. Operating revenues and Operating income may be negatively impacted by the competitive need to continue to offer significant promotional discounts and lower priced plan offerings to new and existing customers.
System operations expenses
System operations expenses decreased in 2022, due primarily to decreases in roaming and customer usage expenses, partially offset by an increase in maintenance, utility, and cell site expenses.
The decrease in roaming expense was driven by a decrease in roaming rates partially offset by an increase in usage.
Cost of equipment sold
Cost of equipment sold increased in 2022, due primarily to increased customer upgrades driven by more promotional activity, combined with higher average cost per unit sold.
Selling, general and administrative expenses increased in 2022, due primarily to increases in bad debts expense partially offset by a decrease in advertising expense.
Bad
debts expense increased $76 million in 2022 as customer payment behavior and the corresponding rate of involuntary churn returned to pre-COVID-19 pandemic trends in 2022. Involuntary churn had been favorable in the prior year due to the impacts of the pandemic which included government stimulus payments and higher consumer savings rates. In addition, customers have purchased higher priced devices in recent periods, which has resulted in higher write-off amounts per uncollectible account in 2022 relative to 2021.
TDS Telecom owns, operates and invests in communications services in a mix of rural and suburban 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. TDS Telecom's strategic goal is to be the preferred broadband provider in the markets it serves. TDS Telecom invests in high-quality networks, services and products, with the constant focus on delivering a best-in-class customer experience.
TDS Telecom's mission is to create a better world by providing high-quality communications services to connect people and businesses, support education, and strengthen communities.
TDS
Telecom's strategic efforts include:
▪TDS Telecom strives to be the preferred broadband provider 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 in its expansion markets and in its incumbent markets that have historically utilized copper and coaxial cable technologies.
▪TDS Telecom seeks to grow its operations and expand its total footprint by creating new clusters of markets in attractive, growing locations and may seek to acquire businesses that support and complement its existing markets.
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 60% of customers subscribe to more than one service.
Residential broadband customers continue to choose higher speeds with 72% taking speeds of 100 Mbps or greater and 11% choosing 1Gig.
Residential Revenue per Connection
For the year ended December 31,
Total
residential revenue per connection increased 3% for 2022, due to a higher concentration of broadband connections as well as an increase in broadband speeds and price increases, partially offset by increased promotional activity.
•Broadband services, including security and support 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 A-CAM
Key components of changes in the statement of operations items were as follows:
Total operating
revenues
Residential revenues increased for 2022 due primarily to price increases and growth in broadband connections, partially offset by a decline in voice and video connections and federal universal service charges.
Commercial revenues decreased for 2022 due primarily to declining connections in CLEC markets, partially offset by an increase in broadband connections.
Cost of services
Cost of services increased for 2022 due primarily to higher employee-related expenses, video programming costs and vehicle maintenance and fuel costs.
Selling, general and administrative
Selling, general and administrative expenses
increased for 2022 due primarily to increases to support current and future growth, including employee-related expenses and advertising and marketing expenses, partially offset by decreases to federal universal service charges.
Depreciation, amortization and accretion
Depreciation, amortization and accretion increased for 2022 due primarily to increased capital expenditures on new fiber assets and customer-related equipment.
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 normal day-to-day operating needs and debt service requirements, to finance the build-out and enhancement of markets and to fund acquisitions. There is no assurance that this will be the case in the future. See Market Risk for additional information regarding maturities of long-term debt.
TDS
has incurred negative free cash flow at times in the past and this could occur in the future. However, TDS believes that existing cash and investment balances, funds available under its financing agreements, expected future tax refunds and expected cash flows from operating and investing activities will provide sufficient liquidity for TDS to meet its normal day-to-day operating needs and debt service requirements for the next several years. TDS will continue to monitor the rapidly changing business and market conditions and plans to take appropriate actions, as necessary, to meet its liquidity needs.
TDS may require substantial additional capital for, among other uses, funding day-to-day operating needs including working capital, acquisitions of providers of telecommunications services, wireless spectrum license acquisitions, capital expenditures, agreements to purchase goods or
services, leases, debt service requirements, repurchases of shares, payment of dividends, or making additional investments, including new technologies and fiber deployments. It may be necessary from time to time to increase the size of the existing credit facilities, to amend existing or put in place new credit agreements, or to obtain other forms of financing in order to fund potential expenditures.
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.
In addition to Cash and cash equivalents, TDS and UScellular had undrawn borrowing capacity from the following debt facilities at December 31, 2022. See the Financing section below for further details.
TDS
UScellular
(Dollars in millions)
Revolving
Credit Agreement
$
399
$
300
Export Credit Financing Agreement
100
—
Receivables Securitization Agreement
—
175
Repurchase
Agreement
—
140
Total undrawn borrowing capacity
$
499
$
615
Financing
Revolving Credit Agreements
TDS and UScellular have unsecured revolving credit agreements with maximum borrowing capacities of $400 million and $300 million, respectively. Amounts under the revolving credit agreements may be
borrowed, repaid and reborrowed from time to time until maturity in July 2026. During 2022, UScellular borrowed and repaid $75 million under its revolving credit agreement. As of December 31, 2022, there were no outstanding borrowings under the revolving credit agreements, except for letters of credit, and TDS' and UScellular’s unused borrowing capacity was $399 million and $300 million, respectively.
Term Loan Agreements
TDS and UScellular have term loan agreements with maximum borrowing capacities of $500 million and $800 million, respectively. The maturity dates for the term loan agreements range from July 2026 to July 2031. During 2022, TDS borrowed an incremental $300 million under its term loan credit agreements and UScellular borrowed an incremental $500 million under its term loan credit agreements. As of December
31, 2022, TDS and UScellular have borrowed the full amounts available under the agreements and the outstanding borrowings were $497 million and $796 million, respectively.
Export Credit Financing Agreements
In November 2022, TDS entered into a $150 million term loan credit facility with Export Development Canada to finance (or refinance) imported equipment, including equipment purchased prior to entering the term loan credit facility agreement. The agreement may be drawn in one or more advances by the five-month anniversary of the date of the agreement which is April 9, 2023; amounts not drawn by that time will cease to be available. The maturity date of the agreement is the five-year anniversary of the first borrowing, which is in December 2027. During 2022, TDS borrowed $50 million under the agreement.
As of December 31, 2022, the outstanding borrowings under the agreement were $50 million and the unused borrowing capacity was $100 million.
TDS borrowed $50 million under its export credit financing agreement in both January and February 2023.
In December 2021, UScellular entered into a $150 million term loan credit facility with Export Development Canada to finance (or refinance) imported equipment, including equipment purchased prior to entering the term loan credit facility agreement. During 2022, UScellular borrowed $150 million, which is the full amount available under the agreement and is due in January 2027.
Receivables Securitization Agreement
UScellular, through its subsidiaries,
has a receivables securitization agreement to permit securitized borrowings using its equipment installment plan receivables. In March 2022, UScellular amended the agreement to extend the maturity date to March 2024. Amounts under the agreement may be borrowed, repaid and reborrowed from time to time until the maturity date. During 2022, UScellular repaid $250 million and borrowed $75 million under the agreement. As of December 31, 2022, the outstanding borrowings under the agreement were $275 million and the unused borrowing capacity was $175 million, subject to sufficient collateral to satisfy the asset borrowing base provisions of the agreement.
In February 2023, UScellular borrowed $25 million under the receivables securitization agreement.
Repurchase Agreement
In January 2022, UScellular,
through a subsidiary (the repo subsidiary), entered into a repurchase agreement to borrow up to $200 million, subject to the availability of eligible equipment installment plan receivables and the agreement of the lender. The transaction is accounted for as a one-month secured borrowing. During 2022, the repo subsidiary borrowed $110 million and repaid $50 million under the repurchase agreement. As of December 31, 2022, the outstanding borrowings under the agreement were $60 million and the unused borrowing capacity was $140 million.
In January 2023, UScellular amended the repurchase agreement to extend the expiration date to January 2024. The outstanding borrowings will bear interest at a rate of the lender's cost of funds (which has historically tracked closely to SOFR) plus 1.35%. There were no significant changes to other terms of the repurchase agreement.
The TDS and UScellular revolving credit agreements, term loan agreements, 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. In particular, under these agreements, TDS and UScellular are 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 also are required to maintain the Consolidated Leverage Ratio at a level not to exceed 3.75 to 1.00 as of the end of any fiscal quarter. TDS and UScellular believe they were in compliance as of December 31, 2022 with all such financial
covenants.
OtherLong-TermFinancing
TDS and UScellular each have an effective shelf registration statement on Form S-3 to issue senior or subordinated debt securities, preferred shares and depositary shares. The proceeds from any such issuances may be used for general corporate purposes, including the possible reduction of other short-term or long-term debt; spectrum purchases; capital expenditures; acquisition, construction and development programs; working capital; additional investments in subsidiaries; or the repurchase of shares. The TDS shelf registration permits TDS to issue at any time and from time to time senior or subordinated debt securities, preferred shares and depositary shares in one
or more offerings in an indeterminate amount. The UScellular shelf registration statement permits UScellular to issue at any time and from time to time senior or subordinated debt securities, preferred shares and depositary shares in one or more offerings, up to the amount registered, which is currently $1 billion. The ability of TDS or UScellular to complete an offering pursuant to such shelf registration statements is subject to market conditions and other factors at the time.
TDS believes that it and/or its subsidiaries were in compliance as of December 31, 2022, with all covenants and other requirements set forth in the TDS and UScellular long-term debt indentures. TDS and UScellular have not
failed to make nor do they expect to fail to make any scheduled payment of principal or interest under such indentures.
Refer to Market Risk — Long-Term Debt for additional information regarding required principal payments and the weighted average interest rates related to TDS’ Long-term debt.
TDS and UScellular, at their discretion, may from time to time seek to retire or purchase their outstanding debt through cash purchases and/or exchanges for other securities, in open market purchases, privately negotiated transactions, tender offers, exchange offers or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
See
Note 12 — Debt in the Notes to Consolidated Financial Statements for additional information regarding the revolving credit agreements, senior term loan agreements, export credit financing agreements, UScellular's receivables securitization agreement, UScellular's Senior Notes and other long-term financing.
Credit Ratings
In certain circumstances, TDS’ and UScellular’s interest cost on their various agreements may be subject to increase if their current credit ratings from nationally recognized credit rating agencies are lowered, and may be subject to decrease if the ratings are raised. The agreements do not cease to be available nor do the maturity dates accelerate solely as a result of a downgrade in TDS’ or UScellular’s credit rating. However, downgrades in TDS’ or UScellular’s credit rating could adversely affect their ability to renew the agreements or obtain access to other credit
agreements in the future.
TDS and UScellular are rated as sub-investment grade issuers. The TDS and UScellular issuer credit ratings as of December 31, 2022, and the dates such ratings were re-affirmed were as follows:
Rating Agency
Rating
Outlook
Moody's (re-affirmed October 2022)
Ba1
stable outlook
Standard
& Poor's (re-affirmed October 2022)
BB
stable outlook
Fitch Ratings (re-affirmed February 2022)
BB+
stable outlook
Capital Requirements
The discussion below is intended to highlight some of the significant cash outlays expected during 2023 and beyond and to highlight the spending incurred in current and prior years for these items. This discussion does not include cash required to fund normal operations, and is not a comprehensive list of capital requirements. Significant cash requirements that are not routine or in the normal course of business could arise from time to time.
CapitalExpenditures
TDS makes substantial investments to acquire, construct and upgrade telecommunications networks and facilities to remain competitive and as a basis for creating long-term value for shareholders. In recent years, rapid changes in technology and new opportunities (such as 5G and VoLTE technology for UScellular and fiber for TDS Telecom) have required substantial investments in potentially revenue-enhancing and cost-saving upgrades to TDS’ networks to remain competitive; this is expected to continue in 2023 and future years with the continued deployment of 5G technology for UScellular, and the continued deployment of fiber for TDS Telecom.
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, in 2022 and 2021, were as follows:
Capital Expenditures
(Dollars in millions)
UScellular’s
capital expenditures in 2022 were $717 million compared to $780 million in 2021. In 2022, UScellular's capital expenditures were used for the following purposes:
•Continue network modernization and 5G deployment;
•Enhance and maintain UScellular's network coverage, including providing 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.
Capital expenditures for 2023 are expected to be between $600 million and $700 million. These expenditures are expected to be used for similar purposes as those listed above.
TDS
Telecom’s capital expenditures in 2022 were $556 million compared to $411 million in 2021. In 2022, these capital expenditures were used for the following purposes:
•Continue to expand fiber deployment in incumbent and expansion markets;
•Maintain and enhance existing infrastructure including build-out requirements to meet state broadband and A-CAM programs;
•Upgrade broadband capacity and speeds; and
•Support success-based spending for broadband growth.
Capital expenditures for 2023 are expected to be between $500 million and $550 million. These expenditures are expected to be used for similar purposes as those listed
above.
Macroeconomic factors may impact the acquisition or cost of products and materials as well as contribute to internal and external labor shortages.
TDS intends to finance its capital expenditures for 2023 using primarily Cash flows from operating activities, existing cash balances and, as required, additional debt financing from its existing agreements and/or other forms of financing.
Acquisitions, Divestitures and Exchanges
TDS
may be engaged from time to time in negotiations (subject to all applicable regulations) relating to the acquisition, divestiture or exchange of companies, properties, wireless spectrum licenses (including pursuant to FCC auctions) 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; commitments for wireless spectrum licenses acquired through FCC auctions; and other agreements to purchase goods or services.
Variable Interest Entities
TDS
consolidates certain “variable interest entities” as defined under GAAP. See Note 15 — 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 in order to fund their operations.
During 2022, TDS repurchased 2,754,339 Common Shares for $40 million at an average cost per share of $14.46. As of December
31, 2022, the maximum dollar value of TDS Common Shares that may yet be purchased under TDS' program was $138 million.
During 2022, UScellular repurchased 1,589,784 Common Shares for $43 million at an average cost per share of $26.78. At December 31, 2022, the total cumulative amount of UScellular Common Shares authorized to be repurchased is 1,927,000.
Depending on its future financial performance, construction, development and acquisition programs, and available sources of financing, TDS and UScellular may not have sufficient liquidity or capital resources to make share repurchases. Therefore, there is no assurance that TDS and UScellular will make any share repurchases in the future.
For additional information related to the current TDS and UScellular repurchase authorizations, see
Note 17 — Shareholders’ Equity in the Notes to Consolidated Financial Statements.
Dividends
TDS paid quarterly dividends per outstanding Common Share of $0.180 in 2022 and $0.175 in 2021. TDS increased the dividend per share to $0.185 in the first quarter of 2023. TDS has no current plans to change its policy of paying dividends.
TDS paid quarterly dividends per outstanding Series UU depositary share (each representing 1/1,000th of a Preferred Share) of $0.414 in 2022, $0.552 in June 2021, $0.414 in September 2021 and $0.414 in December 2021.
TDS paid quarterly dividends per outstanding Series VV depositary share (each representing 1/1,000th of a Preferred Share) of $0.375 in 2022, $0.183 in September 2021 and $0.375 in December 2021.
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 as a basis for 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. 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 in 2022 and 2021.
2022 Commentary
TDS’ Cash, cash equivalents and restricted cash decreased $15 million. Net cash provided by operating
activities was $1,155 million due to net income of $72 million adjusted for non-cash items of $1,036 million and distributions received from unconsolidated entities of $145 million, including $59 million in distributions from the LA Partnership. This was partially offset by changes in working capital items which decreased net cash by $98 million. The working capital changes were primarily influenced by an increase in customer and agent receivables and increases in inventory purchases, partially offset by a federal income tax refund of $125 million received during the first quarter. The increase in customer receivables was driven by a high volume of equipment upgrades due to promotional activities and a longer contract term for equipment installment plans.
Cash flows used for investing activities were $1,783 million, which included payments
for property, plant and equipment of $1,161 million and payments for wireless spectrum licenses of $585 million. Cash payments for property, plant and equipment are lower than the total capital expenditures in 2022 due primarily to future obligations of certain software license agreements that are recorded as current year capital expenditures but are paid over time.
Cash flows provided by financing activities were $613 million, due primarily to $800 million borrowed under the term loan facilities, $200 million borrowed under the export credit financing agreements, $110 million borrowed under the UScellular EIP receivables repurchase agreement, $75 million borrowed under the UScellular revolving credit agreement, and $75 million borrowed under the UScellular receivables securitization agreement. These were partially offset by $250 million of repayments on the UScellular receivables securitization agreement, a $75 million repayment
on the UScellular revolving credit agreement, a $50 million repayment on the UScellular EIP receivables repurchase agreement, the payment of dividends totaling $151 million, the repurchase of TDS and UScellular Common Shares totaling $83 million and cash paid for software license agreements of $23 million.
2021 Commentary
TDS’ Cash, cash equivalents and restricted cash decreased $1,038 million. Net cash provided by operating activities was $1,103 million due to net income of $188 million adjusted for non-cash items of $959 million and distributions received from unconsolidated entities of $180 million, including $76 million in distributions from the LA Partnership. This was partially offset by changes in working capital items which decreased net cash by $224 million. The working capital changes were primarily influenced by an increase in customer and agent receivables, a decrease to
accrued taxes and the timing of vendor payments.
Cash flows used for investing activities were $2,462 million, which included payments for wireless spectrum licenses of $1,322 million and payments for property, plant and equipment of $1,131 million.
Cash flows provided by financing activities were $321 million, reflecting the issuance of $1,110 million of TDS Preferred Shares, the issuance of $500 million of 5.5% UScellular Senior Notes, $625 million borrowed under the UScellular receivables securitization agreement, $217 million borrowed under the UScellular term loan, $125 million borrowed under the TDS revolving credit agreement, and $76 million borrowed under the TDS term loan. These were partially offset by the redemption of $836 million of TDS Senior Notes, $917 million of UScellular Senior Notes, a $200 million repayment on the receivables securitization agreement, a $125 million
repayment on the TDS revolving credit agreement, the payment of dividends totaling $119 million, the payment of debt and equity issuance costs of $62 million, and the repurchase of TDS and UScellular Common Shares.
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 2022 were as follows:
Inventory, net
Inventory, net increased $90 million due primarily to increased inventory levels to support promotions and ensure adequate device supply.
Income taxes receivable
Income taxes receivable decreased $125 million due primarily to a federal income tax refund received related to the 2020 net operating loss carryback enabled by the CARES Act.
Customer deposits and deferred revenues
Customer deposits and deferred revenues increased $49 million due primarily to an increase in contract liabilities resulting from higher promotional activity in the current year.
Other
current liabilities
Other current liabilities increased $232 million due primarily to an increase in the short-term accrual for Auction 107 relocation fees, net borrowings under the EIP receivables repurchase agreement and accruals related to software license agreements. See Note 7 — Intangible Assets in the Notes to Consolidated Financial Statements for additional information on the Auction 107 accrual.
Long-term debt, net
The following table presents the components of the $803 million increase in Long-term debt, net:
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.
Management believes the application of the following critical accounting policies and the estimates required by such application reflect its most significant judgments and estimates used in the preparation of TDS’ consolidated financial statements.
Intangible Asset Impairment
Licenses and Goodwill represent a significant component of TDS’ consolidated assets. These assets are considered
to be indefinite-lived assets and, therefore, are not amortized but rather are tested at least annually for impairment. TDS performs annual impairment testing of Licenses and Goodwill as of November 1 of each year, or more frequently if triggering events occur. Significant negative events, such as changes in any of the assumptions described below or decreases in forecasted cash flows, could result in an impairment in future periods. Licenses are tested for impairment at the level of reporting referred to as a unit of accounting. Goodwill is tested for impairment at the level of reporting referred to as a reporting unit.
See Note 7 — Intangible Assets in the Notes to Consolidated Financial Statements for information related to Licenses and Goodwill activity in 2022 and 2021.
Wireless Spectrum Licenses – UScellular
For purposes of the 2022 impairment
test, UScellular had one unit of accounting as a result of aggregating all developed operating market wireless spectrum licenses (built wireless spectrum licenses) and non-operating market wireless spectrum licenses (unbuilt wireless spectrum licenses), and for the 2021 test, UScellular had eight units of accounting, which consisted of one unit of accounting for built wireless spectrum licenses and seven unbuilt wireless spectrum licenses. UScellular believes this change in units of accounting assessed for impairment better reflects the integrated use of licenses as part of its national interdependent network. This change does not impact the results of the impairment assessment for the current or prior years.
A qualitative assessment of the license values was completed as of November 1, 2022 and November 1, 2021. The qualitative
assessment considered several factors, including analyst estimates of wireless spectrum license values which contemplated recent spectrum auction results, recent UScellular and other market participant transactions, and other industry and market factors. Based on these assessments, UScellular concluded that it was more likely than not that the fair value of the unit of accounting exceeded its carrying value. Therefore, no quantitative impairment evaluation was completed.
Goodwill – TDS Telecom
TDS Telecom has recorded Goodwill as a result of past business acquisitions. For purposes of the 2022 and 2021 Goodwill impairment test, TDS Telecom had one reporting unit.
A qualitative assessment of the reporting unit was completed as of November 1, 2022 and November
1, 2021. The qualitative assessment, which analyzed company, industry and economic trends, concluded that it was more likely than not that the fair value of this reporting unit exceeded its carrying value, and accordingly, no quantitative impairment evaluation was completed and no Goodwill impairment was recorded.
Income Taxes
The amounts of income tax assets and liabilities, the related income tax provision and the amount of unrecognized tax benefits are critical accounting estimates because such amounts are significant to TDS’ financial condition and results of operations.
The preparation of the consolidated financial statements requires TDS to calculate a provision for income taxes. This process involves estimating the actual current income tax liability together with assessing temporary differences resulting from the different treatment
of items for tax purposes. These temporary differences result in deferred income tax assets and liabilities which are included on a net basis in TDS’ Consolidated Balance Sheet. TDS must then assess the likelihood that deferred income tax assets will be realized based on future taxable income and, to the extent management believes that realization is not likely, establish a valuation allowance. Management’s judgment is required in determining the provision for income taxes, deferred income tax assets and liabilities and any valuation allowance that is established for deferred income tax assets.
TDS recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on management’s
judgment as to the possible outcome that has a greater than 50% cumulative likelihood of being realized upon ultimate resolution.
See Note 5 — Income Taxes in the Notes to Consolidated Financial Statements for additional information.
On October 27, 2020, the FCC adopted rules creating the 5G Fund for Rural America, which will
distribute up to $9 billion over ten years to bring 5G wireless broadband connectivity to rural America. The 5G Fund will be implemented through a two-phase competitive process, using multi-round auctions to award support. The winning bidders will be required to meet certain minimum speed requirements and interim and final deployment milestones. The order provides that the 5G Fund be in lieu of the previously proposed fund (the Phase II Connect America Mobility Fund) for the development of 4G LTE. The order also provides that over time a growing percentage of the legacy support a carrier receives must be used for 5G deployment.
UScellular cannot predict at this time when the 5G fund auction will occur, when the phase down period for its existing legacy support from the Federal USF will commence, or whether the 5G fund auction will provide opportunities to UScellular to offset any loss in existing support.
Spectrum
Auctions
On March 2, 2020, the FCC released a Public Notice establishing procedures for an auction offering wireless spectrum licenses in the 3.5 GHz band (Auction 105). On September 2, 2020, the FCC announced by way of public notice that UScellular was the provisional winning bidder for 243 wireless spectrum licenses for a purchase price of $14 million. On July 15, 2022, the FCC released a Consent Decree related to its spectrum aggregation and ownership attribution rules in which UScellular agreed to relinquish its rights to 27 wireless spectrum licenses awarded in Auction 105 and subsequently received a full refund of $2 million. The remaining 216 wireless spectrum licenses were granted by the FCC on July 26, 2022.
On
August 7, 2020, the FCC released a Public Notice establishing procedures for an auction offering wireless spectrum licenses in the 3.7-3.98 GHz bands (Auction 107). On February 24, 2021, the FCC announced by way of public notice that UScellular was the provisional winning bidder for 254 wireless spectrum licenses for $1,283 million. UScellular paid $30 million of this amount in 2020 and the remainder in March 2021. The wireless spectrum licenses from Auction 107 were granted by the FCC in July 2021. Additionally, UScellular expects to be obligated to pay approximately $185 million in total from 2021 through 2024 related to relocation costs and accelerated relocation incentive payments. Such additional costs were accrued and capitalized at the time the licenses were granted, and are adjusted as necessary as the estimated obligation changes. UScellular paid $36 million and
$8 million related to the additional costs in October 2021 and September 2022, respectively. The spectrum must be cleared by incumbent providers before UScellular can access it. UScellular does not expect to have access to this spectrum until late 2023.
On June 9, 2021, the FCC released a Public Notice establishing procedures for an auction offering wireless spectrum licenses in the 3.45-3.55 GHz band (Auction 110). On January 14, 2022, the FCC announced by way of public notice that UScellular was the provisional winning bidder for 380 wireless spectrum licenses for $580 million. UScellular paid $20 million of this amount in 2021 and the remainder in January and February 2022. The wireless spectrum licenses from Auction 110 were granted by the FCC on May 4, 2022.
On
March 21, 2022, the FCC released a Public Notice establishing procedures for an auction offering wireless spectrum licenses in the 2.5 GHz band (Auction 108). On September 1, 2022, the FCC announced by way of public notice that UScellular was the provisional winning bidder for 34 wireless spectrum licenses for $3 million. The wireless spectrum licenses from Auction 108 were granted by the FCC on December 1, 2022.
This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Annual Report contain 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. See "Risk Factors" in this Form 10-K for a further discussion of these risks. 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. Readers should evaluate any statements in light of these important factors.
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.
▪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.
▪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.
▪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.
▪Uncertainty in TDS’ future cash flow
and liquidity or the inability to access capital, deterioration in the capital markets, changes in interest rates, other changes in TDS’ performance or market conditions, changes in TDS’ credit ratings or other factors could limit or restrict the availability of financing on terms and prices acceptable to TDS, which could require TDS to reduce its construction, development or acquisition programs, reduce the amount of wireless spectrum licenses acquired, and/or reduce or cease share repurchases and/or the payment of 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’ 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
▪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 studies to the effect that radio frequency emissions from wireless devices and/or cell sites cause harmful health consequences, including cancer or tumors, or may interfere with various electronic
medical devices or frequencies used by other industries, could have an adverse effect on TDS’ wireless 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.
As of December 31, 2022, 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 December 31, 2022:
Principal Payments Due by Period
Long-Term Debt Obligations1
Weighted-Avg.
Interest Rates on Long-Term Debt Obligations2
(Dollars in millions)
2023
$
19
6.3
%
2024
26
6.2
%
2025
26
6.2
%
2026
275
5.9
%
2027
218
6.0
%
Thereafter
2,983
6.2
%
Total
$
3,547
6.2
%
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 the 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. See Note 12 — Debt in the Notes to Consolidated Financial Statements for additional information.
2Represents the weighted average stated interest rates at December 31, 2022, for debt maturing in the respective periods.
Fair Value of Long-Term Debt
At December 31, 2022 and 2021,
the estimated fair value of long-term debt obligations, excluding lease obligations, the current portion of such long-term debt and debt financing costs, was $3,047 million and $3,197 million, respectively, and the book value was $3,789 million and $2,979 million, respectively. See Note 3 — Fair Value Measurements in the Notes to Consolidated Financial Statements for additional information.
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. Certain of these measures are considered “non-GAAP financial measures” under U.S. Securities and Exchange Commission Rules. Specifically, TDS has referred to the following measures in this Form 10-K Report:
▪EBITDA
▪Adjusted EBITDA
▪Adjusted OIBDA
▪Free cash flow
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 19 — 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, 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, and gains and losses, 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.
TDS - CONSOLIDATED
2022
2021
(Dollars in millions)
Net
income (GAAP)
$
72
$
188
Add back:
Income tax expense
53
33
Interest expense
174
232
Depreciation,
amortization and accretion
929
895
EBITDA (Non-GAAP)
1,228
1,348
Add back or deduct:
Loss on impairment of licenses
3
—
(Gain)
loss on asset disposals, net
27
26
(Gain) loss on sale of business and other exit costs, net
(1)
(2)
Adjusted
EBITDA (Non-GAAP)
1,257
1,372
Deduct:
Equity in earnings of unconsolidated entities
159
182
Interest and dividend income
17
11
Other,
net
1
(1)
Adjusted OIBDA (Non-GAAP)
1,080
1,180
Deduct:
Depreciation, amortization and accretion
929
895
Loss
on impairment of licenses
3
—
(Gain) loss on asset disposals, net
27
26
(Gain) loss on sale of business and other exit costs, net
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.
2022
2021
(Dollars
in millions)
Cash flows from operating activities (GAAP)
$
1,155
$
1,103
Cash paid for additions to property, plant and equipment
(Dollars and shares in millions, except per share amounts)
Current liabilities
Current portion of long-term debt
$
i19
$
i6
Accounts
payable
i506
i481
Customer
deposits and deferred revenues
i285
i236
Accrued
interest
i12
i10
Accrued
taxes
i46
i45
Accrued compensation
i144
i137
Short-term
operating lease liabilities
i146
i141
Other
current liabilities
i356
i124
Total
current liabilities
i1,514
i1,180
Deferred
liabilities and credits
Deferred income tax liability, net
i969
i921
Long-term
operating lease liabilities
i908
i960
Other
deferred liabilities and credits
i813
i759
Long-term
debt, net
i3,731
i2,928
Commitments
and contingencies
i
i
Noncontrolling
interests with redemption features
i12
i11
Equity
TDS
shareholders’ equity
Series A Common and Common Shares
Authorized ii290/
shares (ii25/ Series A Common and ii265/
Common Shares)
Issued ii133/
shares (ii7/ Series A Common and ii126/
Common Shares)
Outstanding i112 shares (i7 Series A Common and i105
Common Shares) and i115 shares (i7 Series A Common and i108
Common Shares), respectively
Par Value ($iiii0.01///
per share)
i1
i1
Capital in excess of
par value
i2,551
i2,496
Preferred
Shares, ii.279/ shares authorized, par value $ii0.01/
per share, ii.0444/ shares outstanding (ii.0168/
Series UU and ii.0276/ Series VV)
i1,074
i1,074
Treasury
shares, at cost, i21 and i18 Common Shares, respectively
(i481)
(i461)
Accumulated
other comprehensive income
i5
i5
Retained
earnings
i2,699
i2,812
Total
TDS shareholders’ equity
i5,849
i5,927
Noncontrolling
interests
i754
i807
Total
equity
i6,603
i6,734
Total
liabilities and equity1
$
i14,550
$
i13,493
The
accompanying notes are an integral part of these consolidated financial statements.
1The consolidated total assets as of December 31, 2022 and 2021, include assets held by consolidated variable interest entities (VIEs) of $i1,236 million and $i1,456
million, respectively, which are not available to be used to settle the obligations of TDS. The consolidated total liabilities as of December 31, 2022 and 2021, include certain liabilities of consolidated VIEs of $i23 million and $i21
million, respectively, for which the creditors of the VIEs have no recourse to the general credit of TDS. See Note 15 — Variable Interest Entities for additional information.
Telephone and Data Systems, Inc. (TDS) is a diversified telecommunications company providing high-quality communications services to customers with i4.7 million retail wireless connections and i1.2
million broadband, video and voice connections at December 31, 2022. TDS conducts all of its wireless operations through its i84%-owned subsidiary, United States Cellular Corporation (UScellular). TDS provides broadband, video and voice services through its wholly-owned subsidiary, TDS Telecommunications LLC (TDS Telecom).
TDS has the following reportable segments: 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 19 — Business Segment Information for summary financial information on each business segment.
Principles of Consolidation
iThe accounting policies of 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 UScellular and TDS Telecom. In addition, the consolidated financial statements include certain entities in which TDS has a variable interest that requires consolidation under GAAP. See Note 15 — Variable Interest Entities for additional information relating to TDS’ VIEs. Intercompany accounts and transactions have been eliminated.
Use of Estimates
iThe
preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (a) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and (b) the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Restricted Cash
iCash and cash equivalents include cash
and highly liquid investments with original maturities of three months or less. Cash and cash equivalents subject to contractual restrictions are classified as restricted cash. Restricted cash primarily consists of balances required under the receivables securitization agreement. See Note 12 — Debt for additional information related to the receivables securitization agreement.iThe 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.
Cash,
cash equivalents and restricted cash in the statement of cash flows
$
i399
$
i414
Accounts
Receivable and Allowance for Credit Losses
i
UScellular’s accounts receivable consist primarily of amounts owed by customers for wireless services and equipment sales, including sales of certain devices and accessories under installment plans, by agents and third-party distributors for sales of equipment to them and by other wireless carriers whose customers have used UScellular’s wireless systems.
TDS Telecom’s accounts receivable primarily consist of amounts owed by customers for services and products provided, by state and federal governments for
grants and support funds, and by interexchange carriers for long-distance and data traffic, which TDS Telecom carries on its network.
iTDS estimates expected credit losses related to accounts receivable balances based on a review of available and relevant information including current economic conditions, projected economic conditions, historical loss experience, account aging, and other factors that could affect collectability. Expected credit losses are determined for each pool of accounts receivable
balances that share similar risk characteristics. The allowance for credit losses is the best estimate of the amount of expected credit losses related to existing accounts receivable. TDS does not have any off-balance sheet credit exposure related to its customers.
iInventory
consists primarily of wireless devices stated at the lower of cost, which approximates cost determined on a first-in first-out basis, or net realizable value. Net realizable value is determined by reference to the stand-alone selling price.
Cloud-Hosted Arrangements
iTDS' cloud-hosted arrangements that are service contracts consist primarily of software used to perform administrative functions.iImplementation costs related to TDS' cloud-hosted arrangements, which are recorded in Prepaid expenses and Other assets and deferred charges in the Consolidated Balance Sheet, were as follows:
These
costs are amortized over the period of the service contract, which is generally three to ifive years. Amortization of implementation costs was $i19
million, $i17 million and $i11 million
for the years ended December 31, 2022, 2021 and 2020, respectively, and was included in Selling, general and administrative expenses.
i
Licenses
Licenses consist of direct and incremental costs incurred in acquiring Federal Communications Commission (FCC) wireless spectrum licenses that
generally provide UScellular with the exclusive right to utilize designated radio spectrum within specific geographic service areas to provide wireless service. Although wireless spectrum licenses are issued for a fixed period of time, generally iten years, or in some cases twelve or ififteen
years, the FCC has granted license renewals routinely and at a nominal cost. The wireless spectrum licenses held by UScellular expire at various dates. UScellular believes that it is probable that its future wireless spectrum license renewal applications will be granted. UScellular determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful lives of the wireless spectrum licenses. Therefore, UScellular has determined that wireless spectrum licenses are indefinite-lived intangible assets.
UScellular performs its annual impairment assessment of wireless spectrum licenses as of November 1 of each year or more frequently if there are events or circumstances that cause UScellular to believe it is more likely than not that the carrying value of wireless spectrum licenses exceeds fair value. For purposes of the 2022 impairment test, UScellular had ione
unit of accounting as a result of aggregating all developed operating market wireless spectrum licenses (built wireless spectrum licenses) and non-operating market wireless spectrum licenses (unbuilt wireless spectrum licenses), and for the 2021 test, UScellular had ieight units of accounting, which consisted of ione
unit of accounting for built wireless spectrum licenses and iseven unbuilt wireless spectrum licenses. UScellular believes this change in units of accounting assessed for impairment better reflects the integrated use of licenses as part of its national interdependent network. This change does not impact the results of the impairment assessment for the current or prior years.
UScellular performed a qualitative impairment assessment to determine whether the wireless spectrum licenses were
impaired. In 2022 and 2021, UScellular considered several qualitative factors, including analyst estimates of wireless spectrum license values which contemplated recent spectrum auction results, recent UScellular and other market participant transactions, and other industry and market factors. Based on these assessments, UScellular concluded that it was more likely than not that the fair value of the unit of accounting exceeded its carrying value. Therefore, no quantitative impairment evaluation was completed. See Note 7 — Intangible Assets for additional details related to wireless spectrum licenses.
Goodwill
TDS has Goodwill as a result of past business acquisitions. TDS performs its annual impairment assessment of Goodwill as of November 1 of each year or more frequently if there are events or circumstances that cause TDS to believe it is more likely than not that the carrying value
of individual reporting units exceeds their respective fair values. Goodwill impairment loss will be measured as the amount by which a reporting unit’s carrying amount exceeds its fair value. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
/
For purposes of conducting its Goodwill impairment test, TDS Telecom has ione
reporting unit. TDS Telecom performed a qualitative impairment assessment in 2022 and 2021. Based on the annual impairment assessments performed, TDS Telecom did iino/t
have an impairment of its Goodwill in 2022 or 2021.
See Note 7 — Intangible Assets for additional details related to Goodwill.
iTDS Telecom has franchise rights as a result of past
acquisitions of cable businesses. Franchise rights are intangible assets that provide their holder with the right to operate a business in a certain geographical location as sanctioned by the franchiser, usually a government agency. Franchise rights are generally granted for iten years and may be renewed for additional terms upon approval by the granting authority. TDS anticipates that future renewals of its franchise rights will be granted. TDS reviews franchise rights for impairment whenever events or changes in circumstances indicate that the assets might be impaired. TDS re-evaluates the useful life of franchise rights each year to
determine if changes in technology or other business changes would warrant a revision of its remaining useful life./ Franchise rights are included in Other intangible assets in the Consolidated Balance Sheet.
See Note 7 — Intangible Assets for additional details related to franchise rights.
Investments in Unconsolidated Entities
iFor its equity method investments for which financial information
is readily available, TDS records its equity in the earnings of the entity in the current period. For its equity method investments for which financial information is not readily available, TDS records its equity in the earnings of the entity on a one quarter lag basis.
Property, Plant and Equipment
i
Property, plant and equipment is stated at the original cost of construction or purchase including capitalized costs of certain taxes, payroll-related expenses, interest and estimated
costs to remove the assets.
Expenditures that enhance the productive capacity of assets in service or extend their useful lives are capitalized and depreciated. Expenditures for maintenance and repairs of assets in service are charged to Cost of services or Selling, general and administrative expense, as applicable. Retirements and disposals of assets are recorded by removing the original cost of the asset (along with the related accumulated depreciation) from plant in service and recording it, together with proceeds, if any, and net removal costs (removal costs less an applicable accrued asset retirement obligation and salvage value realized), as a gain or loss, as appropriate. Certain TDS Telecom segment assets use the group depreciation method. Accordingly, when a group method asset is retired in the ordinary course of business, the original cost of the asset and accumulated depreciation in the same amount are removed, with
no gain or loss recognized on the disposition.
Software licenses that qualify for capitalization as an asset are accounted for as the acquisition of a fixed asset and the incurrence of a liability to the extent that the license fees are not fully paid at acquisition.
Depreciation and Amortization
iDepreciation is provided using the straight-line method over the estimated useful life of the related asset, except
for certain TDS Telecom segment assets, which use the group depreciation method. The group depreciation method develops a depreciation rate based on the average useful life of a specific group of assets, rather than each asset individually. TDS depreciates leasehold improvement assets over periods ranging from ione year to ithirty
years; such periods approximate the shorter of the assets’ economic lives or the specific lease terms./
Useful lives of specific assets are reviewed throughout the year to determine if changes in technology or other business changes would warrant accelerating the depreciation of those specific assets. There were no material changes to the assigned useful lives of the various categories of property, plant and equipment in 2022, 2021 or 2020. However, in 2022, 2021 and 2020, depreciation for certain specific assets was accelerated due to changes in technology. See Note 9 — Property, Plant and Equipment for additional details related to useful lives.
Impairment of Long-Lived Assets
iTDS
reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the assets might be impaired. UScellular and TDS Telecom each have iione/
asset group for purposes of assessing property, plant and equipment for impairment based on the integrated nature of its network, assets and operations. The cash flows generated by each of these groups is the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities./
Leases
A lease is generally present in a contract if the lessee controls the use of identified property, plant or equipment for a period of time in exchange for consideration. See Note 10 — Leases for additional details related to leases.
Agent Liabilities
iUScellular
has relationships with agents, which are independent businesses that obtain customers for UScellular. At December 31, 2022 and 2021, UScellular had accrued $i53 million and $i51
million, respectively, in agent related liabilities. These amounts are included in Other current liabilities in the Consolidated Balance Sheet./
iDebt
issuance costs include underwriters’ and legal fees and other charges related to issuing and renewing various borrowing instruments and other long-term agreements and are amortized over the respective term of each instrument. Debt issuance costs related to TDS’ and UScellular's revolving credit agreements and UScellular's receivables securitization agreement are recorded in Other assets and deferred charges in the Consolidated Balance Sheet. All other debt issuance costs are presented as an offset to the related debt obligation in the Consolidated Balance Sheet.
Asset Retirement Obligations
iTDS
records asset retirement obligations for the fair value of legal obligations associated with asset retirements and a corresponding increase in the carrying amount of the related long-lived asset in the period in which the obligations are incurred. In periods subsequent to initial measurement, TDS recognizes changes in the liability resulting from the passage of time and updates to the timing or the amount of the original estimates. The liability is accreted to its estimated settlement date value over the period to the estimated settlement date. The change in the carrying amount of the long-lived asset is depreciated over the average remaining life of the related asset. See Note 11 — Asset Retirement Obligations for additional information.
Treasury Shares
iCommon
Shares repurchased by TDS are recorded at cost as treasury shares and result in a reduction of equity. When treasury shares are reissued, TDS determines the cost using the first-in, first-out cost method. The difference between the cost of the treasury shares and reissuance price is included in Capital in excess of par value or Retained earnings.
Revenue Recognition
iRevenues from sales of equipment and products are recognized when control has transferred to
the customer, agent or third-party distributor. Service revenues are recognized as the related service is provided. See Note 2 — Revenue Recognition for additional information on TDS' policies related to Revenues.
Advertising Costs
iTDS expenses advertising costs as incurred. Advertising costs totaled $i196
million, $i203 million and $i213 million in 2022, 2021 and 2020, respectively./
Income
Taxes
iTDS files a consolidated federal income tax return. Deferred taxes are computed using the liability method, whereby deferred tax assets are recognized for future deductible temporary differences and operating loss carryforwards, and deferred tax liabilities are recognized for future taxable temporary differences. Both deferred tax assets and liabilities are measured using the enacted tax rates in effect when the temporary differences are expected to reverse. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of enactment. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. TDS evaluates income tax uncertainties, assesses the probability of the ultimate settlement with the applicable taxing authority and records an amount based on that assessment. Deferred taxes are reported as a net non-current asset or liability by jurisdiction. Any corresponding valuation allowance to reduce the amount of deferred tax assets is also recorded as non-current. See Note 5 — Income Taxes for additional information.
Stock-Based Compensation and Other Plans
iTDS
has established long-term incentive plans, dividend reinvestment plans, and a non-employee director compensation plan. The dividend reinvestment plan of TDS is not considered a compensatory plan and, therefore, recognition of compensation costs for grants made under this plan is not required. All other plans are considered compensatory plans; therefore, recognition of costs for grants made under these plans is required.
TDS recognizes stock compensation expense based upon the fair value of the specific awards granted using established valuation methodologies. The amount of stock compensation cost recognized on either a straight-line basis or graded attribution method is based on the portion of the award that is expected to vest over the requisite service period, which generally represents the vesting period. Stock-based compensation cost recognized has been reduced for estimated forfeitures. Forfeitures are estimated
at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. See Note 18 — Stock-Based Compensation for additional information.
The following is a description of principal activities from which TDS generates its revenues.
Services and products
Nature, timing of satisfaction of performance obligations, and significant payment terms
Wireless services
Wireless service includes voice, messaging and data services. Revenue is recognized in Service revenues as wireless service is provided to the customer.
Wireless services generally are billed and paid in advance on a monthly basis.
Wireless devices and accessories
UScellular offers a comprehensive range of wireless devices such as handsets, tablets, mobile hotspots, home phones and routers for use by its customers, as well as accessories. UScellular also sells wireless devices to agents and other third-party distributors for resale. UScellular frequently discounts wireless devices sold to new and current customers. UScellular also offers customers the option to purchase certain devices and accessories under installment contracts over a specified time period. For certain equipment installment plans, after a specified period of time, the customer
may have the right to upgrade to a new device. Such upgrades require the customer to enter into an equipment installment contract for the new device, and transfer the existing device to UScellular. UScellular recognizes revenue in Equipment and product sales revenues when control of the device or accessory is transferred to the customer, agent or third-party distributor, which is generally upon delivery.
Wireless roaming
UScellular receives roaming revenues when other wireless carriers’ customers use UScellular’s wireless systems. UScellular recognizes revenue in Service revenues when the roaming service is provided.
Telecommunications companies may be designated by states, or in some cases by the FCC, as an ETC to receive support payments from the Universal Service Fund if they provide specified services in “high cost” areas. ETC revenues recognized in the reporting period represent the amounts which UScellular is entitled to receive for such period, as determined and approved in connection with UScellular’s designation as an ETC in various states.
Wireless tower rents
UScellular receives tower rental revenues when another carrier leases tower space on a UScellular owned tower. UScellular recognizes revenue in Service revenues in the period during which the services are provided.
Activation
fees
TDS charges its end customers activation fees in connection with the sale of certain services and equipment. Activation fees are deferred and recognized over the period benefitted.
Wireline and cable services
Wireline and cable services include broadband, video and voice services. Revenue is recognized in Service revenues as service is provided to the customer. Wireline and cable services are generally billed and paid in advance on a monthly basis.
Wholesale revenues
Wholesale revenues include network access services primarily to interexchange
and wireless carriers for carrying data and voice traffic on TDS Telecom’s network, special access services and state and federal support payments, including A-CAM. Wholesale revenues are recorded as the related service is provided.
IT hardware sales
TDS recognizes equipment revenue when it no longer has any requirements to perform, when title has passed and when the products are accepted by the customer.
Hosted and managed services
HMS Service revenues consist of cloud and hosting solutions, managed services, Enterprise Resource Planning (ERP) application management, colocation services, and
IT hardware and related maintenance and professional services. Revenues related to these services are recognized as services are provided.
Significant Judgments
As a practical expedient, TDS groups similar contracts or similar performance obligations together into portfolios of contracts or performance obligations if doing so does not result in a significant difference from accounting for the individual contracts discretely. TDS applies this grouping method for the following types of transactions: device activation fees, contract
acquisition costs, contract fulfillment costs, and certain customer promotions. Contract portfolios are recognized over the respective expected customer lives or terms of the contracts.
Services are deemed to be highly interrelated when the method and timing of transfer and performance risk are the same. Highly interrelated services that are determined to not be distinct have been grouped into a single performance obligation. Each month of services promised is a performance obligation. The series of monthly service performance obligations promised over the course of the contract
are combined into a single performance obligation for purposes of the revenue allocation.
TDS has made judgments regarding transaction price, including but not limited to issues relating to variable consideration, time value of money, returns and non-cash consideration. When determined to be significant in the context of the contract, these items are considered in the valuation of transaction price at contract inception or modification, as appropriate.
UScellular and TDS Telecom each sell bundled service and equipment offerings. In these instances, TDS recognizes its revenue based on the relative standalone selling prices for each distinct service or equipment performance obligation, or bundles thereof. TDS estimates the standalone selling price of the device or accessory to be its retail price excluding discounts. TDS estimates the standalone selling price of wireless service to be the price offered to customers on month-to-month contracts.
Incentives
Discounts, incentives, and rebates to agents and end customers that are deemed cash are recognized as a reduction of
Operating revenues concurrently with the associated revenue.
From time to time, UScellular may offer certain promotions to incentivize customers to switch to, or to purchase additional services from, UScellular. Under these types of promotions, an eligible customer may receive an incentive in the form of a discount off additional services purchased shown as a credit to the customer’s monthly bill. UScellular accounts for the future discounts as material rights at the time of the initial transaction by allocating and deferring revenue based on the relative proportion of the future discounts in comparison to the aggregate initial purchase. The deferred revenue will be recognized as service revenue in future periods.
Amounts Collected from Customers and Remitted to Governmental Authorities
TDS records amounts collected from customers and remitted
to governmental authorities on a net basis within a liability account if the amount is assessed upon the customer and TDS merely acts as an agent in collecting the amount on behalf of the imposing governmental authority. If the amount is assessed upon TDS, then amounts collected from customers are recorded in Service revenues and amounts remitted to governmental authorities are recorded in Selling, general and administrative expenses in the Consolidated Statement of Operations. The amounts recorded gross in revenues that are billed to customers and remitted to governmental authorities totaled $i88
million, $i95 million and $i82 million for 2022, 2021 and 2020, respectively.
Disaggregation
of Revenue
iIn 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.
1Revenue line items in this table will not agree to amounts presented in the Consolidated Statement of Operations as the amounts in this table only include revenue resulting from contracts with customers
2For 2021 and 2020, amounts have been adjusted to reclassify $ii8/ million
and $ii5/ million,
respectively, of Internet of Things (IoT) and Reseller revenues from Retail service to Other service.
3iDuring the third quarter of 2021, UScellular recorded a $i9 million
out-of-period error related to the timing of recognition of regulatory fee billings. This adjustment had the impact of increasing Service revenue by $i9 million in 2021. UScellular determined that this adjustment was not material to any of the periods impacted./
For contracts that involve multiple element service and equipment offerings, the transaction price is allocated to each performance obligation based on its relative standalone selling price. When consideration is received in advance of delivery of goods or services, a contract liability is recorded. A contract asset is recorded when revenue is recognized in advance of TDS’ right to receive consideration. Once there is an unconditional right to receive the consideration, TDS records such amounts as receivables, and then bills the customer under the terms of the respective contract.
TDS
recognizes Equipment and product sales revenue when the equipment is delivered to the customer and a corresponding contract asset or liability is recorded for the difference between the amount of revenue recognized and the amount billed to the customer in cases where discounts are offered. The contract asset or liability is reduced over the contract term as service is provided and billed to the customer.
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.
Transaction price allocated to the remaining performance obligations
i
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 December 31, 2022, 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.
TDS expects that commission fees paid as a result of obtaining contracts are recoverable and therefore TDS defers and amortizes these costs. As a practical expedient, costs with an amortization period of one year or less are expensed as incurred. TDS also incurs fulfillment costs, such as installation costs, where there is an expectation that a future benefit will be realized. Deferred commission fees and fulfillment costs are amortized based on the timing of transfer of the goods or services to which the assets relate, typically the contract term. iContract
cost asset balances, which are recorded in Other assets and deferred charges in the Consolidated Balance Sheet, were as follows:
Amortization
of contract cost assets was $i113 million, $i116
million and $i120 million for the years ended December 31, 2022, 2021 and 2020, respectively, and was included in Selling, general and administrative expenses and Cost of services expenses.
i
Note
3 Fair Value Measurements
As of December 31, 2022 and 2021, 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.
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.
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 i6.7% Senior Notes which are traded over the counter. TDS’ “Other” debt consists of term loan credit agreements, receivables securitization agreement and in 2022, an export credit financing agreement. 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 i3.52% to i8.28% and i1.31%
to i4.40% at December 31, 2022 and 2021, 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.
i
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.
i
The
following table summarizes equipment installment plan receivables.
Net
balance presented in the Consolidated Balance Sheet as:
Accounts receivable — Customers and agents (Current portion)
$
i646
$
i639
Other
assets and deferred charges (Non-current portion)
i469
i374
Equipment
installment plan receivables, net
$
i1,115
$
i1,013
/
UScellular
uses various inputs, including internal data, information from credit bureaus and other sources, to evaluate the credit profiles of its customers. 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 i30
days.
i
The balance and aging of the equipment installment plan receivables on a gross basis by credit category were as follows:
A reconciliation of TDS’ income tax expense computed at the statutory rate to the reported income tax expense, and the statutory federal income tax rate to TDS’ effective income tax rate is as follows:
1State
income taxes, net of federal benefit, include changes in unrecognized tax benefits as well as adjustments to state valuation allowances. State taxes increased in 2022 due primarily to valuation allowance adjustments. State taxes in 2021 are a net benefit due primarily to the reduction of tax accruals resulting from expirations of state statute of limitations for prior tax years.
2Change in federal valuation allowance is due primarily to current year interest expense from partnership investments that carryforward but may not be realized.
/
3The CARES Act provided a 5-year carryback of net operating losses generated in years 2018-2020. As the statutory federal tax rate
applicable to certain years within the carryback period is 35%, carryback to those years provided a tax benefit in excess of the current federal statutory rate of i21%.
i
Significant
components of TDS’ deferred income tax assets and liabilities at December 31, 2022 and 2021, were as follows:
At December 31, 2022, TDS and certain subsidiaries had $i3,508
million of state NOL carryforwards (generating a $i177 million deferred tax asset) available to offset future taxable income. The state NOL carryforwards expire between 2023 and 2042. TDS and certain subsidiaries had $i344
million of federal NOL carryforwards (generating a $i72 million deferred tax asset) available to offset future taxable income. The federal NOL carryforwards generally expire between 2023 and 2037, with the exception of federal NOLs generated after 2017, which do not expire. A valuation allowance was established for certain federal and state NOL carryforwards since it is more likely than not that a portion of such carryforwards will expire before they can be utilized.
At December
31, 2022, TDS and certain subsidiaries had $i384 million of state interest limitation carryforwards (generating a $i16
million deferred tax asset) available to offset future taxable income. The state interest limitation carryforwards generally do not expire. TDS and certain subsidiaries had $i277 million of federal interest limitation carryforwards (generating a $i58
million deferred tax asset) available to offset future taxable income. The federal interest limitation carryforwards do not expire. A valuation allowance was established for certain federal and state interest limitation carryforwards since it is more likely than not that a portion of such carryforwards will not be utilized.
i
A summary of TDS' deferred tax asset valuation allowance is as follows:
2022
2021
2020
(Dollars
in millions)
Balance at beginning of year
$
i149
$
i158
$
i152
Charged
to Income tax expense
i28
(i9)
i6
Balance
at end of year
$
i177
$
i149
$
i158
/i
A
reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
2022
2021
2020
(Dollars in millions)
Unrecognized
tax benefits balance at beginning of year
$
i37
$
i54
$
i49
Additions
for tax positions of current year
i6
i8
i8
Additions
for tax positions of prior years
i1
i—
i3
Reductions
for tax positions of prior years
i—
(i3)
(i1)
Reductions
for settlements of tax positions
i—
(i2)
i—
Reductions
for lapses in statutes of limitations
(i6)
(i20)
(i5)
Unrecognized
tax benefits balance at end of year
$
i38
$
i37
$
i54
/
Unrecognized
tax benefits are included in Accrued taxes and Other deferred liabilities and credits in the Consolidated Balance Sheet. If these benefits were recognized at each respective year end period, they would have reduced income tax expense in 2022, 2021 and 2020 by $i30 million, $i30
million and $i43 million, respectively, net of the federal benefit from state income taxes.
TDS recognizes accrued interest and penalties related to unrecognized tax benefits in Income tax expense (benefit). The amounts charged to income tax expense related to interest and penalties resulted in nominal expense in 2022, a benefit of $i10
million in 2021, and an expense of $i2 million in 2020. Net accrued liabilities for interest and penalties were $ii13/
million at both December 31, 2022 and 2021, and are included in Other deferred liabilities and credits in the Consolidated Balance Sheet.
TDS and its subsidiaries file federal and state income tax returns. With limited exceptions, TDS is no longer subject to federal and state income tax audits for the years prior to 2019.
i
Note
6 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.
(Dollars and shares in millions, except per share amounts)
Net income (loss) attributable to TDS common shareholders used in basic earnings (loss) per share
$
(i7)
$
i117
$
i226
Adjustments
to compute diluted earnings (loss):
Noncontrolling interest adjustment
(i1)
(i1)
(i3)
Net
income (loss) attributable to TDS common shareholders used in diluted earnings (loss) per share
$
(i8)
$
i116
$
i223
Weighted
average number of shares used in basic earnings (loss) per share:
Common Shares
i107
i108
i107
Series
A Common Shares
i7
i7
i7
Total
i114
i115
i114
Effects
of dilutive securities
i—
i1
i1
Weighted
average number of shares used in diluted earnings (loss) per share
i114
i116
i115
Basic
earnings (loss) per share attributable to TDS common shareholders
$
(i0.07)
$
i1.03
$
i1.97
Diluted
earnings (loss) per share attributable to TDS common shareholders
$
(i0.07)
$
i1.00
$
i1.93
/
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 per share attributable to TDS common shareholders because their effects were antidilutive. The number of such Common Shares excluded was i5 million shares, i4
million shares and i5 million shares for 2022, 2021 and 2020, respectively.
i
Note
7 Intangible Assets
Licenses
TDS reviews opportunities to acquire additional wireless spectrum, including pursuant to FCC auctions. TDS also may seek to divest outright or exchange wireless spectrum that is not strategic to its long-term success. Prior to 2009, TDS accounted for UScellular’s share repurchases as step acquisitions, allocating a portion of the share repurchase value to TDS’ Licenses. Consequently, UScellular's Licenses on a stand-alone basis do not equal the TDS consolidated Licenses related to UScellular. iActivity
related to TDS' Licenses is presented below.
In February 2021, the FCC announced by way of public notice that UScellular was the provisional winning bidder for i254
wireless spectrum licenses in the 3.7-3.98 GHz bands (Auction 107) for $i1,283 million. UScellular paid $i30 million
of this amount in 2020 and the remainder in March 2021. The wireless spectrum licenses from Auction 107 were granted by the FCC in July 2021. Additionally, UScellular expects to be obligated to pay approximately $i185 million in total from 2021 through 2024 related to relocation costs and accelerated relocation incentive payments. Such additional costs were accrued and capitalized at the time the licenses were granted, and are adjusted as necessary as the estimated obligation changes. UScellular paid $i36 million
and $i8 million related to the additional costs in October 2021 and September 2022, respectively. At December 31, 2022, the remaining estimated payments of approximately $i133 million
and $i8 million are included in Other current liabilities and Other deferred liabilities and credits, respectively, and at December 31, 2021, the remaining payments of approximately $i17 million
and $i128 million are included in Other current liabilities and Other deferred liabilities and credits, respectively, in the Consolidated Balance Sheet. The spectrum must be cleared by incumbent providers before UScellular can access it. UScellular does not expect to have access to this spectrum until late 2023.
Auction 110
In January 2022, the FCC announced by way of public notice that UScellular was the provisional winning bidder for i380
wireless spectrum licenses in the 3.45-3.55 GHz band (Auction 110) for $i580 million. UScellular paid $i20
million of this amount in 2021 and the remainder in January and February 2022. The advance payment was included in Other assets and deferred charges in the December 31, 2021 Consolidated Balance Sheet. The wireless spectrum licenses from Auction 110 were granted by the FCC on May 4, 2022.
Goodwill
The Goodwill balance of TDS Telecom was $ii547/
million at both December 31, 2022 and 2021, net of accumulated impairment losses of $i29 million recorded in prior periods.
Other intangible assets
i
Activity
related to TDS' Other intangible assets is presented below.
Amortization
expense for intangible assets was $i21 million, $i21 million and $i26
million for the years ended December 31, 2022, 2021 and 2020, respectively. Based on the current balance of finite-lived intangible assets, the estimated amortization expense is $i22 million, $i19
million, $i19 million, $i19 million and $i19
million for the years 2023 through 2027, respectively.
i
Note 8 Investments in Unconsolidated Entities
Investments in unconsolidated entities consist of amounts invested in entities in which TDS holds a noncontrolling interest. iTDS'
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.
The following tables, which are based on unaudited information provided in part by third parties, summarize the combined assets, liabilities and equity, and results of operations of TDS’ equity method investments:
TDS’ Property, plant and equipment in service and under construction, and related accumulated depreciation and amortization, as of December 31, 2022 and 2021, were as follows:
December
31,
Useful Lives (Years)
2022
2021
(Dollars in millions)
Land
N/A
$
i63
$
i62
Buildings
i5-i40
i532
i541
Leasehold
and land improvements
i1-i30
i1,538
i1,476
Cable
and wire
i15-i40
i2,609
i2,403
Network
and switching equipment
i3-i10
i2,706
i2,671
Cell
site equipment
i7-i25
i4,248
i4,150
Office
furniture and equipment
i3-i10
i296
i346
Other
operating assets and equipment
i1-i12
i200
i176
System
development
i1-i7
i2,070
i1,864
Work
in process
N/A
i709
i576
Total
property, plant and equipment, gross
i14,971
i14,265
Accumulated
depreciation and amortization
(i10,211)
(i9,904)
Total
property, plant and equipment, net
$
i4,760
$
i4,361
/
Depreciation
and amortization expense totaled $i882 million, $i851 million and $i862
million in 2022, 2021 and 2020, respectively. In 2022, 2021 and 2020, (Gain) loss on asset disposals, net included charges of $i27 million, $i26
million and $i27 million, respectively, related to disposals of assets from service in the normal course of business.
/i
Note
10 Leases
Lessee Agreements
iTDS’ most significant leases are for land and tower spaces, network facilities, retail spaces, and offices. Nearly all of TDS’ leases are classified as operating leases, although it does have a small number of finance leases.
TDS has agreements with both lease and nonlease components, which are accounted for separately. As part of the present value calculation for the lease liabilities, TDS uses an incremental borrowing rate as the rates implicit in the leases are not readily determinable. The incremental borrowing rates used for lease accounting are based on TDS' unsecured rates, adjusted to approximate the rates at which TDS would be required to borrow on a collateralized basis over a term similar to the recognized lease term. TDS applies the incremental borrowing rates to lease components using a portfolio approach based upon the length of the lease term and the reporting entity in which the lease resides. The cost of nonlease components in TDS’ lease portfolio (e.g., utilities and common area maintenance) are not typically predetermined at lease commencement and are expensed as incurred
at their relative standalone price.
Variable lease expense occurs when, subsequent to the lease commencement, lease payments are made that were not originally included in the lease liability calculation. TDS’ variable lease payments are primarily a result of leases with escalations that are tied to an index. The incremental changes due to the index changes are recorded as variable lease expense and are not included in the right-of-use assets or lease liabilities.
The identified lease term determines the periods to which expense is allocated and is also utilized in the right-of-use asset and liability calculations. Many of TDS’ leases include renewal and early termination options. At lease commencement, the lease terms include options to extend the lease when TDS is reasonably certain that it will exercise the options. The lease terms do not include early termination options unless TDS
is reasonably certain to exercise the options. TDS has applied the portfolio approach in cases where asset classes have similar lease characteristics including tower space, retail, and certain ground lease asset classes.
i
The following table shows the components of lease cost included in the Consolidated Statement of Operations:
TDS’
most significant lessor leases are for tower space and colocation space. All of TDS’ lessor leases are classified as operating leases. A lease is generally present in a contract if the lessee controls the use of identified property, plant, or equipment for a period of time in exchange for consideration. TDS’ lessor agreements with lease and nonlease components are generally accounted for separately; however, certain service agreements with insignificant lease components are accounted for as nonlease transactions.
The identified lease term determines the periods to which revenue is allocated over the term of the lease. Many of TDS’ leases include renewal and early termination options. At lease commencement, lease terms include options to extend the lease when TDS is reasonably certain that lessees will exercise the options. Lease terms
would not include periods after the date of a termination option that lessees are reasonably certain to exercise.
Variable lease income occurs when, subsequent to the lease commencement, lease payments are received that were not originally included in the lease receivable calculation. TDS’ variable lease income is primarily a result of leases with escalations that are tied to an index. The incremental increases due to the index changes are recorded as variable lease income.
iThe following table shows the components of lease income which
are included in Service revenues in the Consolidated Statement of Operations:
iThe
maturities of expected lease payments to be received are as follows:
Operating Leases
(Dollars in millions)
2023
$
i98
2024
i90
2025
i72
2026
i40
2027
i21
Thereafter
i39
Total
future lease maturities
$
i360
/
i
Note
11 Asset Retirement Obligations
UScellular is subject to asset retirement obligations associated with its leased cell sites, switching office sites, retail store sites and office locations. Asset retirement obligations generally include obligations to restore leased land, towers, retail store and office premises to their pre-lease conditions.
TDS Telecom owns poles, cable and wire and certain buildings and also leases office space and property used for housing central office switching equipment and fiber cable. These assets and leases often have removal or remediation requirements. For example, TDS Telecom’s poles, cable and wire are often located on property that is not owned by TDS Telecom and may be subject to the provisions of easements, permits, or leasing arrangements. Pursuant to these terms, TDS Telecom is often required to remove these assets and return the property to its
original condition at a future date.
Asset retirement obligations are included in Other deferred liabilities and credits in the Consolidated Balance Sheet.
In 2022 and 2021, UScellular and TDS Telecom performed a review of the assumptions and estimated future costs related to asset retirement obligations. iThe results of the reviews and other changes in asset retirement obligations during 2022 and 2021, were as follows:
At December 31, 2022, TDS and UScellular had revolving credit agreements available for general corporate purposes. Amounts under the revolving credit agreements may be borrowed, repaid and reborrowed from time to time until maturity in July 2026.
iThe
following table summarizes the revolving credit agreements as of December 31, 2022:
TDS
UScellular
(Dollars in millions)
Maximum borrowing capacity
$
i400
$
i300
Letters
of credit outstanding
$
i1
$
i—
Amount
borrowed
$
i—
$
i—
Amount
available for use
$
i399
$
i300
/
Borrowings
under the TDS revolving credit agreement bear interest at a rate of London Inter-bank Offered Rate (LIBOR) plus i1.50%. Borrowings under the UScellular revolving credit agreement bear interest at a rate of Secured Overnight Financing Rate (SOFR) plus i1.60%.
TDS and UScellular may select a borrowing period of either one, two, three or six months (or other period of twelve months or less if requested by TDS or UScellular and approved by the lenders). TDS’ and UScellular’s credit spread and commitment fees on their revolving credit agreements may be subject to increase if their current credit ratings from nationally recognized credit rating agencies are lowered, and may be subject to decrease if the ratings are raised.
During 2022, UScellular borrowed and repaid $ii75/
million under its revolving credit agreement.
Term Loan Agreements
At December 31, 2022, TDS and UScellular had senior term loan credit agreements available for general corporate purposes.
The following tables summarizes the term loan credit agreements as of December 31, 2022:
TDS:
Term Loan 1
Term
Loan 2
Total
(Dollars in millions)
Maximum borrowing capacity
$
i200
$
i300
$
i500
Amount
borrowed and outstanding
$
i198
$
i299
$
i497
Amount
borrowed and repaid
$
i2
$
i1
$
i3
Amount
available for use
$
i—
$
i—
$
i—
Interest
rate
LIBOR plus i2.00%
LIBOR plus i2.50%
Maturity
date
July 2028
July 2031
Quarterly installments
$i0.5 million from December 2021 to maturity date
$i0.75
million from December 2022 to September 2026; $i2 million from December 2026 to maturity date
UScellular:
Term
Loan 1
Term Loan 2
Term Loan 3
Total
(Dollars in millions)
Maximum borrowing capacity
$
i300
$
i300
$
i200
$
i800
Amount
borrowed and outstanding
$
i300
$
i296
$
i200
$
i796
Amount
borrowed and repaid
$
i—
$
i4
$
i—
$
i4
Amount
available for use
$
i—
$
i—
$
i—
$
i—
Interest
rate
SOFR plus i1.60%
SOFR plus i2.10%
SOFR
plus i2.60%
Maturity date
July 2026
July 2028
July 2031
Quarterly installments
$i2
million from March 2023 to December 2023; $i4 million from March 2024 to December 2025; $i8 million from March
2026 to maturity date
$i0.75 million from December 2021 to maturity date
$i0.5
million from December 2022 to September 2026; $i1 million from December 2026 to maturity date
In 2022, TDS borrowed $i300 million and UScellular borrowed $i500 million under the term loan agreements.
Export
Credit Financing Agreements
In November 2022, TDS entered into a $i150 million term loan credit facility with Export Development Canada to finance (or refinance) imported equipment, including equipment purchased prior to entering the term loan credit facility agreement. The agreement may be drawn in one or more advances by the five-month anniversary of the date of the agreement which is April 9, 2023; amounts not drawn by that time will cease
to be available. Borrowings bear interest at a rate of SOFR plus i1.60% and are due and payable on the five-year anniversary of the first borrowing, which is in December 2027. During 2022, TDS borrowed $i50
million under the agreement. As of December 31, 2022, the outstanding borrowings under the agreement were $i50 million and the unused borrowing capacity was $i100 million.
TDS
borrowed $ii50/ million under its export
credit financing agreement in both January and February 2023.
In December 2021, UScellular entered into a $i150 million term loan credit facility with Export Development Canada to finance (or refinance) imported equipment, including equipment purchased prior to entering the term loan credit facility agreement. Borrowings bear interest at a rate of SOFR plus i1.60%
and are due and payable on the five-year anniversary of the first borrowing, which is in January 2027. During 2022, UScellular borrowed $ii150/ million, which is the full
amount available under the agreement.
Receivables Securitization Agreement
At December 31, 2022, UScellular, through its subsidiaries, had a $i450 million receivables securitization agreement for securitized borrowings using its equipment installment receivables for general corporate purposes. Amounts under
the receivables securitization agreement may be borrowed, repaid and reborrowed from time to time until maturity in March 2024. Unless the agreement is amended to extend the maturity date, repayments based on receivable collections commence in April 2024. The outstanding borrowings bear interest at floating rates. During 2022, UScellular repaid $i250 million and borrowed $i75
million under the agreement. As of December 31, 2022, the outstanding borrowings under the agreement were $i275 million and the unused borrowing capacity under the agreement was $i175 million,
subject to sufficient collateral to satisfy the asset borrowing base provisions of the agreement. As of December 31, 2022, the USCC Master Note Trust held $i447 million of assets pledged as collateral for the receivables securitization agreement.
In connection with entering into the receivables securitization agreement in 2017, UScellular formed a wholly-owned subsidiary, USCC Master Note Trust (Trust), which qualifies as a bankruptcy remote entity. Under the terms of the agreement, UScellular, through its subsidiaries,
transfers eligible equipment installment receivables to the Trust. The Trust then utilizes the transferred assets as collateral for notes payables issued to third party financial institutions. Since UScellular retains effective control of the transferred assets in the Trust, any activity associated with this receivables securitization agreement will be treated as a secured borrowing. Therefore, TDS will continue to report equipment installment receivables and any related balances on the Consolidated Balance Sheet. Cash received from borrowings under the receivables securitization agreement will be reported as Debt. Refer to Note 15 — Variable Interest Entities for additional information.
In February 2023, UScellular borrowed $i25 million
under the receivables securitization agreement.
Repurchase Agreement
In January 2022, UScellular, through a subsidiary (the repo subsidiary), entered into a repurchase agreement to borrow up to $i200 million, subject to the availability of eligible equipment installment plan receivables and the agreement of the lender. The transaction form involves the sale of receivables by the repo subsidiary and the commitment to repurchase at the end of the applicable
repurchase term, which may extend up to one month. The transaction is accounted for as a one-month secured borrowing. The outstanding borrowings bear interest at a rate of SOFR plus i1.25%. Although the lender holds a security interest in the receivables, the repo subsidiary retains effective control and collection risk of the receivables, and therefore, any activity associated with the repurchase agreement will be treated as a secured borrowing. UScellular will continue to report equipment installment plan receivables and any related balances on the Consolidated Balance
Sheet. During 2022, the repo subsidiary borrowed $i110 million and repaid $i50 million under the repurchase agreement. As of December 31, 2022, the outstanding borrowings under the agreement
were $i60 million and the unused borrowing capacity was $i140 million. The outstanding borrowings are included in Other current liabilities in the December 31, 2022 Consolidated Balance
Sheet. As of December 31, 2022 UScellular held $i524 million of assets available for inclusion in the repurchase facility; these assets are distinct from the assets held by the USCC Master Note Trust for UScellular's receivables securitization agreement.
In January 2023, UScellular amended the repurchase agreement to extend the expiration date to January 2024. The outstanding borrowings will bear interest at a rate of the lender's cost of funds (which has historically tracked closely to SOFR) plus i1.35%.
There were no significant changes to other terms of the repurchase agreement.
The TDS and UScellular revolving credit agreements, term loan agreements, 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. In particular, under these agreements, TDS and UScellular are required to maintain the Consolidated Interest Coverage Ratio at a level not lower than i3.00
to 1.00 as of the end of any fiscal quarter. TDS and UScellular also are required to maintain the Consolidated Leverage Ratio at a level not to exceed i3.75 to 1.00 as of the end of any fiscal quarter. TDS and UScellular believe they were in compliance as of December 31, 2022 with all such financial covenants.
In connection with UScellular’s revolving credit agreements, UScellular term loan agreements and the UScellular export credit financing agreement TDS and UScellular entered
into subordination agreements together with the administrative agents for the lenders under each agreement. Pursuant to these subordination agreements, (a) any consolidated funded indebtedness from UScellular to TDS will be unsecured and (b) any (i) consolidated funded indebtedness from UScellular to TDS (other than “refinancing indebtedness” as defined in the subordination agreements) in excess of $i105 million and (ii) refinancing indebtedness in excess of $i250
million will be subordinated and made junior in right of payment to the prior payment in full of obligations to the lenders under each agreement.As of December 31, 2022, UScellular had iino/
outstanding consolidated funded indebtedness or refinancing indebtedness that was subordinated to each agreement pursuant to the subordination agreements.
Certain TDS and UScellular wholly-owned subsidiaries have jointly and severally unconditionally guaranteed the payment and performance of the obligations of TDS and UScellular under the revolving credit agreements, term loan agreements and export credit agreements. Other subsidiaries that meet certain criteria will be required to provide a similar guaranty in the future. UScellular entered into a performance guaranty whereby UScellular guarantees the performance of certain wholly-owned subsidiaries under
the receivables securitization agreement and repurchase agreement.
In
2021, TDS redeemed $i836 million of outstanding Senior Notes and UScellular redeemed $i917 million of outstanding Senior Notes. At time of redemption,
$i57 million of interest expense was recorded related to unamortized debt issuance costs for the notes. The notes were redeemed at a price of i100%
of the principal amount, including accrued and unpaid interest to the redemption date.
UScellular may redeem its i6.25% Senior Notes, i5.5%
March 2070 Senior Notes and i5.5% June 2070 Senior Notes, in whole or in part at any time after the respective call date, at a redemption price equal to i100% of the principal
amount redeemed plus accrued and unpaid interest. UScellular may redeem the i6.7% Senior Notes, in whole or in part, at any time prior to maturity at a redemption price equal to the greater of (a) i100%
of the principal amount of such notes, plus accrued and unpaid interest, or (b) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semi-annual basis at the Treasury Rate plus 30 basis points.
Interest on the Senior Notes outstanding at December 31, 2022, is payable quarterly, with the exception of UScellular's i6.7% Senior Notes for which interest is payable semi-annually.
The
annual requirements for principal payments on long-term debt are approximately $i19 million, $i26
million, $i26 million, $i275 million and $i218
million for the years 2023 through 2027, respectively. These amounts do not include payments on the $i275 million of outstanding borrowings under the receivables securitization agreement. If the maturity date of the facility is not extended, principal repayments begin in April 2024. Principal repayments are not scheduled but are instead based on actual receivable collections.
The covenants associated with TDS and its subsidiaries’ long-term debt obligations, among other things,
restrict TDS’ ability, subject to certain exclusions, to incur additional liens, enter into sale and leaseback transactions, and sell, consolidate or merge assets.
UScellular’s long-term debt notes do not contain any provisions resulting in acceleration of the maturities of outstanding debt in the event of a change in UScellular’s credit rating.
i
Note 13 Employee Benefit Plans
Defined
Contribution Plans
TDS sponsors a qualified noncontributory defined contribution pension plan. The plan provides benefits for certain employees of TDS Corporate, TDS Telecom and UScellular. Under this plan, pension costs are calculated separately for each participant and are funded annually. Total pension costs were $i17 million, $i16
million and $i16 million in 2022, 2021 and 2020, respectively. In addition, TDS sponsors a defined contribution retirement savings plan (401(k) plan). Total costs incurred from TDS’ contributions to the 401(k) plan were $i28
million, $i27 million and $i27 million in 2022, 2021 and 2020, respectively.
TDS also
sponsors an unfunded nonqualified deferred supplemental executive retirement plan for certain employees to offset the reduction of benefits caused by the limitation on annual employee compensation under the tax laws.
Other Post-Retirement Benefits
TDS sponsors a defined benefit post-retirement plan that provides medical benefits to retirees and that covers certain employees of TDS Corporate and TDS Telecom, which is not significant to TDS’ financial position or operating results. The plan is contributory, with retiree contributions adjusted annually. TDS recognizes the funded status of the plan as a component of Other assets and deferred charges in the Consolidated Balance Sheet as of December 31, 2022 and 2021. Changes in the funded status are included in Accumulated other comprehensive
income (loss) in the Consolidated Balance Sheet before affecting such amounts for income taxes to the extent that such changes are not recognized in earnings as a component of net periodic benefit cost.
The post-retirement benefit fund invests mainly in mutual funds that hold U.S. equities, international equities, and debt securities. The post-retirement benefit fund does not hold any debt or equity securities issued by TDS, UScellular or any related parties. The fair value of the plan assets of the post-retirement benefit fund was $i66
million and $i77 million as of December 31, 2022 and 2021, respectively. The total plan benefit obligations were $i44
million and $i54 million as of December 31, 2022 and 2021, respectively. Therefore, the total funded status was an asset of $i22
million and $i23 million as of December 31, 2022 and 2021, respectively.
TDS is not required to set aside current funds for its future retiree health insurance benefits. The decision to contribute to the plan assets is based upon several factors, including the funded status of the plan, market conditions, alternative investment opportunities, tax benefits and other circumstances. In accordance with applicable
income tax regulations, annual contributions to fund the costs of future retiree medical benefits may not exceed certain thresholds. TDS has not determined whether it will make a contribution to the plan in 2023.
/i
Note 14 Commitments and Contingencies
Indemnifications
TDS
enters into agreements in the normal course of business that provide for indemnification of counterparties. The terms of the indemnifications vary by agreement. The events or circumstances that would require TDS to perform under these indemnities are transaction specific; however, these agreements may require TDS to indemnify the counterparty for costs and losses incurred from litigation or claims arising from the underlying transaction. TDS is unable to estimate the maximum potential liability for these types of indemnifications as the amounts are dependent on the outcome of future events, the nature and likelihood of which cannot be determined at this time. Historically, TDS has not made any significant indemnification payments under such agreements.
iTDS is involved or may be involved from time to time in legal proceedings before the FCC, other regulatory authorities, and/or various state and federal courts. If TDS believes that a loss arising from such legal proceedings is probable and can be reasonably estimated, an amount is accrued in the financial statements for the estimated loss. If only a range of loss can be determined, the best estimate within that range is accrued; if none of the estimates within that range is better than
another, the low end of the range is accrued. The assessment of the expected outcomes of legal proceedings is a highly subjective process that requires judgments about future events. The legal proceedings are reviewed at least quarterly to determine the adequacy of accruals and related financial statement disclosures. The ultimate outcomes of legal proceedings could differ materially from amounts accrued in the financial statements.
TDS had iino/
significant accruals with respect to legal proceedings and unasserted claims as of December 31, 2022 and 2021. TDS is unable to estimate any contingent loss in excess of the amounts accrued.
In April 2018, the United States Department of Justice (DOJ) notified TDS that it was conducting inquiries of UScellular and TDS under the federal False Claims Act relating to UScellular’s participation in wireless spectrum license auctions 58, 66, 73 and 97 conducted by the FCC. UScellular is/was a limited partner in several limited partnerships which qualified for the i25%
bid credit in each auction. The investigation arose from civil actions under the Federal False Claims Act brought by private parties in the U.S. District Court for the Western District of Oklahoma. In November and December 2019, following the DOJ’s investigation, the DOJ informed TDS and UScellular that it would not intervene in the above-referenced actions. Subsequently, the private party plaintiffs filed amended complaints in both actions in the U.S. District Court for the Western District of Oklahoma and are continuing the action on their own. In July 2020, these actions were transferred to the U.S. District Court for the District of Columbia. TDS and UScellular believe that UScellular’s arrangements with the limited partnerships and the limited partnerships’ participation in the FCC auctions complied with applicable law and FCC rules. At this time, TDS cannot predict the outcome of any proceeding.
i
Note
15 Variable Interest Entities
Consolidated VIEs
iTDS 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 TDS’ Form 10-K for the year ended December 31, 2022.
UScellular formed USCC EIP LLC (Seller/Sub-Servicer), USCC Receivables Funding LLC (Transferor) and the 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. Refer to Note 12 — Debt, Receivables Securitization Agreement for additional details regarding the securitization agreement for which these entities were established.
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.
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 under the variable interest model.
i
The following table presents the classification and balances of the consolidated VIEs’ assets and liabilities in TDS’ Consolidated Balance Sheet.
1Total
liabilities does not include amounts borrowed under the receivables securitization agreement. See Note 12 — 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 under the variable interest model.
TDS’ total investment in these unconsolidated entities was $ii4/
million at both December 31, 2022 and 2021, and is included in Investments in unconsolidated entities in TDS’ Consolidated Balance Sheet. The maximum exposure from unconsolidated VIEs is limited to the investment held by TDS in those entities.
Other Related Matters
TDS made contributions, loans or advances to its VIEs totaling $i282
million, $i36 million and $i111 million during
2022, 2021 and 2020, respectively; of which $i249 million in 2022 and $i83 million in 2020 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 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. In June 2022, the limited partnership agreement was amended and the general partner’s put option related
to its interest in Advantage Spectrum will now be exercisable in the third quarter of 2023, and if not exercised at that time, will be exercisable in the third quarter of 2024. The greater of the carrying value of the general partner's investment or the value of the put option, net of any borrowings due to TDS, is recorded as Noncontrolling interests with redemption features in TDS’ Consolidated Balance Sheet. Also in accordance with GAAP, minority share of income or changes in the redemption value of the put option, net of interest accrued on the loans, are recorded as a component of Net income attributable to noncontrolling interests, net of tax, in TDS’ Consolidated Statement of Operations.
The
following schedule discloses the effects of Net income attributable to TDS shareholders and changes in TDS’ ownership interest in UScellular on TDS’ equity:
Change in TDS’ Capital in excess of par value from UScellular's issuance of UScellular shares
(i19)
(i49)
(i38)
Change
in TDS’ Capital in excess of par value from UScellular’s repurchases of UScellular shares
i35
i17
i14
Purchase
of ownership in subsidiaries from noncontrolling interests
i—
i—
(i9)
Net
transfers (to) from noncontrolling interests
i16
(i32)
(i33)
Net
income attributable to TDS shareholders after transfers (to) from noncontrolling interests
$
i78
$
i124
$
i193
/
Mandatorily
Redeemable Noncontrolling Interests in Finite-Lived Subsidiaries
TDS’ consolidated financial statements include certain noncontrolling interests that meet the GAAP definition of mandatorily redeemable financial instruments. These mandatorily redeemable noncontrolling interests represent interests held by third parties in consolidated partnerships, where the terms of the underlying partnership agreement provide for a defined termination date at which time the assets of the subsidiary are to be sold, the liabilities are to be extinguished and the remaining net proceeds are to be distributed to the noncontrolling interest holders and TDS in accordance with the respective partnership agreements. The termination dates of these mandatorily redeemable noncontrolling interests range from 2085 to 2092.
The
estimated aggregate amount that would be due and payable to settle all of these noncontrolling interests, assuming an orderly liquidation of the finite-lived consolidated partnerships on December 31, 2022, net of estimated liquidation costs, is $i20 million. This amount excludes redemption amounts recorded in Noncontrolling interests with redemption features in the Consolidated Balance Sheet. The estimate of settlement value was based on certain factors and assumptions which are
subjective in nature. Changes in those factors and assumptions could result in a materially larger or smaller settlement amount. The corresponding carrying value of the mandatorily redeemable noncontrolling interests in finite-lived consolidated partnerships at December 31, 2022, was $i6 million, and is included in Noncontrolling interests in the Consolidated Balance Sheet. The excess of the aggregate settlement value over the aggregate carrying value of these mandatorily
redeemable noncontrolling interests is due primarily to the unrecognized appreciation of the noncontrolling interest holders’ share of the underlying net assets in the consolidated partnerships. Neither the noncontrolling interest holders’ share, nor TDS’ share, of the appreciation of the underlying net assets of these subsidiaries is reflected in the consolidated financial statements.
/i
Note
17 Shareholders’ Equity
Common Stock
Series A Common Shares are convertible on a share-for-share basis into Common Shares. In matters other than the election of directors, each Series A Common Share is entitled to iten votes per share, compared to ione
vote for each Common Share. The Series A Common Shares are entitled to elect ieight directors, and the Common Shares elect ifour. TDS
has reserved i7,411,000 Common Shares at December 31, 2022, for possible issuance upon conversion of Series A Common Shares.
On August 2, 2013, the Board of Directors of TDS authorized a $i250
million stock repurchase program for the purchase of TDS Common Shares from time to time pursuant to open market purchases, block transactions, private purchases or otherwise, depending on market conditions. This authorization does not have an expiration date. As of December 31, 2022, the maximum dollar value of TDS Common Shares that may yet be purchased under TDS' program was $i138 million.
In November 2009, UScellular announced by Form 8-K that
the Board of Directors of UScellular authorized the repurchase of up to i1,300,000 Common Shares on an annual basis beginning in 2009 and continuing each year thereafter, on a cumulative basis. In December 2016, the UScellular Board amended this authorization to provide that, beginning on January 1, 2017, the authorized repurchase amount with respect to a particular year will be any amount from izero
to i1,300,000 Common Shares, as determined by the Pricing Committee of the Board of Directors, and that if the Pricing Committee did not specify an amount for any year, such amount would be zero for such year. The Pricing Committee has not specified any increase in the authorization since that time. The Pricing Committee also was authorized to decrease the cumulative amount of the authorization at any time, but has not taken any action to do so at
this time. As of December 31, 2022, the total cumulative amount of Common Shares authorized to be purchased is i1,927,000. The authorization provides that share repurchases will be made pursuant to open market purchases, block purchases, private purchases, or otherwise, depending on market prices and other conditions. This authorization does not have an expiration date.
In March 2021, TDS issued i16,800 shares of TDS’ i6.625%
Series UU Cumulative Redeemable Perpetual Preferred Stock (Preferred Shares) for $i25,000 per Preferred Share, for total gross proceeds of $i420 million.
The Preferred Shares were issued to a depositary to facilitate the issuance of i16,800,000 depositary shares (Depositary Shares), each representing 1/1,000th of a Preferred Share. TDS received net cash proceeds of $i406 million
after payment of issuance costs of $i14 million. The proceeds were for general corporate purposes, including but not limited to, the funding of capital expenditures associated with TDS Telecom's fiber program and retirement of existing debt.
In August 2021, TDS issued i27,600
shares of TDS’ i6.000% Series VV Preferred Shares for $i25,000 per Preferred Share, for total gross proceeds of $i690 million.
The Preferred Shares were issued to a depositary to facilitate the issuance of i27,600,000 Depositary Shares, each representing 1/1,000th of a Preferred Share. TDS received net cash proceeds of $i668 million
after payment of issuance costs of $i22 million. The proceeds were for general corporate purposes, including but not limited to, the funding of capital expenditures associated with TDS Telecom's fiber program and retirement of existing debt.
Each holder of Depositary Shares is entitled to a proportional fractional interest in all rights and preferences of the Preferred Shares, including dividend, voting, redemption and liquidation rights. The Preferred Shares have no maturity or mandatory redemption date and are not redeemable
at the option of the holders.
Dividends on the Preferred Shares, when declared, are payable quarterly at a rate equal to i6.625% per year for the Series UU Preferred Shares and i6.000%
for the Series VV Preferred Shares. As of December 31, 2022, there were no dividends in arrears. The Preferred Shares rank senior to TDS’ Common Shares and junior to all of TDS’ existing and future indebtedness outstanding under TDS’ credit facilities and unsecured senior notes. The Series VV Preferred Shares rank on parity with the Series UU Preferred Shares. Upon voluntary or involuntary liquidation, holders of Preferred Shares are entitled to a liquidating distribution of $ii25,000/
per Preferred Share after satisfaction of liabilities and obligations to creditors. The Preferred Shares have voting rights only if certain limited conditions are met.
TDS may, at its option, redeem the Series UU Preferred Shares (a) in whole or in part, on or after March 31, 2026 at a redemption price of $i25,000 per Preferred Share, or (b) in whole but not in part, any time prior to March 31, 2026, within
120 days after a credit rating downgrade as specified in the offering prospectus, at a redemption price of $i25,500 per Preferred Share, or (c) in whole or in part, within 120 days of the occurrence of a change in control as specified in the offering prospectus, at a redemption price of $i25,000
per Preferred Share, plus, in each case, all accumulated and unpaid dividends (whether or not declared) up to the redemption date.
TDS may, at its option, redeem the Series VV Preferred Shares (a) in whole or in part, on or after September 30, 2026 at a redemption price of $i25,000 per Preferred Share, or (b) in whole but not in part, any time prior to September 30, 2026, within 120 days after a credit
rating downgrade as specified in the offering prospectus, at a redemption price of $i25,500 per Preferred Share, or (c) in whole or in part, within 120 days of the occurrence of a change in control as specified in the offering prospectus, at a redemption price of $i25,000
per Preferred Share, plus, in each case, all accumulated and unpaid dividends (whether or not declared) up to the redemption date.
The Preferred Shares are convertible, at the option of the holder, to shares of TDS Common Shares upon a change of control as specified in the offering prospectus. The conversion right is the lesser of (a) Common Shares equal to $ii25,000/
per Preferred Share plus any accumulated and unpaid dividends, divided by the TDS Common Stock price, or (b) i2,773.200 Common Shares for each Series UU Preferred Share and i2,584.000
Common Shares for each Series VV Preferred Share, which represents one-half the conversion rate at the time of closing. In both cases, certain other adjustments and provisions may impact the conversion.
Tax-Deferred Savings Plan
At December 31, 2022, TDS has reserved i988,000 Common Shares for issuance under the TDS Tax-Deferred Savings Plan, a qualified profit‑sharing plan pursuant
to Sections 401(a) and 401(k) of the Internal Revenue Code. Participating employees have the option of investing their contributions and TDS’ contributions in a TDS Common Share fund, a UScellular Common Share fund or certain unaffiliated funds.
Deferred
compensation bonus and matching stock unit awards
i—
i—
i1
Awards
under Non-Employee Director compensation plan
i2
i2
i2
Total
stock-based compensation, before income taxes
i42
i49
i53
Income
tax benefit
(i11)
(i12)
(i13)
Total
stock-based compensation expense, net of income taxes
$
i31
$
i37
$
i40
/
At
December 31, 2022, unrecognized compensation cost for all stock‑based compensation awards was $i54 million and is expected to be recognized over a weighted average period of i1.9
years.
i
The following table provides a summary of the classification of stock-based compensation expense included in the Consolidated Statement of Operations for the years ended:
TDS’
tax benefits realized from the exercise of stock options and the vesting of other awards totaled $i7 million in 2022.
TDS (Excluding UScellular)
The information in this section relates to stock‑based compensation plans using the equity instruments of TDS. Participants in these plans are employees of TDS Corporate and TDS Telecom and Non-employee Directors of TDS. Information
related to plans using the equity instruments of UScellular are shown in the UScellular section following the TDS section.
Under the TDS Long-Term Incentive Plans, TDS may grant fixed and performance-based incentive and non-qualified stock options, restricted stock, restricted stock units, and deferred compensation stock unit awards to key employees.
TDS had reserved i20,700,000
Common Shares at December 31, 2022, for equity awards granted and to be granted under the TDS Long-Term Incentive Plans in effect. At December 31, 2022, the only types of awards outstanding are fixed non-qualified stock option awards, restricted stock unit awards, performance share awards and deferred compensation stock unit awards.
TDS has also established a Non-Employee Directors’ compensation plan under which it has reserved i81,000
TDS Common Shares at December 31, 2022, for issuance as compensation to members of the Board of Directors who are not employees of TDS.
TDS uses treasury stock to satisfy requirements for shares issued pursuant to its various stock-based compensation plans.
Long-Term Incentive Plans – Restricted Stock Units
TDS grants restricted stock unit awards to key employees. Each outstanding restricted stock unit is convertible into one Common Share Award. The restricted stock unit awards currently outstanding were granted in 2020, 2021 and 2022 and will vest in 2023, 2024 and 2025, respectively.
TDS estimates the fair value of restricted stock units by reducing the grant-date price of TDS’ shares by the present value of the dividends expected to be paid on
the underlying shares during the requisite service period, discounted at the appropriate risk-free interest rate, since employees are not entitled to dividends declared on the underlying shares while the restricted stock is unvested. The fair value is then recognized as compensation cost on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.
The
total fair values as of the respective vesting dates of restricted stock units vested during 2022, 2021 and 2020 were $i7 million, $i11
million and $i7 million, respectively. The weighted average grant date fair value per share of the restricted stock units granted in 2022, 2021 and 2020 was $i15.34,
$i23.34 and $i17.19,
respectively.
Long-Term Incentive Plans – Performance Share Units
Beginning in 2016, TDS granted performance share units to certain TDS executive officers, and beginning in 2019, to certain key TDS Corporate and TDS Telecom employees. Each recipient may be entitled to shares of TDS common stock equal to i0% to i200%
of a communicated target award depending on the achievement of predetermined performance-based and market-based operating targets over ithree years. Performance-based operating targets for the TDS awards include Total Revenue and Return on Capital. Market-based operating targets are measured against TDS’ total shareholder return relative to a defined peer group. Performance-based operating targets for the TDS Telecom employees' awards include Total Revenue, Return on Capital and Adjusted EBITDA. Performance shares accumulate
dividend equivalents, which are forfeitable if the performance metrics are not achieved. If the predetermined performance-based and market-based operating targets are met, the units granted in 2020, 2021 and 2022 will vest in 2023, 2024 and 2025, respectively.
TDS estimates fair value of performance-based operating targets using TDS’ closing stock price on the date of grant. An estimate of the number of performance units expected to vest based upon achieving the performance-based operating targets is made and the fair value is expensed on a straight-line basis over the requisite service period. Each reporting period these estimates are reviewed and stock compensation expense is adjusted accordingly to reflect the new estimates of total units expected to vest. If any part of the performance share units do not vest as a result of the established performance-based operating targets not being achieved, the related stock compensation
expense is reversed.
TDS estimates the market-based operating target’s fair value using an internally developed valuation model. This estimated fair value approximated TDS’ closing stock price at the date of grant for market-based share units granted in 2022, 2021 and 2020. This market-based operating target value determined at the date of grant is expensed on a straight-line basis over the requisite service period and the stock compensation expense is not adjusted during the performance period for the subsequent changes in the value of the market-based unit awards and will not be reversed even if the market-based operating target is not achieved.
i
A
summary of TDS nonvested performance share units and changes during 2022 is presented in the table below:
The
total fair value of performance share units that vested during 2022, 2021 and 2020 was $i5 million, $i3
million and $i2 million, respectively. The weighted average grant date fair value per share of the performance share units granted in 2022, 2021 and 2020 was $i17.42,
$i25.36 and $i19.15,
respectively.
Stock options granted to key employees are exercisable over a specified period not in excess of iten
years. Stock options generally vest over periods up to ithree years from the date of grant. Stock options outstanding at December 31, 2022, expire between 2023 and 2031. However, vested stock options typically expire i30
days after the effective date of an employee’s termination of employment for reasons other than retirement. Employees who leave at the age of retirement have i90 days (or ione
year if they satisfy certain requirements) within which to exercise their vested stock options. The exercise price of options equals the market value of TDS common stock on the date of grant.
i
TDS estimated the fair value of stock options granted in 2021 and 2020 using the Black-Scholes valuation model and the assumptions shown in the table below:
2021
2020
Expected
life
i6.3 years
i6.2
years
Expected annual volatility rate
i36.6
%
i35.0
%
Dividend
yield
i2.8
%
i3.6
%
Risk-free
interest rate
i1.1
%
i0.5
%
/
Pre-vesting
forfeitures and expected life are estimated based on historical experience related to similar awards, giving considerations to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. TDS believes that its historical experience provides the best estimates of future pre-vesting forfeitures and future expected life. The expected volatility assumption is based on historical volatility of TDS’ common stock over a period commensurate with the expected life. The dividend yield assumption is equal to the dividends declared in the most recent year as a percentage of the share price on the date of grant. The risk-free interest rate assumption is determined using the U.S. Treasury Yield Curve Rate with a term length that approximates the expected life of the stock options.
i
A
summary of TDS stock options (total and portion exercisable) and changes during 2022 is presented in the tables and narrative below.
The
weighted average grant date fair value per share of the TDS stock options granted in 2021 and 2020 was $i6.86 and $i4.24,
respectively. TDS did not grant options in 2022. The aggregate intrinsic value of TDS stock options exercised in 2022 and 2021 was less than $ii1/
million. There were ino TDS stock options exercised in 2020. The aggregate intrinsic value at December 31, 2022, presented in the table above represents the total pre-tax intrinsic value (the difference between TDS’ closing stock prices and the exercise price, multiplied by the number of in-the-money options) that would have been received by option holders
had all options been exercised on December 31, 2022.
Long-Term Incentive Plans – Deferred Compensation Stock Units
Certain TDS employees may elect to defer receipt of all or a portion of their annual bonuses and to receive a company matching contribution on the amount deferred. All bonus compensation that is deferred by employees electing to participate is immediately vested and is deemed to be invested in TDS Common Share units. The amount of TDS’ matching contribution depends on the portion of the annual bonus that is deferred. Participants receive a i25%
stock unit match for amounts deferred up to 50% of their total annual bonus and a i33% match for amounts that exceed 50% of their total annual bonus; such matching contributions also are deemed to be invested in TDS Common Share units and vest over ithree
years.
Compensation of Non-Employee Directors
TDS issued i51,000, i50,000
and i43,000 Common Shares under its Non-Employee Director plan in 2022, 2021 and 2020, respectively.
TDS
had reserved i2,234,000 Common Shares at December 31, 2022, for issuance under Automatic Dividend Reinvestment and Stock Purchase Plans and i198,000
Series A Common Shares for issuance under the Series A Common Share Automatic Dividend Reinvestment Plan. These plans enabled holders of TDS’ Common Shares to reinvest cash dividends in Common Shares and holders of Series A Common Shares to reinvest cash dividends in Series A Common Shares. The purchase price of the shares is ii95/%
of the market value, based on the average of the daily high and low sales prices for TDS’ Common Shares on the New York Stock Exchange for the ten trading days preceding the date on which the purchase is made. These plans are considered non-compensatory plans; therefore, no compensation expense is recognized for stock issued under these plans.
UScellular
The information in this section relates to stock‑based compensation plans using the equity instruments of UScellular. Participants in these plans are employees of UScellular and Non-employee Directors of UScellular. Information related to plans using the equity instruments of TDS are shown in the previous section.
UScellular has established the following stock‑based compensation plans: Long-Term Incentive Plans and a Non-Employee Director compensation plan.
Under
the UScellular Long-Term Incentive Plans, UScellular may grant fixed and performance-based incentive and non-qualified stock options, restricted stock, restricted stock units, and deferred compensation stock unit awards to key employees. At December 31, 2022, the only types of awards outstanding are fixed non-qualified stock option awards, restricted stock unit awards, performance share awards and deferred compensation stock unit awards.
Under the Non-Employee Director compensation plan, UScellular may grant Common Shares to members of the Board of Directors who are not employees of UScellular or TDS.
At December 31, 2022, UScellular had reserved i18,037,000
Common Shares for equity awards granted and to be granted under the Long-Term Incentive Plans and i62,000 Common Shares for issuance under the Non-Employee Director compensation plan.
UScellular uses treasury stock to satisfy requirements for Common Shares issued pursuant to its various stock-based compensation plans.
Long-TermIncentive
Plans–Restricted Stock Units
Restricted stock unit awards granted to key employees generally vest after ithree years. The restricted stock unit awards currently outstanding were granted in 2020, 2021 and 2022 and will vest in 2023, 2024 and 2025, respectively.
UScellular estimates the fair value of restricted stock units based on the closing
market price of UScellular shares on the date of grant. The fair value is then recognized as compensation cost on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.
A summary of UScellular nonvested restricted stock units and changes during 2022 is presented in the table below:
The
total fair value of restricted stock units that vested during 2022, 2021 and 2020 was $i9 million, $i22
million and $i20 million, respectively. The weighted average grant date fair value per share of the restricted stock units granted in 2022, 2021 and 2020 was $i30.35,
$i36.68 and $i29.18,
respectively.
Long-Term Incentive Plans – Performance Share Units
Beginning in 2017, UScellular granted performance share units to key employees. The performance share units generally vest after ithree years. Beginning with the 2021 grants, each recipient may be entitled to shares of UScellular common stock equal to ii0/%
to ii200/%
of a communicated target award depending on the achievement of a predetermined performance based operating target over the performance period, which is generally a three-year period beginning on January 1 in the year of grant to December 31 of the third year. The performance-based operating target for the 2021 and 2022 grants is Return on Capital.
Prior to the 2021 grants, each recipient was entitled to shares of UScellular common stock equal to i50%
to i200% of a communicated target award depending on the achievement of predetermined performance-based operating targets over the performance period, which was generally a one-year period beginning on January 1 in the year of grant to December 31 in the year of grant. The remaining time through the end of the vesting period is considered the “time-based period”. Performance-based operating targets for grants made in 2020 included Consolidated Total Service Revenues,
Consolidated Operating Cash Flow, Consolidated Capital Expenditures and Postpaid Handset Voluntary Defections; and for grants made prior to 2020 included Simple Free Cash Flow, Consolidated Total Operating Revenues and Postpaid Handset Voluntary Defections. Grants made prior to 2021 are subject to vesting during the time-based period and their performance share unit award agreements provide that in no event shall the awards be less than i50% of the target opportunity as of
their grant dates. The performance share units currently outstanding were granted in 2020, 2021 and 2022 and will vest in 2023, 2024 and 2025, respectively.
Additionally, UScellular granted performance share units during 2020 to a newly appointed President and Chief Executive Officer. The recipient may be entitled to shares of UScellular common stock equal to i100% of the communicated target award depending on the achievement of
predetermined performance-based operating targets over the performance period, which is any two calendar-year period commencing no earlier than January 1, 2021 and ending no later than December 31, 2026. Performance-based operating targets include Average Total Revenue Growth and Average Annual Return on Capital. If one, or both, of the performance targets are not satisfied, the award will be forfeited.
UScellular estimates the fair value of performance share units using UScellular’s closing stock price on the date of grant. An estimate of the number of performance share units expected to vest based upon achieving the performance-based operating targets is made and the aggregate fair value is expensed on a straight-line basis over the requisite service period. Each reporting period, during the performance period, the estimate
of the number of performance share units expected to vest is reviewed and stock compensation expense is adjusted as appropriate to reflect the revised estimate of the aggregate fair value of the performance share units expected to vest.
A summary of UScellular’s nonvested performance share units and changes during 2022 is presented in the table below:
The
total fair value of performance share units that vested during 2022, 2021 and 2020 was $i6 million, $i22
million and $i11 million, respectively. The weighted average grant date fair value per share of the performance share units granted in 2022, 2021 and 2020 was $i31.35,
$i37.67 and $i29.71,
respectively.
Long-Term Incentive Plans–Stock Options
UScellular's last stock option grant occurred in 2016.
Stock options outstanding, and the related weighted average exercise price, at December 31, 2022 and 2021 were i348,000
units at $i42.41 and i378,000
units at $i42.18, respectively. All stock options are exercisable and expire between 2023 and 2026.
The aggregate intrinsic value of UScellular stock options exercised in 2021 was less than $i1 million.
iiNo/
stock options were exercised in 2022 or 2020.
Long-Term Incentive Plans–Deferred CompensationStock Units
Certain UScellular employees may elect to defer receipt of all or a portion of their annual bonuses and to receive a company matching contribution on the amount deferred. All bonus compensation that is deferred by employees electing to participate is immediately vested and is deemed to be invested in UScellular Common Share stock units. Beginning with the 2021 performance year, the amount of UScellular's matching contribution is a ii33/%
match for the amount of their total annual bonus that is deferred into the program. Prior to the 2021 performance year, the amount of UScellular’s matching contribution was a i25% match for amounts deferred up to 50% of their total annual bonus and a i33%
match for amounts that exceeded 50% of their total annual bonus. Matching contributions are also deemed to be invested in UScellular Common Share stock units and vest over ithree years.
Compensation of Non-Employee Directors
UScellular issued i22,000,
i20,000 and i19,000
Common Shares in 2022, 2021 and 2020, respectively, under its Non-Employee Director compensation plan.
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 on a basis that is representative of what they would have been if UScellular and TDS Telecom operated on a stand-alone basis.
i
Financial
data for TDS’ reportable segments for 2022, 2021 and 2020, is as follows. See Note 1 — Summary of Significant Accounting Policies for additional information.
Cost
of services (excluding Depreciation, amortization and accretion reported below)
i782
i392
i70
i1,244
Cost
of equipment and products
i1,011
i1
i98
i1,110
Selling,
general and administrative
i1,368
i270
i43
i1,681
Depreciation,
amortization and accretion
i683
i203
i23
i909
(Gain)
loss on asset disposals, net
i25
i1
i1
i27
(Gain)
loss on license sales and exchanges, net
(i5)
i—
i—
(i5)
Operating
income (loss)
i173
i110
(i24)
i259
Equity
in earnings of unconsolidated entities
i179
i—
i2
i181
Interest
and dividend income
i8
i5
i2
i15
Gain
(loss) on investments
i2
i—
i—
i2
Interest
expense
(i112)
i4
(i60)
(i168)
Other,
net
i—
(i1)
i—
(i1)
Income
(loss) before income taxes
i250
i117
(i79)
i288
Income
tax expense (benefit)
i17
i18
(i16)
i19
Net
income (loss)
i233
i100
(i64)
i269
Add
back:
Depreciation, amortization and accretion
i683
i203
i23
i909
(Gain)
loss on asset disposals, net
i25
i1
i1
i27
(Gain)
loss on license sales and exchanges, net
(i5)
i—
i—
(i5)
Gain
(loss) on investments
(i2)
i—
i—
(i2)
Interest
expense
i112
(i4)
i60
i168
Income
tax expense (benefit)
i17
i18
(i16)
i19
Adjusted
EBITDA1
$
i1,063
$
i317
$
i5
$
i1,385
Investments
in unconsolidated entities
$
i435
$
i4
$
i38
$
i477
Total
assets
$
i9,681
$
i2,359
$
i484
$
i12,525
Capital
expenditures
$
i940
$
i368
$
i9
$
i1,317
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 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.
i
Note
20 Supplemental Cash Flow Disclosures
i
Following are supplemental cash flow disclosures regarding interest paid and income taxes paid.
Following are supplemental cash flow disclosures regarding transactions related to stock-based compensation awards. In certain situations, TDS and UScellular withhold shares that are issuable upon the exercise of stock options or the vesting of restricted shares to cover, and with a value equivalent to, the exercise price and/or the amount of taxes required to be withheld from the stock award holder at the time of the exercise or vesting. TDS and
UScellular then pay the amount of the required tax withholdings to the taxing authorities in cash.
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 $i130 million, $i22
million and $i19 million for the years ended 2022, 2021 and 2020, respectively. At December 31, 2022, liabilities of $i65
million and $i76 million related to software license agreements were recorded to Other current liabilities and Other deferred liabilities and credits, respectively, and at December 31, 2021, liabilities of $i18
million and $i13 million related to software license agreements were recorded to Other current liabilities and Other deferred liabilities and credits, respectively.
i
Note
21 Certain Relationships and Related Transactions
Sidley Austin LLP is the principal law firm of TDS and its subsidiaries: Walter C.D. Carlson, a trustee and beneficiary of a voting trust that controls TDS, the non-executive Chair of the Board and member of the Board of Directors of TDS and a director of UScellular, a subsidiary of TDS is Senior Counsel at Sidley Austin LLP; and John P. Kelsh, the General Counsel and/or an Assistant Secretary of TDS and UScellular and certain other subsidiaries of TDS is a partner at Sidley Austin LLP. Walter C.D. Carlson does not provide legal
services to TDS or its subsidiaries. TDS, UScellular and their subsidiaries incurred legal costs from Sidley Austin LLP of $i8 million, $i10
million and $i11 million in 2022, 2021 and 2020, respectively.
The Audit Committee of the Board of Directors of TDS is responsible for the review and evaluation of all related-party transactions as such term is defined by the rules of the New York Stock Exchange.
Management’s Responsibility for Financial Statements
Management of Telephone and Data Systems, Inc. has the responsibility for preparing the accompanying consolidated financial statements and for their integrity and objectivity. The statements were prepared in accordance with accounting principles generally accepted in the United States of America and, in management’s opinion, were fairly presented. The financial statements included amounts that were based on management’s best estimates and judgments. Management also prepared the other information in the annual report and is responsible for its accuracy and consistency with the financial statements.
PricewaterhouseCoopers LLP
(PCAOB ID i238), an independent registered public accounting firm, has audited these consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and has expressed herein its unqualified opinion on these financial statements.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Telephone and Data Systems, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Telephone and Data Systems, Inc. and its subsidiaries (“the Company”)as of December 31, 2022 and 2021, and the related consolidated statements
of operations, of comprehensive income, of changes in equity, and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidatedfinancial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31, 2022 and 2021,and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company's internal control over financial
reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included
performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition - Retail Service and Equipment and Product Sales Revenue for the UScellular segment
As described in Note 2 to the consolidated financial statements, the Company generates revenues from retail services through the sale of wireless services including voice, messaging, and data services, as well as revenues from equipment and product sales through the sale of wireless devices and accessories. The Company recognizes wireless service revenue as the wireless service is provided to the customer. Wireless services are generally billed and paid in advance on a monthly basis. The
Company offers a comprehensive range of wireless devices such as handsets, tablets, mobile hotspots, home phones, and routers for use by its customers. The Company also sells wireless devices to agents and other third-party distributors for resale. The Company also offers customers the option to purchase certain devices and accessories under installment contracts over a specified time period. The Company recognizes revenue in equipment and product sales revenues when control of the device or accessory is transferred to the customer, agent or third-party distributor, which is generally upon delivery. The UScellular segment’s
retail service and equipment and product sales revenue was $2,793 million and $1,044 million, respectively, for the year ended December 31, 2022.
The principal consideration for our determination that performing procedures relating to revenue recognition - retail service and equipment and product sales revenue for the UScellular segment is a critical audit matter is a high degree of auditor effort in performing procedures related to the Company’s revenue recognition.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the retail service and equipment and
product sales revenue recognition processes. These procedures also included, among others, (i) testing whether the criteria for recognition of retail service and equipment and product sales revenue had been met by obtaining and inspecting invoices, shipping documents, where applicable, and cash receipts from customers for a sample of revenue transactions, (ii) testing discounts and rebates for a sample of transactions, (iii) evaluating the allocation of the transaction price to the performance obligations, where applicable, (iv) recalculating the appropriateness of the retail service and equipment and product sales revenue recognized based on the terms of each arrangement for a sample of transactions, and (v) confirming a sample of outstanding customer invoice balances as of December 31, 2022, and obtaining and inspecting source documents such as invoices, sales contracts,
shipping documents, and subsequent cash receipts, for confirmations not returned.
TDS maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under 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 Rule 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 Annual Report. Based on this evaluation, the principal executive officer and principal financial officer have concluded that TDS’ disclosure controls and procedures were effective as of December 31, 2022, at the reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. TDS’ internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (GAAP). TDS’ internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and, where required, the board
of directors of the issuer; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the issuer’s assets that could have a material effect on the interim or annual consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of TDS’ management, including its principal executive officer and principal financial officer, TDS conducted an evaluation of the effectiveness of its internal control over financial reporting as of December
31, 2022, based on the criteria established in the 2013 version of Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management has concluded that TDS maintained effective internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 version of Internal Control — Integrated Framework issued by the COSO.
The effectiveness of TDS’ internal control over financial reporting as of December 31, 2022, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in the firm’s report
which is included in Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in TDS’ internal control over financial reporting during the fourth quarter of 2022 that have materially affected, or are reasonably likely to materially affect, TDS’ internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this Item 10 is incorporated by reference from Proxy Statement sections entitled “Election of Directors,”“Corporate Governance,”“Executive Officers" and "Delinquent Section 16(a) Reports."
Item 11. Executive Compensation
Information required by this Item 11 is incorporated
by reference from Proxy Statement section entitled “Executive and Director Compensation.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this Item 12 is incorporated by reference from Proxy Statement sections entitled “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance under Equity Compensation Plans.”
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information
required by this Item 13 is incorporated by reference from Proxy Statement sections entitled “Corporate Governance” and “Certain Relationships and Related Transactions.”
Item 14. Principal Accountant Fees and Services
Information required by this Item 14 is incorporated by reference from Proxy Statement section entitled “Fees Paid to Principal Accountants.”
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*
Indicates
a management contract or compensatory plan or arrangement
**
Portions of this Exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K promulgated under the Exchange Act.
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
