The following discussion and analysis compares Telephone and Data Systems, Inc.’s (TDS) financial results for the three and six months ended June 30, 2021,March 31, 2022, to the three and six months ended June 30, 2020.March 31, 2021. It should be read in conjunction with TDS’ interim consolidated financial statements and notes included herein, and with the description of TDS’ business, its audited consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) included in TDS’ Annual Report on Form 10-K (Form 10-K) for the year ended December 31, 2020.2021. 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-Q Report.

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 first TDS ESG Report in 2021.

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. Strategic efforts include:

The following is a list of definitions of certain industry terms that are used throughout this document:

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.method or the net asset value practical expedient. TDS’ investment in the Los Angeles SMSA Limited Partnership (LA Partnership) contributed pretaxpre-tax income of $22$18 million and $20$19 million for the three months ended June 30,March 31, 2022 and 2021, and 2020, respectively and $41 million and $42 million for the six months ended June 30, 2021 and 2020, respectively. See Note 87 — Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.

The effective tax rate on Income before income taxes for the three months ended June 30,March 31, 2022 and 2021 was 34.5% and 2020 was (48.9)% and 9.6%30.1%, respectively. The effective tax rates for the three month periods reflect a combined rate of federal and state taxes, adjusted for impacts of nondeductible expenses.

During the three months ended June 30, 2021 was lower due primarilyMarch 31, 2022, TDS received a federal income tax refund of $125 million related to the reduction of tax accruals resulting from expirations of state statute of limitations for prior tax years. The decrease was partially offset2020 net operating loss carryback enabled by the income tax benefits of the CARES Act included in the 2020 tax rate, which do not recur as benefits in the 2021 tax rate.

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.

UScellular owns, operates, and invests in wireless markets throughout the United States. UScellular is an 82%83%-owned subsidiary of TDS. UScellular’s strategy is to attract and retain wireless customers through a value proposition comprised of a high-quality network, outstanding customer service, and competitive devices, plans, and pricing - all provided with a community focus. 

Total postpaid handset net losses increased for the three months ended March 31, 2022, when compared to the same period last year due to lower gross additions and higher defections resulting from aggressive industry-wide competition.

Total postpaid connected device net additions decreased for the three months ended June 30, 2021,March 31, 2022, when compared to the same period last year due primarily to an increase in defections resulting from higher consumer switching activity which was depressed in 2020 due to COVID-19. Partially offsetting the increase in defections was an increase in gross additions.

Postpaid ARPU and Postpaid ARPA increased for the three and six months ended June 30, 2021,March 31, 2022, when compared to the same period last year, due to (i) an increase in regulatorycost recovery revenues,surcharges, (ii) favorable plan and product offering mix and (iii) an increase in device protection plan revenues, and (iv) an increase in overage fees which were waived in Q2 2020 to assist customers during the COVID-19 pandemic.revenues. These increases were partially offset by an increase in promotional discounts.

Retail service revenues increased for the three and six months ended June 30, 2021,March 31, 2022, primarily as a result of an increase in Postpaid ARPU as previously discussed in the Operational Overview section as well as an increase in the average number of postpaid subscribers.section.

Inbound roaming revenues decreased for the three and six months ended June 30, 2021,March 31, 2022, primarily driven by lower data revenues resulting from lower usage and lower rates. UScellular expects inbound roaming revenues to continue to decline during 20212022 relative to prior year levels.

Other service revenues increased for the three and six months ended June 30, 2021,March 31, 2022, resulting from increases in tower rental revenues and miscellaneous other service revenues.

Equipment sales revenues increaseddecreased for the three and six months ended June 30, 2021,March 31, 2022, due primarily to an increasea decrease in the volume of new smartphone and accessory sales, partially offset by an increase inand higher promotional activity.

In recent periods, wireless service providers have increased promotional aggressiveness to attract new customers and retain existing customers. Operating revenues and Operating income may be negatively impacted in future periods by the competitive need to offer increased promotional discounts to new and existing customers.

Cost of equipment sold increaseddecreased for the three and six months ended June 30, 2021,March 31, 2022, due primarily to an increasea decrease in the volume of new smartphone and accessory sales.

Selling, general and administrative expenses increased for the three months ended June 30, 2021,March 31, 2022, due primarily to increases in system development costs and Federal USF expense.

TDS Telecom owns, operates and invests in communications services in a mix of rural and metropolitansuburban 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 strategy is to grow its customer base through market expansions and offering state-of-the-art services. The companybe the preferred broadband provider in the markets it serves. TDS Telecom invests in high-quality networks, services and provides excellentproducts, with the constant focus on delivering a best-in-class customer service, a key tenet of its long-standing mission.experience.

Total connections decreased slightlyare flat despite strong broadband connection growth due primarily to a decreaseoffsetting decreases in legacy voice, connectionsvideo, and competitive local exchange carrier (CLEC) commercial connections.

A majority of TDS Telecom's residential customers take advantage of bundling options as 64%62% of customers subscribe to more than one service.

TDS and its subsidiaries operate capital-intensive businesses. In the past, TDS’ existing cash and investment balances, funds available under its revolving credit and receivables securitizationfinancing agreements, funds from other financing sources, including term loans, other long-term debt, 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 revolving credit, term loan and receivables securitizationfinancing 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 coming years.foreseeable future. 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, the repurchaserepurchases of shares, the payment of dividends, or making additional investments, including new technologies and fiber builds. It may be necessary from time to time to increase the size of the existing revolving credit agreements, to put in place new credit agreements, or to obtain other forms of financing in order to fund potential expenditures.

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.

In March 2020, TDS entered into a $400 millionand UScellular have unsecured revolving credit agreementagreements with certain lendersmaximum borrowing capacities of $400 million and other parties and UScellular entered into a $300 million, unsecured revolving credit agreement with certain lenders and other parties.respectively. Amounts under the revolving credit agreements may be borrowed, repaid and reborrowed from time to time until maturity in March 2025.July 2026. During the three months ended June 30, 2021, TDSMarch 31, 2022, UScellular borrowed $125and repaid $75 million under its revolving credit agreement. As of June 30, 2021,March 31, 2022, there were no outstanding borrowings under the UScellular revolving credit agreement. Asagreements, except for letters of June 30, 2021, TDS’credit, and UScellular’sTDS' and UScellular's unused borrowing capacity was $274$399 million and $300 million, respectively.

In January 2021, TDS borrowed $75 million under its senior term loan credit agreement. In February 2021, UScellular borrowed $217 million under its senior term loan credit agreement. As of June 30, 2021, TDS and UScellular have bothterm 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 the three months ended March 31, 2022, TDS borrowed the full amounts available$150 million under the seniorits term loan credit agreements of $200 million and $300 million, respectively.

In December 2021, UScellular entered into a $150 million term loan agreements.credit facility with Export Development Canada to finance (or refinance) equipment imported from Canada, including equipment purchased prior to entering the term loan credit facility agreement. During the three months ended March 31, 2022, UScellular borrowed $150 million, which is the full amount available under the agreement and is due in January 2027.

UScellular, through its subsidiaries, has a receivables securitization agreement to permit securitized borrowings using its equipment installment plan receivables. In March 2021,2022, UScellular amended the agreement to extend the maturity date to March 2024. Amounts under the agreement may be borrowed, an additional $275repaid and reborrowed from time to time until March 2024. During the three months ended March 31, 2022, UScellular repaid $50 million under its receivables securitizationthe agreement. In June 2021, UScellular repaid $200 million of the outstanding borrowing.

In April 2022, UScellular repaid $50 million under the receivables securitization agreement.

In January 2022, UScellular, through a subsidiary (the repo subsidiary), entered into a repurchase agreement may be repaid and reborrowed from time to time until December 2022, which may be extended from timeborrow up to time as specified therein. See Note 9 — Debt in the Notes to Consolidated Financial Statements for additional information related$200 million, subject to the availability of eligible equipment installment plan receivables securitization agreement.

TDS and UScellular believe they were in compliance with all of the financial covenants and requirements set forth in their revolving credit agreements, senior term loan credit agreements, export credit financing agreement and receivables securitization agreement as of June 30, 2021.

Capital expenditures (i.e., additions to property, plant and equipment and system development expenditures; excludes wireless spectrum license additions), which include the effects of accruals and capitalized interest, for the sixthree months ended June 30,March 31, 2022 and 2021, and 2020, were as follows:

TDS intends to finance its capital expenditures for 20212022 using primarily Cash flows from operating activities, existing cash balances and, ifas required, additional debt financing from its revolving credit, term loan and receivables securitizationexisting agreements and/or other forms of financing.

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.

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; Auction 107 relocation costs and accelerated relocation incentive payments;commitments for wireless spectrum licenses acquired through FCC auctions; and other agreements to purchase goods or services.

TDS consolidates certain “variable interest entities” as defined under GAAP. See Note 109 — 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 the sixthree months ended June 30, 2021,March 31, 2022, TDS repurchased 162,500254,102 Common Shares for $3$5 million at an average cost per share of $18.50.$18.21. As of June 30, 2021,March 31, 2022, the maximum dollar value of TDS Common Shares that may yet be repurchased under TDS’ program was $182$173 million. For additional information related to the current TDS repurchase authorization, see Unregistered Sales of Equity Securities and Use of Proceeds.

During the sixthree months ended June 30, 2021,March 31, 2022, UScellular repurchased 54,900363,821 Common Shares for $2$10 million at an average cost per share of $29.52.$28.64. As of June 30, 2021,March 31, 2022, the total cumulative amount of UScellular Common Shares authorized to be repurchased is 4,452,000.

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, the timing of acquisitions and divestitures, capital expenditures and other factors. The following discussion summarizes TDS' cash flow activities for the sixthree months ended June 30, 2021March 31, 2022 and 2020.2021.