15
| |
31) |
Any of the foregoing events or other events could cause revenues, earnings, capital expenditures and/or any other financial or statistical information to vary from U.S. Cellular’s forward-looking estimates by a material amount.Table of Contents |
From time to time, U.S. Cellular may disclose forward-looking information, including estimates of future operating revenues; various measures of income before income taxes; and/or capital expenditures. Any such forward-looking information includes consideration of known or anticipated changes to the extent disclosed, but dynamic market conditions and/or other unknown or unanticipated events, including but not limited to the risks discussed above, could cause such estimates to differ materially from the actual amounts.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
U.S. CellularUScellular has properties located throughout the United States. U.S. Cellular’sUScellular’s corporate headquarters is located in Chicago, IL. U.S. Cellular'sUScellular's local business offices, cell sites, cell site equipment, connectivity centers, data centers, call centers and retail stores are located primarily in U.S. Cellular’sUScellular’s operating markets. These properties are either owned or leased by U.S. Cellular,UScellular, one of its subsidiaries, or the partnership, limited liability company or corporation which holds the license issued by the FCC.
As of December 31, 2019, U.S. Cellular’s2021, UScellular’s gross investment in property, plant and equipment was $8,293$9,056 million.
Item 3. Legal Proceedings
U.S. CellularUScellular 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 U.S. CellularUScellular 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 13 — Commitments and Contingencies in the Notes to Consolidated Financial Statements for further information.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market, holder, dividend and performance graph information is incorporated
Common Stock Information
UScellular's Common Shares are listed on the New York Stock Exchange under the symbol "USM." As of January 31, 2022, the last trading day of the month, UScellular's Common Shares were held by reference from Exhibit 13 to this Form 10-K Annual Report section entitled “Shareholder Information.”230 record owners. All of the Series A Common Shares were held by TDS. No public trading market exists for the Series A Common Shares. The Series A Common Shares are convertible on a share-for-share basis into Common Shares.
U.S. CellularUScellular has not paid any cash dividends in recent periods and currently intends to retain all earnings for use in U.S. Cellular’sUScellular’s business.
Information relatingStock Performance Graph
The following chart provides a comparison of UScellular’s cumulative total return to shareholders 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 |
UScellular Common Shares (NYSE: USM) | $ | 100 | | | $ | 86.07 | | | $ | 118.87 | | | $ | 82.87 | | | $ | 70.20 | | | $ | 72.10 | |
S&P 500 Index | 100 | | | 121.83 | | | 116.49 | | | 153.17 | | | 181.35 | | | 233.41 | |
Dow Jones U.S. Telecommunications Index | 100 | | | 99.72 | | | 93.02 | | | 118.95 | | | 111.91 | | | 102.21 | |
The comparison above assumes $100.00 invested at the close of trading on the last trading day preceding the first day of 2016, in UScellular Common Shares, S&P 500 Index and the Dow Jones U.S. Telecommunications Index.
Issuer Purchases of Equity Securities is set forth below.
In November 2009, U.S. CellularUScellular announced by Form 8-K that the Board of Directors of U.S. CellularUScellular authorized the repurchase of up to 1,300,000 Common Shares on an annual basis beginning in 2009 and continuing each year thereafter, on a cumulative basis. In December 2016, the U.S. CellularUScellular Board of Directors 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 zero to 1,300,000 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. 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. U.S. CellularUScellular did not determine to terminate the foregoing Common Share repurchase program, as amended, or cease making further purchases thereunder, during the fourth quarter of 2019.2021.
The maximum number of shares that may yet be purchased under this program was 5,311,000 as of December 31, 2019. There were nofollowing table provides certain information with respect to all purchases made by or on behalf of U.S. Cellular,UScellular, and noany open market purchases made by any “affiliated purchaser” (as defined by the SEC) of U.S. Cellular,UScellular, of U.S. CellularUScellular Common Shares during the fourth quarter ended December 31, 2019.of 2021.
| | | | | | | | | | | | | | |
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 Number of Shares that May Yet Be Purchased Under the Plans or Programs |
October 1 - 31, 2021 | 258,678 | $ | 31.49 | | 258,678 | 3,566,725 |
November 1 - 30, 2021 | 35,000 | $ | 31.44 | | 35,000 | 3,531,725 |
December 1 - 31, 2021 | 15,000 | $ | 29.49 | | 15,000 | 3,516,725 |
Total for or as of the end of the quarter ended December 31, 2021 | 308,678 | $ | 31.38 | | 308,678 | 3,516,725 |
Item 6. Selected Financial Data[Reserved]
Incorporated by reference from Exhibit 13 to this Form 10-K Annual Report section entitled “Selected Consolidated Financial Data.”
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Incorporated
| | | | | | | | |
Index to Management's Discussions and Analysis of Financial Condition and Results of Operations (MD&A) | | Page No. |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
United States Cellular Corporation
Management’s Discussion and Analysis of
Financial 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 United States Cellular Corporation (UScellular) for the year ended December 31, 2021, and with the description of UScellular’s 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 reference from Exhibit 13such forward looking statements. See Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement for additional information.
UScellular uses certain “non-GAAP financial measures” and each such measure is identified in the MD&A. A discussion of the reason UScellular 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 Annual Report section entitled “Management’sReport.
The following MD&A omits discussion of 2020 compared to 2019. Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations.”Operations in UScellular's Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 18, 2021, for that discussion.
General
UScellular owns, operates, and invests in wireless markets throughout the United States. UScellular is an 82%-owned subsidiary of Telephone and Data Systems, Inc. (TDS).
▪Serves customers with 5.0 million connections including 4.4 million postpaid, 0.5 million prepaid and 0.1 million reseller and other connections
▪Operates in 21 states
▪Employs approximately 4,800 associates
▪4,301 owned towers
▪6,898 cell sites in service
COVID-19 considerations
The coronavirus (COVID-19) pandemic did not have a material impact on UScellular's financial results in 2021. The impact of COVID-19 on UScellular's future financial results is uncertain, but is not projected to have a material impact. However, there are many factors, including the severity and duration of the pandemic, as well as other direct and indirect impacts, that could negatively impact UScellular.
UScellular Mission and Strategy
UScellular’s mission is to provide 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 through a value proposition comprising 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 and expanding its solutions available to business and government customers.
▪UScellular continues to devote efforts 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 commercial 5G services in portions of substantially all of UScellular’s markets and will continue to launch in 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.
Terms Used by UScellular
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.
▪Auctions 105, 107 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.
▪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.
▪Connections – individual lines of service associated with each device activated by a customer. Connections are associated with all types of devices that connect directly to the UScellular network.
▪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.
▪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.
▪Free Cash Flow – non-GAAP metric defined as Cash flows from operating activities less Cash paid for additions to property, plant and equipment. 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.
▪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.
▪Retail Connections – the sum of postpaid connections and prepaid connections.
▪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.
▪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.
Operational Overview
| | | | | | | | | | | | | |
As of December 31, | 2021 | | 2020 | | |
Retail Connections – End of Period |
Postpaid | 4,380,000 | | 4,412,000 | | |
Prepaid | 513,000 | | 499,000 | | |
Total | 4,893,000 | | 4,911,000 | | |
| | | | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2021 vs. 2020 | | |
Postpaid Activity and Churn | | | | | | | |
Gross Additions | | | | | | | |
Handsets | 434,000 | | 397,000 | | 9 | % | | |
Connected Devices | 159,000 | | 203,000 | | (22) | % | | |
Total Gross Additions | 593,000 | | 600,000 | | (1) | % | | |
Net Additions (Losses) | | | | | | | |
Handsets | (11,000) | | (13,000) | | 15 | % | | |
Connected Devices | (21,000) | | 39,000 | | N/M | | |
Total Net Additions (Losses) | (32,000) | | 26,000 | | N/M | | |
Churn | | | | | | | |
Handsets | 0.96 | % | | 0.89 | % | | | | |
Connected Devices | 2.72 | % | | 2.58 | % | | | | |
Total Churn | 1.18 | % | | 1.09 | % | | | | |
N/M - Percentage change not meaningful
Total postpaid handset net losses decreased in 2021 due primarily to an increase in gross additions as a result of higher consumer switching activity, partially offset by an increase in postpaid handset churn.
Total postpaid connected device net additions decreased in 2021 due primarily to lower demand for internet related products as a result of a reduction in COVID-related funding vehicles, many of which are connected to government subsidies.
Macroeconomic factors, including the continuing impacts of the ongoing COVID-19 pandemic, have caused some supply chain disruption and delays, including constraints on certain devices. These supply constraints are due primarily to component availability, resulting in extended lead times and additional uncertainty, which may negatively impact UScellular in future periods.
Postpaid Revenue
| | | | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2021 vs. 2020 | | |
Average Revenue Per User (ARPU) | $ | 48.03 | | | $ | 47.01 | | | 2% | | |
Average Revenue Per Account (ARPA) | $ | 125.92 | | | $ | 122.93 | | | 2% | | |
Postpaid ARPU and Postpaid ARPA increased in 2021, due primarily to (i) favorable plan and product offering mix, (ii) an increase in regulatory recovery revenues and (iii) an increase in device protection plan revenues. These increases were partially offset by an increase in promotional discounts.
2021 Postpaid ARPU and ARPA amounts exclude $9 million of postpaid revenue related to an out-of-period error recorded in the third quarter. See Note 2 — Revenue Recognition in the Notes to Consolidated Financial Statements for additional information.
Financial Overview | | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | | | 2021 vs. 2020 | | |
(Dollars in millions) | | | | | | | | | |
Retail service | $ | 2,765 | | | $ | 2,686 | | | | | 3 | % | | |
Inbound roaming | 110 | | | 152 | | | | | (27) | % | | |
Other | 240 | | | 229 | | | | | 5 | % | | |
Service revenues | 3,115 | | | 3,067 | | | | | 2 | % | | |
Equipment sales | 1,007 | | | 970 | | | | | 4 | % | | |
Total operating revenues | 4,122 | | | 4,037 | | | | | 2 | % | | |
| | | | | | | | | |
System operations (excluding Depreciation, amortization and accretion reported below) | 790 | | | 782 | | | | | 1 | % | | |
Cost of equipment sold | 1,118 | | | 1,011 | | | | | 11 | % | | |
Selling, general and administrative | 1,345 | | | 1,368 | | | | | (2) | % | | |
Depreciation, amortization and accretion | 678 | | | 683 | | | | | (1) | % | | |
| | | | | | | | | |
(Gain) loss on asset disposals, net | 23 | | | 25 | | | | | (9) | % | | |
(Gain) loss on sale of business and other exit costs, net | (2) | | | — | | | | | N/M | | |
(Gain) loss on license sales and exchanges, net | — | | | (5) | | | | | N/M | | |
Total operating expenses | 3,952 | | | 3,864 | | | | | 2 | % | | |
| | | | | | | | | |
Operating income | $ | 170 | | | $ | 173 | | | | | (2) | % | | |
| | | | | | | | | |
Net income | $ | 160 | | | $ | 233 | | | | | (31) | % | | |
Adjusted OIBDA (Non-GAAP)1 | $ | 869 | | | $ | 876 | | | | | (1) | % | | |
Adjusted EBITDA (Non-GAAP)1 | $ | 1,054 | | | $ | 1,063 | | | | | (1) | % | | |
Capital expenditures2 | $ | 780 | | | $ | 940 | | | | | (17) | % | | |
N/M - Percentage change not meaningful
1Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.
2Refer to Liquidity and Capital Resources within this MD&A for additional information on Capital expenditures.
Operating Revenues
(Dollars in millions)
Service revenues consist of:
▪Retail Service – Charges for voice, data and value added services and recovery of regulatory costs
▪Inbound Roaming – Charges to other wireless carriers whose customers use UScellular’s wireless systems when roaming
▪Other Service – Amounts received from the Federal USF, tower rental revenues, and miscellaneous other service revenues
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 2021, 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.
Inbound roaming revenues decreased in 2021, primarily driven by lower data revenues resulting from lower usage and lower rates. UScellular expects inbound roaming revenues to continue to decline during 2022 relative to prior year levels.
Other service revenues increased in 2021, resulting from increases in tower rental revenues and miscellaneous other service revenues.
Equipment sales revenues increased in 2021, due primarily to an increase in the volume of new smartphone and accessory sales, partially offset by 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 continue to offer significant promotional discounts to new and existing customers.
System operations expenses
System operations expenses increased in 2021, due primarily to higher circuit costs and an increase in cell site rent expense, partially offset by a decrease in roaming expense driven by lower rates.
Cost of equipment sold
Cost of equipment sold increased in 2021, due primarily to an increase in the volume of new smartphone and accessory sales.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased in 2021, due primarily to decreases in (i) bad debts expense driven by fewer non-pay customers as a result of better credit mix and improved customer payment behavior and (ii) advertising expense due to reduced media spend.
Components of Other Income (Expense) | | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | | | 2021 vs. 2020 | | |
(Dollars in millions) | | | | | | | | | |
Operating income | $ | 170 | | | $ | 173 | | | | | (2) | % | | |
| | | | | | | | | |
Equity in earnings of unconsolidated entities | 179 | | | 179 | | | | | – | | |
Interest and dividend income | 6 | | | 8 | | | | | (27) | % | | |
Gain (loss) on investments | — | | | 2 | | | | | N/M | | |
Interest expense | (175) | | | (112) | | | | | (55) | % | | |
| | | | | | | | | |
Total investment and other income | 10 | | | 77 | | | | | (87) | % | | |
| | | | | | | | | |
Income before income taxes | 180 | | | 250 | | | | | (28) | % | | |
Income tax expense | 20 | | | 17 | | | | | 26 | % | | |
| | | | | | | | | |
Net income | 160 | | | 233 | | | | | (31) | % | | |
Less: Net income attributable to noncontrolling interests, net of tax | 5 | | | 4 | | | | | 14 | % | | |
Net income attributable to UScellular shareholders | $ | 155 | | | $ | 229 | | | | | (32) | % | | |
N/M - Percentage change not meaningful
Equity in earnings of unconsolidated entities
Equity in earnings of unconsolidated entities represents UScellular’s share of net income from entities in which it has a noncontrolling interest and that are accounted for using the equity method. UScellular’s investment in the Los Angeles SMSA Limited Partnership (LA Partnership) contributed pre-tax income of $82 million for both 2021 and 2020. See Note 8 — Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.
Interest expense
Interest expense increased in 2021, primarily as a result of (i) the issuance of $500 million of 6.25% Senior Notes in August 2020 and $500 million of 5.50% Senior Notes in both December 2020 and May 2021 and (ii) the write off of $31 million of unamortized debt issuance costs related to Senior Notes that were redeemed in 2021. These increases were partially offset by a reduction in interest expense due to the redemptions of Senior Notes with higher interest rates. See Note 12 — Debt in the Notes to Consolidated Financial Statements for additional information.
Income tax expense
The effective tax rate on Income before income taxes was 11.4% for 2021, compared to 6.6% in 2020. The higher effective tax rate in 2021 as compared to 2020 is due primarily to 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. The 2021 tax rate includes a state tax benefit due primarily to the reductions of tax accruals from expirations of state statute of limitations for prior tax years.
In January 2022, UScellular received an income tax refund of $123 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.
Liquidity and Capital Resources
Sources of Liquidity
UScellular operates a capital-intensive business. In the past, UScellular’s existing cash and investment balances, funds available under its revolving credit and receivables securitization agreements, funds from other financing sources, including term loans and other long-term debt, and cash flows from operating and certain investing and financing activities, including sales of assets or businesses, provided sufficient liquidity and financial flexibility for UScellular 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, primarily of wireless spectrum licenses. 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.
UScellular has incurred negative free cash flow at times in the past and this could occur in the future. However, UScellular believes that existing cash and investment balances, funds available under its revolving credit, term loan and receivables securitization agreements and expected cash flows from operating and investing activities will provide sufficient liquidity for UScellular to meet its normal day-to-day operating needs and debt service requirements for the foreseeable future. UScellular will continue to monitor the rapidly changing business and market conditions and plans to take appropriate actions, as necessary, to meet its liquidity needs.
UScellular may require substantial additional capital for, among other uses, funding day-to-day operating needs including working capital, acquisitions of providers of wireless telecommunications services, wireless spectrum license acquisitions, capital expenditures, agreements to purchase goods or services, leases, debt service requirements, the repurchase of shares, or making additional investments. It may be necessary from time to time to increase the size of the existing revolving credit agreement, to 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 UScellular's Cash and cash equivalents investment activities is to preserve principal.
Cash and Cash Equivalents
(Dollars in millions)
The majority of UScellular’s 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, UScellular had undrawn borrowing capacity from existing debt facilities of $950 million at December 31, 2021. Additional financing activity subsequent to December 31, 2021 reduced the undrawn borrowing capacity to $615 million at February 17, 2022. See the Financing section below for further details.
Financing
Revolving Credit Agreement
In July 2021, UScellular entered into an amended and restated $300 million unsecured revolving credit agreement with certain lenders and other parties. Amounts under the amended and restated revolving credit agreement may be borrowed, repaid and reborrowed from time to time until maturity in July 2026. As of December 31, 2021, there were no outstanding borrowings under the revolving credit agreement, and UScellular’s unused borrowing capacity was $300 million. In January 2022, UScellular borrowed $75 million under its revolving credit agreement and in February 2022, repaid the entire borrowing.
Term Loan Agreements
In July 2021, UScellular amended and restated its term loan agreement to allow for additional borrowing capacity of $200 million, to allow for total borrowing capacity of $500 million. The additional borrowing capacity may be drawn in one or more advances by the one-year anniversary of the date of the agreement; amounts not drawn by that time will cease to be available. The maturity date for the existing borrowings is in July 2028 and for any additional borrowings is in July 2031. As of December 31, 2021, the outstanding borrowings under the agreement were $299 million and the unused borrowing capacity was $200 million. In January 2022, UScellular borrowed $100 million under the term loan agreement.
In December 2021, UScellular entered into an additional $300 million term loan agreement. The agreement may be drawn in one or more advances by the three-month anniversary of the date of the agreement; amounts not drawn by that time will cease to be available. The maturity date for the agreement is in July 2026. As of December 31, 2021, there were no outstanding borrowings under the term loan agreement and the unused borrowing capacity was $300 million. In February 2022, UScellular borrowed $225 million under the term loan agreement.
Export Credit Financing Agreement
In December 2021, UScellular entered into a $150 million term loan 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. The agreement may be drawn in one or more advances by the three-month anniversary of the date of the agreement; 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 January 2027. As of December 31, 2021, there were no outstanding borrowings under the credit facility and the unused borrowing capacity was $150 million. In January 2022, UScellular borrowed $150 million under the agreement.
Receivables Securitization Agreement
UScellular, through its subsidiaries, has a receivables securitization agreement to permit securitized borrowings using its equipment installment plan receivables. In June 2021, UScellular increased the borrowing capacity under the receivables securitization agreement to $450 million. Amounts under the receivables securitization agreement may be borrowed, repaid and reborrowed from time to time until December 2022. Unless the agreement is amended to extend the maturity date, repayments based on receivable collections commence in January 2023. As of December 31, 2021, UScellular has borrowed the full amount available under the agreement of $450 million.
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. The expiration date of the repurchase agreement is in January 2023. In February 2022, the repo subsidiary borrowed $60 million under the repurchase agreement.
Financial Covenants
The revolving credit agreement, senior term loan agreement and receivables securitization and export credit financing agreements require UScellular to comply with certain affirmative and negative covenants, which include certain financial covenants. In particular, under these agreements, UScellular is 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. UScellular also was 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. UScellular believes that it was in compliance as of December 31, 2021 with all such financial covenants.
Other Long-Term Financing
In August 2020, UScellular issued $500 million of 6.25% Senior Notes due in 2069 and in December 2020, UScellular issued $500 million of 5.5% Senior Notes due in March 2070. The proceeds from both issuances were for general corporate purposes, including but not limited to, the purchase of additional wireless spectrum licenses acquired in Auction 107, funding of capital expenditures, including in connection with 5G buildout projects and retirement of existing debt.
In May 2021, UScellular issued $500 million of 5.5% Senior Notes due in June 2070. The proceeds from the issuance were used for general corporate purposes, including but not limited to, the repayment of other debt, the purchase of additional spectrum and the funding of capital expenditures, including in connection with 5G buildout projects.
In May 2021, UScellular redeemed its outstanding $275 million of 7.25% Senior Notes due 2063. At time of redemption, $9 million of interest expense was recorded related to unamortized debt issuance costs for these notes. The notes were redeemed at a price of 100% of the principal amount, including accrued and unpaid interest to the redemption date.
In June 2021, UScellular redeemed its outstanding $300 million of 7.25% Senior Notes due 2064. At time of redemption, $10 million of interest expense was recorded related to unamortized debt issuance costs for these notes. The notes were redeemed at a price of 100% of the principal amount, including accrued and unpaid interest to the redemption date.
In September 2021, UScellular redeemed its outstanding $342 million of 6.95% Senior Notes due 2060. At time of redemption, $11 million of interest expense was recorded related to unamortized debt issuance costs related to the notes. The notes were redeemed at a price of 100% of the principal amount, including accrued and unpaid interest to the redemption date.
UScellular has 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 issuance 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 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 UScellular to complete an offering pursuant to such shelf registration statement is subject to market conditions and other factors at the time.
UScellular believes that it was in compliance as of December 31, 2021, with all covenants and other requirements set forth in the UScellular long-term debt indentures. UScellular has not failed to make nor does it 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 UScellular’s Long-term debt.
UScellular, at its discretion, may from time to time seek to retire or purchase its 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 agreement, senior term loan agreement, receivables securitization and export credit financing agreements, Senior Notes and other long-term financing.
Credit Ratings
In certain circumstances, UScellular’s interest cost on its revolving credit and term loan agreements may be subject to increase if its current credit ratings from nationally recognized credit rating agencies are lowered, and may be subject to decrease if the ratings are raised. UScellular’s agreements do not cease to be available nor do the maturity dates accelerate solely as a result of a downgrade in credit rating. However, a downgrade in UScellular’s credit rating could adversely affect its ability to renew the agreements or obtain access to other credit agreements in the future.
UScellular is rated as a sub-investment grade issuer. The UScellular issuer credit ratings as of December 31, 2021, and the dates such ratings were re-affirmed were as follows:
| | | | | | | | |
Rating Agency | Rating | Outlook |
Moody's (re-affirmed August 2021) | Ba1 | stable outlook |
Standard & Poor's (re-affirmed October 2021) | BB | stable outlook |
Fitch Ratings (re-affirmed February 2021) | BB+ | stable outlook |
Capital Requirements
The discussion below is intended to highlight some of the significant cash outlays expected during 2022 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.
Capital Expenditures
UScellular makes substantial investments to acquire, construct and upgrade wireless 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) have required substantial investments in potentially revenue‑enhancing and cost-saving upgrades of UScellular’s networks to remain competitive; this is expected to continue in 2022 and future years with the continued deployment of 5G technology.
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 2021 and 2020 were as follows: Capital Expenditures
(Dollars in millions)
In 2021, 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.
UScellular’s capital expenditures for 2022 are expected to be between $700 million and $800 million. These expenditures are expected to be used for similar purposes as those listed above.
Macroeconomic factors, including the continuing impacts of the ongoing COVID-19 pandemic, have caused some supply chain disruption and delays. These factors may impact the acquisition of certain products and materials and contribute to internal and external labor shortages.
UScellular intends to finance its capital expenditures for 2022 using primarily Cash flows from operating activities, existing cash balances and, as required, additional debt financing from its revolving credit, term loan and receivables securitization agreements and/or other forms of financing.
Acquisitions, Divestitures and Exchanges
UScellular may be engaged from time to time in negotiations (subject to all applicable regulations) relating to the acquisition, divestiture or exchange of companies, properties or wireless spectrum licenses (including pursuant to FCC auctions). In general, UScellular may not disclose such transactions until there is a definitive agreement.
In January and February 2022, UScellular paid $560 million for wireless spectrum licenses won in Auction 110. This amount was paid using the funds available under UScellular's various financing agreements as described above.
Other Obligations
UScellular will require capital for future spending on existing contractual obligations, including long-term debt 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
UScellular consolidates certain “variable interest entities” as defined under GAAP. See Note 14 — Variable Interest Entities in the Notes to Consolidated Financial Statements for additional information related to these variable interest entities. UScellular may elect to make additional capital contributions and/or advances to these variable interest entities in future periods in order to fund their operations.
Common Share Repurchase Program
During 2021, UScellular repurchased 989,988 Common Shares for $31 million at an average cost per share of $31.37. At December 31, 2021, the total cumulative amount of UScellular Common Shares authorized to be repurchased is 3,517,000.
Depending on its future financial performance, construction, development and acquisition programs, and available sources of financing, UScellular may not have sufficient liquidity or capital resources to make share repurchases. Therefore, there is no assurance that UScellular will make any share repurchases in the future.
For additional information related to the current repurchase authorization, see Note 16 — Common Shareholders’ Equity in the Notes to Consolidated Financial Statements.
Consolidated Cash Flow Analysis
UScellular operates a capital‑intensive business. UScellular makes substantial investments to acquire wireless spectrum licenses and properties and to construct and upgrade wireless telecommunications 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 UScellular’s networks. Cash flows may fluctuate from quarter to quarter and year to year due to seasonality, timing and other factors. The following discussion summarizes UScellular’s cash flow activities in 2021 and 2020.
2021 Commentary
UScellular’s Cash, cash equivalents and restricted cash decreased $1,092 million. Net cash provided by operating activities was $802 million due to net income of $160 million adjusted for non-cash items of $677 million and distributions received from unconsolidated entities of $176 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 $211 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 $2,036 million. Cash paid for additions to property, plant and equipment totaled $724 million. Cash payments for wireless spectrum licenses, including advance payments, were $1,322 million.
Cash flows provided by financing activities were $142 million, reflecting the issuance of $500 million of 5.50% Senior Notes, $625 million borrowed under the receivables securitization agreement, and $217 million borrowed under the term loan. These were partially offset by the redemption of $917 million of UScellular Senior Notes, a $200 million repayment on the receivables securitization agreement, the repurchase of $31 million of Common Shares and payment of debt issuance costs of $22 million.
2020 Commentary
UScellular’s Cash, cash equivalents and restricted cash increased $1,000 million. Net cash provided by operating activities was $1,237 million due to net income of $233 million adjusted for non-cash items of $758 million, distributions received from unconsolidated entities of $189 million including $89 million in distributions from the LA Partnership, and changes in working capital items which increased net cash by $57 million. The working capital changes were primarily influenced by the timing of vendor payments partially offset by tax impacts from the CARES Act and the timing of collections of customer and agent receivables.
Cash flows used for investing activities were $1,163 million. Cash paid for additions to property, plant and equipment totaled $989 million. Cash payments for wireless spectrum licenses, including advance payments, were $201 million.
Cash flows provided by financing activities were $926 million, reflecting the issuance of $500 million of 5.50% Senior Notes, $500 million of 6.25% Senior Notes, and $125 million borrowed under the receivables securitization agreement. These were partially offset by a $100 million repayment on the receivables securitization agreement, payment of debt issuance costs of $38 million and the repurchase of $23 million of Common Shares.
Consolidated Balance Sheet Analysis
The following discussion addresses certain captions in the consolidated balance sheet and changes therein. This discussion is intended to highlight the significant changes and is not intended to fully reconcile the changes. Changes in financial condition during 2021 were as follows:
Inventory, net
Inventory, net increased $27 million due primarily to an increase in the volume of inventory.
Licenses
Licenses increased $1,459 million due primarily to wireless spectrum licenses acquired through Auction 107. See Note 7 — Intangible Assets in the Notes to Consolidated Financial Statements for additional information.
Customer deposits and deferred revenues
Customer deposits and deferred revenues increased $40 million due primarily to an increase in contract liabilities resulting from higher promotional activity in the current year.
Other deferred liabilities and credits
Other deferred liabilities and credits increased $197 million due primarily to relocation and acceleration fees related to wireless spectrum licenses acquired through Auction 107 and an increase in asset retirement obligations.
Long-term debt, net
The following table presents the components of the $239 million increase in Long-term debt, net:
| | | | | |
| Long-term debt, net |
(Dollars in millions) | |
Balance at December 31, 2020 | $ | 2,489 | |
Borrowings under Term Loan Agreements | 217 | |
Borrowings under Receivables Securitization Agreement | 625 | |
Issuance of Senior Notes, net of debt issuance costs | 484 | |
Repayments under Receivables Securitization Agreement | (200) | |
Repayments under Term Loan Agreements | (1) | |
Redemptions of Senior Notes | (917) | |
Debt issuance costs charged to interest expense | 32 | |
Other | (1) | |
Balance at December 31, 2021 | $ | 2,728 | |
Application of Critical Accounting Policies and Estimates
UScellular prepares its consolidated financial statements in accordance with GAAP. UScellular’s 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 UScellular’s consolidated financial statements.
Wireless Spectrum Licenses
Wireless spectrum licenses represent a significant component of UScellular’s consolidated assets. Wireless spectrum licenses are considered to be indefinite-lived assets and, therefore, are not amortized but rather are tested at least annually for impairment. Significant negative events, such as changes in any of the assumptions described below as well as decreases in forecasted cash flows, could result in an impairment in future periods. Wireless spectrum licenses are tested for impairment at the level of reporting referred to as a unit of accounting.
For purposes of its impairment testing, UScellular separates its FCC wireless spectrum licenses into eight units of accounting, which consist of one unit of accounting for developed operating market wireless spectrum licenses (built wireless spectrum licenses) and seven geographic non-operating market wireless spectrum licenses (unbuilt wireless spectrum licenses).
A qualitative assessment of the license values was completed as of November 1, 2021 and November 1, 2020. 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 wireless spectrum licenses in each unit of accounting exceeded their respective carrying values. Therefore, no quantitative impairment evaluation was completed.
See Note 7 — Intangible Assets in the Notes to Consolidated Financial Statements for information related to wireless spectrum licenses activity in 2021 and 2020.
Income Taxes
UScellular is included in a consolidated federal income tax return with other members of the TDS consolidated group. TDS and UScellular are parties to a Tax Allocation Agreement which provides that UScellular and its subsidiaries be included with the TDS affiliated group in a consolidated federal income tax return and in state income or franchise tax returns in certain situations. For financial statement purposes, UScellular and its subsidiaries calculate their income, income tax and credits as if they comprised a separate affiliated group. Under the Tax Allocation Agreement between TDS and UScellular, UScellular remits its applicable income tax payments to TDS, and receives applicable tax refunds from TDS, consistent with when such payments would be paid or received if UScellular and its subsidiaries were a separate affiliated group.
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 UScellular’s financial condition and results of operations.
The preparation of the consolidated financial statements requires UScellular 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 UScellular’s Consolidated Balance Sheet. UScellular 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.
UScellular 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.
Regulatory Matters
5G Fund
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, of which up to $5 million relates to licenses which are subject to the FCC's spectrum aggregation and ownership attribution rules for Auction 105. None of the wireless spectrum licenses have been granted yet by the FCC.
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 $181 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. In October 2021, UScellular paid $36 million related to the additional costs. 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. Combined with prior mid-band purchases in Auction 105, UScellular will have mid-band spectrum in nearly all of its operating footprint, covering approximately 95% of subscribers.
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 are expected to be granted by the FCC in 2022.
Private Securities Litigation Reform Act of 1995
Safe Harbor Cautionary Statement
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 UScellular 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 UScellular’s Annual Report on Form 10-K for the year ended December 31, 2021, for a further discussion of these risks. Each of the following risks could have a material adverse effect on UScellular’s 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. UScellular 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 UScellular’s revenues or increase its costs to compete.
▪Changes in roaming practices or other factors could cause UScellular's roaming revenues to decline from current levels, roaming expenses to increase from current levels and/or impact UScellular's ability to service its customers in geographic areas where UScellular does not have its own network, which could have an adverse effect on UScellular's business, financial condition or results of operations.
▪A failure by UScellular 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 UScellular’s business, financial condition or results of operations.
▪An inability to attract 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 UScellular's business, financial condition or results of operations.
▪UScellular’s smaller scale relative to larger competitors that may have greater financial and other resources than UScellular could cause UScellular 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 UScellular’s business, financial condition or results of operations.
▪Advances or changes in technology could render certain technologies used by UScellular obsolete, could put UScellular at a competitive disadvantage, could reduce UScellular’s revenues or could increase its costs of doing business.
▪Complexities associated with deploying new technologies present substantial risk and UScellular investments in unproven technologies may not produce the benefits that UScellular expects.
▪Costs, integration problems or other factors associated with acquisitions, divestitures or exchanges of properties or wireless spectrum licenses and/or expansion of UScellular’s business could have an adverse effect on UScellular’s business, financial condition or results of operations.
▪A failure by UScellular 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 UScellular does business, including changes in UScellular's relationships with or financial or operational difficulties, including supply chain disruptions, of key suppliers or independent agents and third-party national retailers who market UScellular’s services, could adversely affect UScellular's business, financial condition or results of operations.
▪A failure by UScellular to maintain flexible and capable telecommunication networks or information technologies, or a material disruption thereof, could have an adverse effect on UScellular’s business, financial condition or results of operations.
Financial Risk Factors
▪Uncertainty in UScellular’s future cash flow and liquidity or the inability to access capital, deterioration in the capital markets, changes in interest rates, other changes in UScellular’s performance or market conditions, changes in UScellular’s credit ratings or other factors could limit or restrict the availability of financing on terms and prices acceptable to UScellular, which could require UScellular to reduce its construction, development or acquisition programs, reduce the amount of wireless spectrum licenses acquired, and/or reduce or cease share repurchases.
▪UScellular 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.
▪UScellular’s assets and revenue are concentrated in the U.S. wireless telecommunications industry. Consequently, its operating results may fluctuate based on factors related primarily to conditions in this industry.
▪UScellular has significant investments in entities that it does not control. Losses in the value of such investments could have an adverse effect on UScellular’s financial condition or results of operations.
Regulatory, Legal and Governance Risk Factors
▪Failure by UScellular to timely or fully comply with any existing applicable legislative and/or regulatory requirements or changes thereto could adversely affect UScellular’s business, financial condition or results of operations.
▪UScellular 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 UScellular’s 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 UScellular’s 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 UScellular's 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 UScellular from using necessary technology to provide products or services or subject UScellular to expensive intellectual property litigation or monetary penalties, which could have an adverse effect on UScellular’s business, financial condition or results of operations.
▪There are potential conflicts of interests between TDS and UScellular.
▪Certain matters, such as control by TDS and provisions in the UScellular Restated Certificate of Incorporation, may serve to discourage or make more difficult a change in control of UScellular or have other consequences.
General Risk Factors
▪UScellular 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 UScellular's 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 UScellular’s 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 UScellular’s business, financial condition or results of operations.
▪The impact of public health emergencies, such as the COVID-19 pandemic, on UScellular's business is uncertain, but depending on duration and severity could have a material adverse effect on UScellular's business, financial condition or results of operations.
Market Risk
Long-Term Debt
As of December 31, 2021, the majority of UScellular’s long-term debt was in the form of fixed-rate notes with remaining maturities ranging up to 49 years. UScellular also holds variable-rate debt. Fluctuations in market interest rates can lead to fluctuations in the fair value of fixed-rate notes and interest paid 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, 2021: | | | | | | | | | | | |
| Principal Payments Due by Period |
| Long-Term Debt Obligations1 | | Weighted-Avg. Interest Rates on Long-Term Debt Obligations2 |
(Dollars in millions) | | | |
2022 | $ | 3 | | | 2.4 | % |
2023 | 3 | | | 2.4 | % |
2024 | 3 | | | 2.5 | % |
2025 | 3 | | | 2.4 | % |
2026 | 3 | | | 2.4 | % |
Thereafter | 2,331 | | | 5.5 | % |
Total3 | $ | 2,346 | | | 5.5 | % |
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 and unamortized discounts related to the 6.7% Senior Notes. See Note 12 — Debt in the Notes to Consolidated Financial Statements for additional information.
2Represents the weighted average stated interest rates at December 31, 2021, for debt maturing in the respective periods.
3Excludes $450 million of outstanding borrowings under the receivables securitization agreement. If the maturity date of the facility is not extended, principal repayments begin in January 2023. Principal repayments are not scheduled but are instead based on actual receivable collections. UScellular intends to extend the maturity date of the facility.
Fair Value of Long-Term Debt
At December 31, 2021 and 2020, 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 $2,999 million and $2,775 million, respectively, and the book value was $2,781 million and $2,558 million, respectively. See Note 3 — Fair Value Measurements in the Notes to Consolidated Financial Statements for additional information.
Other Market Risk Sensitive Instruments
The substantial majority of UScellular’s other market risk sensitive instruments (as defined in Item 305 of SEC Regulation S-K) are short-term, including Cash and cash equivalents. Accordingly, UScellular believes that a significant change in interest rates would not have a material effect on such other market risk sensitive instruments.
Supplemental Information Relating to Non-GAAP Financial Measures
UScellular 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, UScellular 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. UScellular 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.
Management uses Adjusted EBITDA and Adjusted OIBDA as measurements of profitability, and therefore, reconciliations to Net income and Operating income are deemed appropriate. Management believes Adjusted EBITDA and Adjusted OIBDA are useful measures of UScellular’s 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 UScellular’s 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 table reconciles EBITDA, Adjusted EBITDA and Adjusted OIBDA to the corresponding GAAP measures, Net income and Operating income.
| | | | | | | | | | | | | |
| 2021 | | 2020 | | |
(Dollars in millions) | | | | | |
Net income (GAAP) | $ | 160 | | | $ | 233 | | | |
Add back: | | | | | |
Income tax expense | 20 | | | 17 | | | |
Interest expense | 175 | | | 112 | | | |
Depreciation, amortization and accretion | 678 | | | 683 | | | |
EBITDA (Non-GAAP) | 1,033 | | | 1,045 | | | |
Add back or deduct: | | | | | |
| | | | | |
(Gain) loss on asset disposals, net | 23 | | | 25 | | | |
(Gain) loss on sale of business and other exit costs, net | (2) | | | — | | | |
(Gain) loss on license sales and exchanges, net | — | | | (5) | | | |
(Gain) loss on investments | — | | | (2) | | | |
Adjusted EBITDA (Non-GAAP) | 1,054 | | | 1,063 | | | |
Deduct: | | | | | |
Equity in earnings of unconsolidated entities | 179 | | | 179 | | | |
Interest and dividend income | 6 | | | 8 | | | |
| | | | | |
Adjusted OIBDA (Non-GAAP) | 869 | | | 876 | | | |
Deduct: | | | | | |
Depreciation, amortization and accretion | 678 | | | 683 | | | |
| | | | | |
(Gain) loss on asset disposals, net | 23 | | | 25 | | | |
(Gain) loss on sale of business and other exit costs, net | (2) | | | — | | | |
(Gain) loss on license sales and exchanges, net | — | | | (5) | | | |
Operating income (GAAP) | $ | 170 | | | $ | 173 | | | |
Free Cash Flow
The following table presents Free cash flow, which is defined as Cash flows from operating activities less Cash paid for additions to property, plant and equipment. Free cash flow is a non-GAAP financial measure which UScellular 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. | | | | | | | | | | | | | |
| 2021 | | 2020 | | |
(Dollars in millions) | | | | | |
Cash flows from operating activities (GAAP) | $ | 802 | | | $ | 1,237 | | | |
Less: Cash paid for additions to property, plant and equipment | 724 | | | 989 | | | |
Free cash flow (Non-GAAP) | $ | 78 | | | $ | 248 | | | |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Incorporated by reference from Exhibit 13 to this Form 10-K Annual ReportSee section entitled “Market Risk.”Risk” in Item 7 of this Form 10-K.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference from Exhibit 13
| | | | | | | | |
Index to Financial Statements and Supplementary Data | | Page No. |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Financial Statements
United States Cellular Corporation
Consolidated Statement of Operations” “Consolidated
| | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
(Dollars and shares in millions, except per share amounts) | | | | | |
Operating revenues | | | | | |
Service | $ | 3,115 | | | $ | 3,067 | | | $ | 3,035 | |
Equipment sales | 1,007 | | | 970 | | | 987 | |
Total operating revenues | 4,122 | | | 4,037 | | | 4,022 | |
| | | | | |
Operating expenses | | | | | |
System operations (excluding Depreciation, amortization and accretion reported below) | 790 | | | 782 | | | 756 | |
Cost of equipment sold | 1,118 | | | 1,011 | | | 1,028 | |
Selling, general and administrative | 1,345 | | | 1,368 | | | 1,406 | |
Depreciation, amortization and accretion | 678 | | | 683 | | | 702 | |
| | | | | |
(Gain) loss on asset disposals, net | 23 | | | 25 | | | 19 | |
(Gain) loss on sale of business and other exit costs, net | (2) | | | — | | | (1) | |
(Gain) loss on license sales and exchanges, net | — | | | (5) | | | — | |
Total operating expenses | 3,952 | | | 3,864 | | | 3,910 | |
| | | | | |
Operating income | 170 | | | 173 | | | 112 | |
| | | | | |
Investment and other income (expense) | | | | | |
Equity in earnings of unconsolidated entities | 179 | | | 179 | | | 166 | |
Interest and dividend income | 6 | | | 8 | | | 17 | |
Gain (loss) on investments | — | | | 2 | | | — | |
Interest expense | (175) | | | (112) | | | (110) | |
| | | | | |
Total investment and other income | 10 | | | 77 | | | 73 | |
| | | | | |
Income before income taxes | 180 | | | 250 | | | 185 | |
Income tax expense | 20 | | | 17 | | | 52 | |
| | | | | |
Net income | 160 | | | 233 | | | 133 | |
Less: Net income attributable to noncontrolling interests, net of tax | 5 | | | 4 | | | 6 | |
Net income attributable to UScellular shareholders | $ | 155 | | | $ | 229 | | | $ | 127 | |
| | | | | |
Basic weighted average shares outstanding | 86 | | | 86 | | | 86 | |
Basic earnings per share attributable to UScellular shareholders | $ | 1.80 | | | $ | 2.66 | | | $ | 1.47 | |
| | | | | |
Diluted weighted average shares outstanding | 87 | | | 87 | | | 88 | |
Diluted earnings per share attributable to UScellular shareholders | $ | 1.77 | | | $ | 2.62 | | | $ | 1.44 | |
The accompanying notes are an integral part of these consolidated financial statements.
United States Cellular Corporation
Consolidated Statement of Cash Flows” “Consolidated
| | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
(Dollars in millions) | | | | | |
Cash flows from operating activities | | | | | |
Net income | $ | 160 | | | $ | 233 | | | $ | 133 | |
Add (deduct) adjustments to reconcile net income to net cash flows from operating activities | | | | | |
Depreciation, amortization and accretion | 678 | | | 683 | | | 702 | |
Bad debts expense | 56 | | | 72 | | | 107 | |
Stock-based compensation expense | 27 | | | 32 | | | 41 | |
Deferred income taxes, net | 41 | | | 130 | | | (4) | |
Equity in earnings of unconsolidated entities | (179) | | | (179) | | | (166) | |
Distributions from unconsolidated entities | 176 | | | 189 | | | 161 | |
| | | | | |
(Gain) loss on asset disposals, net | 23 | | | 25 | | | 19 | |
(Gain) loss on sale of business and other exit costs, net | (2) | | | — | | | (1) | |
(Gain) loss on license sales and exchanges, net | — | | | (5) | | | — | |
(Gain) loss on investments | — | | | (2) | | | — | |
Other operating activities | 33 | | | 2 | | | 4 | |
Changes in assets and liabilities from operations | | | | | |
Accounts receivable | (27) | | | (8) | | | (46) | |
Equipment installment plans receivable | (116) | | | (54) | | | (97) | |
Inventory | (27) | | | 16 | | | (20) | |
Accounts payable | (57) | | | 145 | | | (69) | |
Customer deposits and deferred revenues | 40 | | | 2 | | | (8) | |
Accrued taxes | (41) | | | (57) | | | (23) | |
Other assets and liabilities | 17 | | | 13 | | | (9) | |
Net cash provided by operating activities | 802 | | | 1,237 | | | 724 | |
| | | | | |
Cash flows from investing activities | | | | | |
Cash paid for additions to property, plant and equipment | (724) | | | (989) | | | (650) | |
Cash paid for licenses | (1,302) | | | (171) | | | (266) | |
Cash received from investments | 3 | | | 1 | | | 29 | |
Cash paid for investments | — | | | (3) | | | (11) | |
Cash received from divestitures and exchanges | 3 | | | 26 | | | 41 | |
Advance payments for license acquisitions | (20) | | | (30) | | | (5) | |
Other investing activities | 4 | | | 3 | | | (2) | |
Net cash used in investing activities | (2,036) | | | (1,163) | | | (864) | |
| | | | | |
Cash flows from financing activities | | | | | |
Issuance of long-term debt | 1,342 | | | 1,125 | | | — | |
Repayment of long-term debt | (1,118) | | | (108) | | | (116) | |
Common Shares reissued for benefit plans, net of tax payments | (16) | | | (11) | | | (9) | |
Repurchase of Common Shares | (31) | | | (23) | | | (21) | |
Payment of debt issuance costs | (22) | | | (38) | | | (1) | |
| | | | | |
Distributions to noncontrolling interests | (3) | | | (6) | | | (4) | |
Payments to acquire additional interest in subsidiaries | — | | | (11) | | | — | |
Other financing activities | (10) | | | (2) | | | (1) | |
Net cash provided by (used in) financing activities | 142 | | | 926 | | | (152) | |
| | | | | |
Net increase (decrease) in cash, cash equivalents and restricted cash | (1,092) | | | 1,000 | | | (292) | |
| | | | | |
Cash, cash equivalents and restricted cash | | | | | |
Beginning of period | 1,291 | | | 291 | | | 583 | |
End of period | $ | 199 | | | $ | 1,291 | | | $ | 291 | |
The accompanying notes are an integral part of these consolidated financial statements.
United States Cellular Corporation
Consolidated Balance Sheet” “Consolidated — Assets
| | | | | | | | | | | |
December 31, | 2021 | | 2020 |
(Dollars in millions) | | | |
Current assets | | | |
Cash and cash equivalents | $ | 156 | | | $ | 1,271 | |
Short-term investments | — | | | 3 | |
Accounts receivable | | | |
Customers and agents, less allowances of $57 and $62, respectively | 976 | | | 915 | |
Roaming | 7 | | | 13 | |
| | | |
Other, less allowances of $2 and $1, respectively | 63 | | | 70 | |
Inventory, net | 173 | | | 146 | |
Prepaid expenses | 58 | | | 51 | |
Income taxes receivable | 123 | | | 125 | |
Other current assets | 49 | | | 29 | |
Total current assets | 1,605 | | | 2,623 | |
| | | |
Assets held for sale | 18 | | | 2 | |
| | | |
Licenses | 4,088 | | | 2,629 | |
| | | |
Investments in unconsolidated entities | 439 | | | 435 | |
| | | |
Property, plant and equipment | | | |
In service and under construction | 9,056 | | | 8,785 | |
Less: Accumulated depreciation and amortization | 6,450 | | | 6,319 | |
Property, plant and equipment, net | 2,606 | | | 2,466 | |
| | | |
Operating lease right-of-use assets | 959 | | | 924 | |
| | | |
Other assets and deferred charges | 626 | | | 602 | |
| | | |
Total assets1 | $ | 10,341 | | | $ | 9,681 | |
The accompanying notes are an integral part of these consolidated financial statements.
United States Cellular Corporation
Consolidated Balance Sheet — Liabilities and Equity
| | | | | | | | | | | |
December 31, | 2021 | | 2020 |
(Dollars and shares in millions, except per share amounts) | | | |
Current liabilities | | | |
Current portion of long-term debt | $ | 3 | | | $ | 2 | |
Accounts payable | | | |
Affiliated | 14 | | | 10 | |
Trade | 346 | | | 377 | |
Customer deposits and deferred revenues | 191 | | | 151 | |
Accrued taxes | 33 | | | 48 | |
Accrued compensation | 83 | | | 82 | |
Short-term operating lease liabilities | 129 | | | 116 | |
Other current liabilities | 104 | | | 85 | |
Total current liabilities | 903 | | | 871 | |
| | | |
Liabilities held for sale | — | | | 1 | |
| | | |
Deferred liabilities and credits | | | |
Deferred income tax liability, net | 674 | | | 633 | |
Long-term operating lease liabilities | 889 | | | 875 | |
Other deferred liabilities and credits | 573 | | | 376 | |
| | | |
Long-term debt, net | 2,728 | | | 2,489 | |
| | | |
Commitments and contingencies | 0 | | 0 |
| | | |
Noncontrolling interests with redemption features | 11 | | | 10 | |
| | | |
Equity | | | |
UScellular shareholders’ equity | | | |
Series A Common and Common Shares | | | |
Authorized 190 shares (50 Series A Common and 140 Common Shares) | | | |
Issued 88 shares (33 Series A Common and 55 Common Shares) | | | |
Outstanding 86 shares (33 Series A Common and 53 Common Shares) | | | |
Par Value ($1.00 per share) ($33 Series A Common and $55 Common Shares) | 88 | | | 88 | |
Additional paid-in capital | 1,678 | | | 1,651 | |
Treasury shares, at cost, 2 Common Shares | (68) | | | (67) | |
Retained earnings | 2,849 | | | 2,739 | |
Total UScellular shareholders' equity | 4,547 | | | 4,411 | |
| | | |
Noncontrolling interests | 16 | | | 15 | |
| | | |
Total equity | 4,563 | | | 4,426 | |
| | | |
Total liabilities and equity1 | $ | 10,341 | | | $ | 9,681 | |
The accompanying notes are an integral part of these consolidated financial statements.
1The consolidated total assets as of December 31, 2021 and 2020, include assets held by consolidated variable interest entities (VIEs) of $1,482 million and $1,060 million, respectively, which are not available to be used to settle the obligations of UScellular. The consolidated total liabilities as of December 31, 2021 and 2020, include certain liabilities of consolidated VIEs of $23 million and $20 million, respectively, for which the creditors of the VIEs have no recourse to the general credit of UScellular. See Note 14 — Variable Interest Entities for additional information.
United States Cellular Corporation
Consolidated Statement of Changes in Equity” “Notes
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| UScellular Shareholders | | | | |
| Series A Common and Common shares | | Additional paid-in capital | | Treasury shares | | Retained earnings | | Total UScellular shareholders' equity | | Noncontrolling interests | | Total equity |
(Dollars in millions) | | | | | | | | | | | | | |
December 31, 2020 | $ | 88 | | | $ | 1,651 | | | $ | (67) | | | $ | 2,739 | | | $ | 4,411 | | | $ | 15 | | | $ | 4,426 | |
| | | | | | | | | | | | | |
Net income attributable to UScellular shareholders | — | | | — | | | — | | | 155 | | | 155 | | | — | | | 155 | |
Net income attributable to noncontrolling interests classified as equity | — | | | — | | | — | | | — | | | — | | | 4 | | | 4 | |
Repurchase of Common Shares | — | | | — | | | (31) | | | — | | | (31) | | | — | | | (31) | |
Incentive and compensation plans | — | | | 27 | | | 30 | | | (45) | | | 12 | | | — | | | 12 | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | (3) | | | (3) | |
| | | | | | | | | | | | | |
December 31, 2021 | $ | 88 | | | $ | 1,678 | | | $ | (68) | | | $ | 2,849 | | | $ | 4,547 | | | $ | 16 | | | $ | 4,563 | |
The accompanying notes are an integral part of these consolidated financial statements.
United States Cellular Corporation
Consolidated Statement of Changes in Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| UScellular Shareholders | | | | |
| Series A Common and Common shares | | Additional paid-in capital | | Treasury shares | | Retained earnings | | Total UScellular shareholders' equity | | Noncontrolling interests | | Total equity |
(Dollars in millions) | | | | | | | | | | | | | |
December 31, 2019 | $ | 88 | | | $ | 1,629 | | | $ | (70) | | | $ | 2,550 | | | $ | 4,197 | | | $ | 13 | | | $ | 4,210 | |
Cumulative effect of accounting change | — | | | — | | | — | | | (2) | | | (2) | | | — | | | (2) | |
Net income attributable to UScellular shareholders | — | | | — | | | — | | | 229 | | | 229 | | | — | | | 229 | |
Net income attributable to noncontrolling interests classified as equity | — | | | — | | | — | | | — | | | — | | | 4 | | | 4 | |
Repurchase of Common Shares | — | | | — | | | (23) | | | — | | | (23) | | | — | | | (23) | |
Incentive and compensation plans | — | | | 32 | | | 26 | | | (38) | | | 20 | | | — | | | 20 | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | (6) | | | (6) | |
Acquisitions of noncontrolling interests | — | | | (10) | | | — | | | — | | | (10) | | | 4 | | | (6) | |
December 31, 2020 | $ | 88 | | | $ | 1,651 | | | $ | (67) | | | $ | 2,739 | | | $ | 4,411 | | | $ | 15 | | | $ | 4,426 | |
The accompanying notes are an integral part of these consolidated financial statements.
United States Cellular Corporation
Consolidated Statement of Changes in Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| UScellular Shareholders | | | | |
| Series A Common and Common shares | | Additional paid-in capital | | Treasury shares | | Retained earnings | | Total UScellular shareholders' equity | | Noncontrolling interests | | Total equity |
(Dollars in millions) | | | | | | | | | | | | | |
December 31, 2018 | $ | 88 | | | $ | 1,590 | | | $ | (65) | | | $ | 2,444 | | | $ | 4,057 | | | $ | 10 | | | $ | 4,067 | |
Cumulative effect of accounting change | — | | | — | | | — | | | 2 | | | 2 | | | — | | | 2 | |
Net income attributable to UScellular shareholders | — | | | — | | | — | | | 127 | | | 127 | | | — | | | 127 | |
Net income attributable to noncontrolling interests classified as equity | — | | | — | | | — | | | — | | | — | | | 6 | | | 6 | |
Repurchase of Common Shares | — | | | — | | | (21) | | | — | | | (21) | | | — | | | (21) | |
Incentive and compensation plans | — | | | 39 | | | 16 | | | (23) | | | 32 | | | — | | | 32 | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | (3) | | | (3) | |
December 31, 2019 | $ | 88 | | | $ | 1,629 | | | $ | (70) | | | $ | 2,550 | | | $ | 4,197 | | | $ | 13 | | | $ | 4,210 | |
The accompanying notes are an integral part of these consolidated financial statements.
United States Cellular Corporation
Notes to Consolidated Financial Statements” “Management’s Report on Internal Control Over
Note 1 Summary of Significant Accounting Policies
United States Cellular Corporation (UScellular), a Delaware Corporation, is an 82%-owned subsidiary of Telephone and Data Systems, Inc. (TDS).
Nature of Operations
UScellular owns, operates and invests in wireless systems throughout the United States. As of December 31, 2021, UScellular served customers with 5.0 million total connections. UScellular has 1 reportable segment.
Principles of Consolidation
The accounting policies of UScellular conform to accounting principles generally accepted in the United States of America (GAAP) as set forth in the Financial Reporting,” “ReportAccounting Standards Board (FASB) Accounting Standards Codification (ASC). Unless otherwise specified, references to accounting provisions and GAAP in these notes refer to the requirements of Independent Registered Public Accounting Firm,”the FASB ASC. The consolidated financial statements include the accounts of UScellular, subsidiaries in which it has a controlling financial interest, general partnerships in which UScellular has a majority partnership interest and “Consolidated Quarterly Information (Unaudited).”certain entities in which UScellular has a variable interest that requires consolidation under GAAP. See Note 14 — Variable Interest Entities for additional information relating to UScellular’s VIEs. Intercompany accounts and transactions have been eliminated. The Consolidated Statement of Comprehensive Income was not included because comprehensive income for the years ended December 31, 2019, 20182021, 2020 and 20172019 equaled net income.
Use of Estimates
The 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. Significant estimates are involved in accounting for indefinite-lived intangible assets and income taxes.
Cash, Cash Equivalents and Restricted Cash
Cash 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. The following table provides a reconciliation of Cash and cash equivalents and restricted cash reported in the Consolidated Balance Sheet to the total of the amounts in the Consolidated Statement of Cash Flows.
| | | | | | | | | | | |
December 31, | 2021 | | 2020 |
(Dollars in millions) | | | |
Cash and cash equivalents | $ | 156 | | | $ | 1,271 | |
Restricted cash included in Other current assets | 43 | | | 20 | |
Cash, cash equivalents and restricted cash in the statement of cash flows | $ | 199 | | | $ | 1,291 | |
Accounts Receivable and Allowance for Credit Losses
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.
UScellular 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. UScellular does not have any off-balance sheet credit exposure related to its customers.
Inventory
Inventory consists primarily of wireless devices stated at the lower of cost, which approximates cost determined on the 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
UScellular's cloud-hosted arrangements that are service contracts consist primarily of software used to perform administrative functions. Implementation costs related to UScellular's cloud-hosted arrangements, which are recorded in Prepaid expenses and Other assets and deferred charges in the Consolidated Balance Sheet, were as follows:
| | | | | | | | | | | |
December 31, | 2021 | | 2020 |
(Dollars in millions) | | | |
Implementation costs, gross | $ | 76 | | | $ | 67 | |
Accumulated amortization | (29) | | | (13) | |
Implementation costs, net | $ | 47 | | | $ | 54 | |
These costs are amortized over the period of the service contract, which is generally three to five years. Amortization of implementation costs was $16 million and $11 million for the years ended December 31, 2021 and 2020, respectively, and was included in Selling, general and administrative expenses.
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 ten years, or in some cases twelve or fifteen 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 its impairment testing, UScellular separated its FCC wireless spectrum licenses into 8 units of accounting. The 8 units of accounting consisted of 1 unit of accounting for developed operating market wireless spectrum licenses (built wireless spectrum licenses) and 7 units of accounting for geographic non-operating market wireless spectrum licenses (unbuilt wireless spectrum licenses).
UScellular performed a qualitative impairment assessment to determine whether the wireless spectrum licenses were impaired. In 2021 and 2020, 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 wireless spectrum licenses in each unit of accounting exceeded their respective carrying values. Therefore, no quantitative impairment evaluation was completed. See Note 7 — Intangible Assets for additional details related to wireless spectrum licenses.
Investments in Unconsolidated Entities
For its equity method investments for which financial information is readily available, UScellular 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, UScellular records its equity in the earnings of the entity on a one quarter lag basis.
Property, Plant and Equipment
UScellular’s 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 System operations expense 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.
UScellular capitalizes certain costs of developing new information systems. 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
Depreciation is provided using the straight-line method over the estimated useful life of the related asset.
UScellular depreciates leasehold improvement assets over periods ranging from one year to thirty 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 2021, 2020 or 2019. However, in 2021, 2020 and 2019, 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
UScellular reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the assets might be impaired.
UScellular has 1 asset group for purposes of assessing property, plant and equipment for impairment based on the integrated nature of its assets and operations. The cash flows generated by this single interdependent asset group represent 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.
UScellular adopted the provisions of ASC 842 on January 1, 2019, using a modified retrospective method. Under this method, UScellular elected to apply the new accounting standard only to the most recent period presented, recognizing the cumulative effect of the accounting change as an adjustment to the beginning balance of retained earnings. The cumulative effect of applying the provisions of ASC 842 had no material impact on retained earnings.
Agent Liabilities
UScellular has relationships with agents, which are independent businesses that obtain customers for UScellular. At December 31, 2021 and 2020, UScellular had accrued $51 million and $55 million, respectively, in agent related liabilities. These amounts are included in Other current liabilities in the Consolidated Balance Sheet.
Debt Issuance Costs
Debt 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 UScellular’s revolving credit agreement and 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
UScellular 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, UScellular 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
Common Shares repurchased by UScellular are recorded at cost as treasury shares and result in a reduction of equity. When treasury shares are reissued, UScellular 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 Additional paid-in capital or Retained earnings.
Revenue Recognition
Revenues 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 UScellular's policies related to Revenues.
Advertising Costs
UScellular expenses advertising costs as incurred. Advertising costs totaled $184 million, $196 million and $212 million in 2021, 2020 and 2019, respectively.
Income Taxes
UScellular is included in a consolidated federal income tax return with other members of the TDS consolidated group. For financial statement purposes, UScellular and its subsidiaries calculate their income, income taxes and credits as if they comprised a separate affiliated group. Under a tax allocation agreement between TDS and UScellular, UScellular remits its applicable income tax payments to and receives applicable tax refunds from TDS. UScellular had a tax receivable balance with TDS of $123 million and $125 million as of December 31, 2021, and 2020, respectively. In January 2022, UScellular received $123 million of the tax receivable balance with TDS.
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. UScellular 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
UScellular has established a long-term incentive plan and a non-employee director compensation plan. These plans are considered compensatory plans and, therefore, recognition of costs for grants made under these plans is required.
UScellular 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 17 — Stock-Based Compensation for additional information.
Defined Contribution Plans
UScellular participates in a qualified noncontributory defined contribution pension plan sponsored by TDS; such plan provides pension benefits for the employees of UScellular and its subsidiaries. Under this plan, pension costs are calculated separately for each participant and are funded annually. Pension costs were $12 million, $12 million and $11 million in 2021, 2020 and 2019, respectively.
UScellular also participates in a defined contribution retirement savings plan (401(k) plan) sponsored by TDS. Total costs incurred for UScellular’s contributions to the 401(k) plan were $15 million, $15 million and $14 million in 2021, 2020 and 2019, respectively.
Note 2 Revenue Recognition
Nature of goods and services
The following is a description of principal activities from which UScellular 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 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. |
| |
Wireless Eligible Telecommunications Carrier (ETC) Revenues | 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. |
Significant Judgments
As a practical expedient, UScellular 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. UScellular applies this grouping method for the following types of transactions: device activation fees, contract acquisition 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.
UScellular 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.
Multiple Performance Obligations
UScellular sells bundled service and equipment offerings. In these instances, UScellular recognizes its revenue based on the relative standalone selling prices for each distinct service or equipment performance obligation, or bundles thereof. UScellular estimates the standalone selling price of the device or accessory to be its retail price excluding discounts. UScellular 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
UScellular 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 UScellular merely acts as an agent in collecting the amount on behalf of the imposing governmental authority. If the amount is assessed upon UScellular, 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 $66 million, $56 million and $53 million for 2021, 2020 and 2019, respectively.
Disaggregation of Revenue
In the following table, UScellular's revenues are disaggregated by type of service, which represents the relevant categorization of revenues for UScellular, and timing of recognition. Service revenues are recognized over time and Equipment sales are point in time.
| | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
(Dollars in millions) | | | | | |
Revenues from contracts with customers: | | | | | |
Retail service1 | $ | 2,765 | | | $ | 2,686 | | | $ | 2,650 | |
Inbound roaming | 110 | | | 152 | | | 174 | |
Other service | 157 | | | 152 | | | 137 | |
Service revenues from contracts with customers | 3,032 | | | 2,990 | | | 2,961 | |
Equipment sales | 1,007 | | | 970 | | | 987 | |
Total revenues from contracts with customers2 | $ | 4,039 | | | $ | 3,960 | | | $ | 3,948 | |
1During the third quarter of 2021, UScellular recorded a $9 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 $9 million in 2021. UScellular determined that this adjustment was not material to any of the periods impacted.
2Revenue 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.
Contract Balances
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 payment is collected 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 UScellular’s right to receive consideration. Once there is an unconditional right to receive the consideration, UScellular records such amounts as receivables, and then bills the customer under the terms of the respective contract.
UScellular recognizes Equipment 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.
| | | | | | | | | | | |
December 31, | 2021 | | 2020 |
(Dollars in millions) | | | |
Contract assets | $ | 7 | | | $ | 10 | |
Contract liabilities | $ | 243 | | | $ | 171 | |
Revenue recognized related to contract liabilities existing at January 1, 2021 was $132 million for the year ended December 31, 2021.
Transaction price allocated to the remaining performance obligations
The following table includes estimated service revenues expected to be recognized related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period. These estimates represent service revenues to be recognized when wireless 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, 2021, and may vary from actual results. As practical expedients, revenue related to contracts of less than one year, generally month-to-month contracts, and contracts with a fixed per-unit price and variable quantity, are excluded from these estimates. | | | | | |
| Service Revenues |
(Dollars in millions) | |
2022 | $ | 252 | |
2023 | 112 | |
Thereafter | 81 | |
Total | $ | 445 | |
Contract Cost Assets
UScellular expects that commission fees paid as a result of obtaining contracts are recoverable and therefore UScellular defers and amortizes these costs. As a practical expedient, costs with an amortization period of one year or less are expensed as incurred. The contract cost asset balance related to commission fees and other costs was $126 million and $124 million at December 31, 2021 and 2020, respectively and was recorded in Other assets and deferred charges in the Consolidated Balance Sheet. Deferred commission fees are amortized based on the timing of transfer of the goods or services to which the assets relate, typically the contract term. Amortization of contract cost assets was $99 million, $104 million and $109 million for the years ended December 31, 2021, 2020 and 2019, respectively, and was included in Selling, general and administrative expenses.
Note 3 Fair Value Measurements
As of December 31, 2021 and 2020, UScellular 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.
UScellular has applied the provisions of fair value accounting for purposes of computing the fair value of financial instruments for disclosure purposes as displayed below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Level within the Fair Value Hierarchy | | December 31, 2021 | | December 31, 2020 |
| Book Value | | Fair Value | | Book Value | | Fair Value |
(Dollars in millions) | | | | | | | | | |
Long-term debt | | | | | | | | | |
Retail | 2 | | $ | 1,500 | | | $ | 1,594 | | | $ | 1,917 | | | $ | 1,962 | |
Institutional | 2 | | 535 | | | 659 | | | 535 | | | 707 | |
Other | 2 | | 746 | | | 746 | | | 106 | | | 106 | |
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. UScellular’s “Institutional” debt consists of the 6.7% Senior Notes which are traded over the counter. UScellular’s “Other” debt consists of a senior term loan credit agreement and receivables securitization agreement. UScellular 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 1.31% to 4.40% and 1.35% to 3.75% at December 31, 2021 and 2020, respectively.
The fair values of Cash and cash equivalents, restricted cash and Short-term investments approximate their book values due to the short-term nature of these financial instruments.
Note 4 Equipment Installment Plans
UScellular sells devices to customers under equipment installment plans over a specified time period. For certain equipment installment plans, after a specified period of time or amount of payments, the customer may have the right to upgrade to a new device and have the remaining unpaid equipment installment contract balance waived, subject to certain conditions, including trading in the original device in good working condition and signing a new equipment installment contract.
The following table summarizes equipment installment plan receivables.
| | | | | | | | | | | |
December 31, | 2021 | | 2020 |
(Dollars in millions) | | | |
Equipment installment plan receivables, gross | $ | 1,085 | | | $ | 1,007 | |
| | | |
| | | |
Allowance for credit losses | (72) | | | (78) | |
Equipment installment plan receivables, net | $ | 1,013 | | | $ | 929 | |
| | | |
Net balance presented in the Consolidated Balance Sheet as: | | | |
Accounts receivable — Customers and agents (Current portion) | $ | 639 | | | $ | 590 | |
Other assets and deferred charges (Non-current portion) | 374 | | | 339 | |
Equipment installment plan receivables, net | $ | 1,013 | | | $ | 929 | |
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 30 days. The balance and aging of the equipment installment plan receivables on a gross basis by credit category were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Lowest Risk | | Lower Risk | | Slight Risk | | Higher Risk | | Total | | Lowest Risk | | Lower Risk | | Slight Risk | | Higher Risk | | Total |
(Dollars in millions) | | | | | | | | | | | | | | | | | | | |
Unbilled | $ | 896 | | | $ | 94 | | | $ | 24 | | | $ | 5 | | | $ | 1,019 | | | $ | 819 | | | $ | 98 | | | $ | 22 | | | $ | 9 | | | $ | 948 | |
Billed — current | 40 | | | 5 | | | 1 | | | 1 | | | 47 | | | 36 | | | 5 | | | 1 | | | 1 | | | 43 | |
Billed — past due | 10 | | | 6 | | | 2 | | | 1 | | | 19 | | | 8 | | | 5 | | | 2 | | | 1 | | | 16 | |
Total | $ | 946 | | | $ | 105 | | | $ | 27 | | | $ | 7 | | | $ | 1,085 | | | $ | 863 | | | $ | 108 | | | $ | 25 | | | $ | 11 | | | $ | 1,007 | |
The balance of the equipment installment plan receivables as of December 31, 2021 on a gross basis by year of origination were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2020 | | 2021 | | Total |
(Dollars in millions) | | | | | | | |
Lowest Risk | $ | 41 | | | $ | 278 | | | $ | 627 | | | $ | 946 | |
Lower Risk | 3 | | | 26 | | | 76 | | | 105 | |
Slight Risk | 1 | | | 4 | | | 22 | | | 27 | |
Higher Risk | — | | | 1 | | | 6 | | | 7 | |
Total | $ | 45 | | | $ | 309 | | | $ | 731 | | | $ | 1,085 | |
Activity for the years ended December 31, 2021 and 2020, in the allowance for credit losses for equipment installment plan receivables was as follows:
| | | | | | | | | | | |
| 2021 | | 2020 |
(Dollars in millions) | | | |
Allowance for credit losses, beginning of year | $ | 78 | | | $ | 84 | |
Bad debts expense | 38 | | | 50 | |
Write-offs, net of recoveries | (44) | | | (56) | |
Allowance for credit losses, end of year | $ | 72 | | | $ | 78 | |
Note 5 Income Taxes
UScellular is included in a consolidated federal income tax return and in certain state income tax returns with other members of the TDS consolidated group. For financial statement purposes, UScellular and its subsidiaries compute their income tax expense as if they comprised a separate affiliated group and were not included in the TDS consolidated group.
UScellular’s current income taxes balances at December 31, 2021 and 2020, were as follows:
| | | | | | | | | | | |
December 31, | 2021 | | 2020 |
(Dollars in millions) | | | |
Federal income taxes receivable | $ | 123 | | | $ | 124 | |
Net state income taxes receivable | — | | | 1 | |
Income tax expense (benefit) is summarized as follows:
| | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
(Dollars in millions) | | | | | |
Current | | | | | |
Federal | $ | 2 | | | $ | (118) | | | $ | 44 | |
State | (23) | | | 5 | | | 12 | |
Deferred | | | | | |
Federal | 49 | | | 124 | | | — | |
State | (8) | | | 6 | | | (4) | |
Total income tax expense (benefit) | $ | 20 | | | $ | 17 | | | $ | 52 | |
A reconciliation of UScellular’s income tax expense computed at the statutory rate to the reported income tax expense, and the statutory federal income tax rate to UScellular’s effective income tax rate is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
| Amount | | Rate | | Amount | | Rate | | Amount | | Rate |
(Dollars in millions) | | | | | | | | | | | |
Statutory federal income tax expense and rate | $ | 38 | | | 21.0 | % | | $ | 52 | | | 21.0 | % | | $ | 39 | | | 21.0 | % |
State income taxes, net of federal benefit1 | (25) | | | (14.1) | | | 8 | | | 3.4 | | | 6 | | | 3.4 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Change in federal valuation allowance2 | 7 | | | 3.8 | | | — | | | 0.1 | | | 7 | | | 3.6 | |
Loss carryback benefit of CARES Act3 | — | | | — | | | (49) | | | (19.8) | | | — | | | — | |
Nondeductible compensation | 2 | | | 1.3 | | | 6 | | | 2.6 | | | 2 | | | 1.3 | |
Tax credits | — | | | (0.2) | | | — | | | (0.1) | | | (3) | | | (1.5) | |
Other differences, net | (2) | | | (0.4) | | | — | | | (0.6) | | | 1 | | | 0.3 | |
Total income tax expense (benefit) and rate | $ | 20 | | | 11.4 | % | | $ | 17 | | | 6.6 | % | | $ | 52 | | | 28.1 | % |
1State income taxes, net of federal benefit, include changes in unrecognized tax benefits as well as adjustments to state valuation allowances. 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 interest expense carryforwards from partnership investments that may not be realized.
3The CARES Act provides 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 provides a tax benefit in excess of the current federal statutory rate of 21%.
Significant components of UScellular’s deferred income tax assets and liabilities at December 31, 2021 and 2020, were as follows:
| | | | | | | | | | | |
December 31, | 2021 | | 2020 |
(Dollars in millions) | | | |
Deferred tax assets | | | |
Net operating loss (NOL) carryforwards | $ | 126 | | | $ | 107 | |
| | | |
| | | |
Lease liabilities | 254 | | | 236 | |
Asset retirement obligation | 64 | | | 51 | |
Other | 130 | | | 83 | |
Total deferred tax assets | 574 | | | 477 | |
Less valuation allowance | (83) | | | (94) | |
Net deferred tax assets | 491 | | | 383 | |
Deferred tax liabilities | | | |
Property, plant and equipment | 446 | | | 391 | |
Licenses/intangibles | 330 | | | 256 | |
Partnership investments | 154 | | | 143 | |
Lease assets | 232 | | | 215 | |
Other | 3 | | | 11 | |
Total deferred tax liabilities | 1,165 | | | 1,016 | |
Net deferred income tax liability | $ | 674 | | | $ | 633 | |
At December 31, 2021, UScellular and certain subsidiaries had $2,058 million of state NOL carryforwards (generating a $90 million deferred tax asset) available to offset future taxable income. The state NOL carryforwards expire between 2022 and 2041. UScellular and certain subsidiaries had $170 million of federal NOL carryforwards (generating a $36 million deferred tax asset) available to offset future taxable income. The federal NOL carryforwards generally expire between 2022 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.
A summary of UScellular’s deferred tax asset valuation allowance is as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
(Dollars in millions) | | | | | |
Balance at beginning of year | $ | 94 | | | $ | 90 | | | $ | 75 | |
Charged to Income tax expense | (11) | | | 4 | | | 15 | |
| | | | | |
Balance at end of year | $ | 83 | | | $ | 94 | | | $ | 90 | |
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
(Dollars in millions) | | | | | |
Unrecognized tax benefits balance at beginning of year | $ | 51 | | | $ | 48 | | | $ | 48 | |
Additions for tax positions of current year | 8 | | | 7 | | | 7 | |
Additions for tax positions of prior years | — | | | 2 | | | — | |
Reductions for tax positions of prior years | (3) | | | — | | | (6) | |
Reductions for settlements of tax positions | (2) | | | — | | | (1) | |
Reductions for lapses in statutes of limitations | (19) | | | (6) | | | — | |
Unrecognized tax benefits balance at end of year | $ | 35 | | | $ | 51 | | | $ | 48 | |
Unrecognized tax benefits are included in 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 2021, 2020 and 2019 by $28 million, $41 million and $37 million, respectively, net of the federal benefit from state income taxes.
UScellular 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 a benefit of $10 million in 2021, and expenses of $2 million and $3 million in 2020 and 2019, respectively. Net accrued liabilities for interest and penalties were $12 million and $23 million at December 31, 2021 and 2020, respectively, and are included in Other deferred liabilities and credits in the Consolidated Balance Sheet.
UScellular is included in TDS’ consolidated federal and certain state income tax returns. UScellular also files certain state and local income tax returns separately from TDS. With limited exceptions, TDS is no longer subject to federal and state income tax audits for the years prior to 2018.
Note 6 Earnings Per Share
Basic earnings per share attributable to UScellular shareholders is computed by dividing Net income attributable to UScellular shareholders by the weighted average number of Common Shares outstanding during the period. Diluted earnings per share attributable to UScellular shareholders is computed by dividing Net income attributable to UScellular 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.
The amounts used in computing basic and diluted earnings per share attributable to UScellular shareholders were as follows:
| | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
(Dollars and shares in millions, except per share amounts) | | | | | |
Net income attributable to UScellular shareholders | $ | 155 | | | $ | 229 | | | $ | 127 | |
| | | | | |
Weighted average number of shares used in basic earnings per share | 86 | | | 86 | | | 86 | |
Effects of dilutive securities | 1 | | | 1 | | | 2 | |
Weighted average number of shares used in diluted earnings per share | 87 | | | 87 | | | 88 | |
| | | | | |
Basic earnings per share attributable to UScellular shareholders | $ | 1.80 | | | $ | 2.66 | | | $ | 1.47 | |
| | | | | |
Diluted earnings per share attributable to UScellular shareholders | $ | 1.77 | | | $ | 2.62 | | | $ | 1.44 | |
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 UScellular shareholders because their effects were antidilutive. The number of such Common Shares excluded was less than 1 million shares for 2021, 2020 and 2019, respectively.
Note 7 Intangible Assets
Licenses
UScellular reviews attractive opportunities to acquire additional wireless spectrum, including pursuant to FCC auctions. UScellular also may seek to divest outright or exchange wireless spectrum that is not strategic to its long-term success. Activity related to UScellular's Licenses is presented below. | | | | | | | | | | | |
| 2021 | | 2020 |
(Dollars in millions) | | | |
Balance at beginning of year | $ | 2,629 | | | $ | 2,471 | |
Acquisitions | 1,464 | | | 171 | |
Transferred to Assets held for sale | (18) | | | — | |
Divestitures | — | | | (18) | |
| | | |
| | | |
Capitalized interest | 13 | | | 5 | |
Balance at end of year | $ | 4,088 | | | $ | 2,629 | |
Auction 103
In March 2020, the FCC announced by way of public notice that UScellular was the provisional winning bidder for 237 wireless spectrum licenses in the 37, 39 and 47 GHz bands (Auction 103) for $146 million. UScellular paid $5 million of this amount in 2019 and the remainder in 2020. In June 2020, the wireless spectrum licenses from Auction 103 were granted by the FCC.
Auction 107
In February 2021, the FCC announced by way of public notice that UScellular was the provisional winning bidder for 254 wireless spectrum licenses in the 3.7-3.98 GHz bands (Auction 107) 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 $181 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. In October 2021, UScellular paid $36 million related to the additional costs. 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 380 wireless spectrum licenses in the 3.45-3.55 GHz band (Auction 110) for $580 million. UScellular paid $20 million of this amount in 2021 and the remainder in January and February 2022. The advance payment is included in Other assets and deferred charges in the December 31, 2021 Consolidated Balance Sheet. The wireless spectrum licenses from Auction 110 are expected to be granted by the FCC in 2022.
Note 8 Investments in Unconsolidated Entities
Investments in unconsolidated entities consist of amounts invested in entities in which UScellular holds a noncontrolling interest. UScellular's Investments in unconsolidated entities are accounted for using either the equity method or measurement alternative 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.
| | | | | | | | | | | |
December 31, | 2021 | | 2020 |
(Dollars in millions) | | | |
Equity method investments: | | | |
Capital contributions, loans, advances and adjustments | $ | 104 | | | $ | 104 | |
Cumulative share of income | 2,417 | | | 2,238 | |
Cumulative share of distributions | (2,090) | | | (1,914) | |
Total equity method investments | 431 | | | 428 | |
Measurement alternative method investments | 8 | | | 7 | |
Total investments in unconsolidated entities | $ | 439 | | | $ | 435 | |
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 UScellular’s equity method investments:
| | | | | | | | | | | |
December 31, | 2021 | | 2020 |
(Dollars in millions) | | | |
Assets | | | |
Current | $ | 1,223 | | | $ | 1,199 | |
Noncurrent | 6,129 | | | 5,849 | |
Total assets | $ | 7,352 | | | $ | 7,048 | |
| | | |
Liabilities and Equity | | | |
Current liabilities | $ | 707 | | | $ | 643 | |
Noncurrent liabilities | 1,249 | | | 1,112 | |
Partners’ capital and shareholders’ equity | 5,396 | | | 5,293 | |
Total liabilities and equity | $ | 7,352 | | | $ | 7,048 | |
| | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
(Dollars in millions) | | | | | |
Results of Operations | | | | | |
Revenues | $ | 7,100 | | | $ | 6,677 | | | $ | 6,903 | |
Operating expenses | 5,130 | | | 4,733 | | | 5,022 | |
Operating income | 1,970 | | | 1,944 | | | 1,881 | |
Other income (expense), net | 15 | | | 16 | | | (22) | |
Net income | $ | 1,985 | | | $ | 1,960 | | | $ | 1,859 | |
Note 9 Property, Plant and Equipment
Property, plant and equipment in service and under construction, and related accumulated depreciation and amortization, as of December 31, 2021 and 2020, were as follows:
| | | | | | | | | | | | | | | | | |
December 31, | Useful Lives (Years) | | 2021 | | 2020 |
(Dollars in millions) | | | | | |
Land | N/A | | $ | 37 | | | $ | 34 | |
Buildings | 20 | | 293 | | | 295 | |
Leasehold and land improvements | 1-30 | | 1,442 | | | 1,369 | |
Cell site equipment | 7-25 | | 4,150 | | | 4,018 | |
Switching equipment | 5-8 | | 1,095 | | | 1,094 | |
Office furniture and equipment | 3-5 | | 252 | | | 282 | |
Other operating assets and equipment | 3-5 | | 47 | | | 49 | |
System development | 1-7 | | 1,479 | | | 1,327 | |
Work in process | N/A | | 261 | | | 317 | |
Total property, plant and equipment, gross | | | 9,056 | | | 8,785 | |
Accumulated depreciation and amortization | | | (6,450) | | | (6,319) | |
Total property, plant and equipment, net | | | $ | 2,606 | | | $ | 2,466 | |
Depreciation and amortization expense totaled $662 million, $669 million and $689 million in 2021, 2020 and 2019, respectively. In 2021, 2020 and 2019, (Gain) loss on asset disposals, net included charges of $23 million, $25 million and $19 million, respectively, related to disposals of assets, trade-ins of older assets for replacement assets and other retirements of assets from service in the normal course of business.
Note 10 Leases
Lessee Agreements
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. Nearly all of UScellular’s leases are classified as operating leases, although it does have a small number of finance leases. UScellular’s most significant leases are for land and tower spaces, network facilities, retail spaces, and offices.
UScellular has agreements with both lease and nonlease components, which are accounted for separately. As part of the present value calculation for the lease liabilities, UScellular 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 UScellular's unsecured rates, adjusted to approximate the rates at which UScellular would be required to borrow on a collateralized basis over a term similar to the recognized lease term. UScellular applies the incremental borrowing rates to lease components using a portfolio approach based upon the length of the lease term. The cost of nonlease components in UScellular’s 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. UScellular’s 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 also has a significant impact on the right-of-use asset and lease liability calculations. Many of UScellular’s leases include renewal and early termination options. At lease commencement, the lease terms include options to extend the lease when UScellular is reasonably certain that it will exercise the options. The lease terms do not include early termination options unless UScellular is reasonably certain to exercise the options. Certain asset classes have similar lease characteristics; therefore, UScellular has applied the portfolio approach for lease term recognition for its tower space, retail, and certain ground lease asset classes.
The following table shows the components of lease cost included in the Consolidated Statement of Operations:
| | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
(Dollars in millions) | | | | | |
Operating lease cost | $ | 181 | | | $ | 171 | | | $ | 163 | |
| | | | | |
| | | | | |
| | | | | |
Variable lease cost | 10 | | | 10 | | | 7 | |
| | | | | |
Total | $ | 191 | | | $ | 181 | | | $ | 170 | |
The following table shows supplemental cash flow information related to lease activities:
| | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
(Dollars in millions) | | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
Operating cash flows from operating leases | $ | 183 | | | $ | 169 | | | $ | 156 | |
| | | | | |
| | | | | |
Right-of-use assets obtained in exchange for lease obligations: | | | | | |
Operating leases | $ | 182 | | | $ | 155 | | | $ | 125 | |
| | | | | |
The table below shows a weighted-average analysis for lease terms and discount rates for operating leases:
| | | | | | | | | | | |
December 31, | 2021 | | 2020 |
| | | |
Weighted Average Remaining Lease Term | 12 years | | 12 years |
| | | |
| | | |
| | | |
Weighted Average Discount Rate | 3.8 | % | | 4.1 | % |
| | | |
The maturities of lease liabilities are as follows:
| | | | | | | | |
| Operating Leases | | | |
(Dollars in millions) | | | | |
2022 | $ | 163 | | | | |
2023 | 162 | | | | |
2024 | 143 | | | | |
2025 | 118 | | | | |
2026 | 87 | | | | |
Thereafter | 680 | | | | |
Total lease payments1 | $ | 1,353 | | | | |
Less: Imputed interest | 335 | | | | |
Present value of lease liabilities | $ | 1,018 | | | | |
1 Lease payments exclude $33 million of legally binding lease payments for leases signed but not yet commenced.
Lessor Agreements
UScellular's most significant lessor leases are for tower space. All of UScellular’s 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. UScellular’s lessor agreements with lease and nonlease components are generally accounted for separately.
The identified lease term determines the periods to which revenue is allocated over the term of the lease. Many of UScellular’s leases include renewal and early termination options. At lease commencement, lease terms include options to extend the lease when UScellular 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. UScellular’s 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.
The following table shows the components of lease income which are included in Service revenues in the Consolidated Statement of Operations:
| | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
(Dollars in millions) | | | | | |
Operating lease income1 | $ | 83 | | | $ | 77 | | | $ | 74 | |
| | | | | |
| | | | | |
1 During the third quarter of 2019, UScellular recorded an out-of-period adjustment attributable to 2009 through the second quarter of 2019 due to errors in the timing of recognition of revenue for certain tower leases. This out-of-period adjustment had the impact of increasing operating lease income by $5 million for the year ended December 31, 2019. UScellular determined that this adjustment was not material to any of the periods impacted.
The maturities of expected lease payments to be received are as follows:
| | | | | |
| Operating Leases |
(Dollars in millions) | |
2022 | $ | 72 | |
2023 | 69 | |
2024 | 54 | |
2025 | 36 | |
2026 | 17 | |
Thereafter | 15 | |
Total future lease maturities | $ | 263 | |
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. These obligations are included in Other deferred liabilities and credits in the Consolidated Balance Sheet.
In 2021 and 2020, UScellular performed a review of the assumptions and estimated future costs related to asset retirement obligations. The results of the review and other changes in asset retirement obligations during 2021 and 2020, were as follows:
| | | | | | | | | | | |
| 2021 | | 2020 |
(Dollars in millions) | | | |
Balance at beginning of year | $ | 249 | | | $ | 220 | |
Additional liabilities accrued | 9 | | | 5 | |
Revisions in estimated cash outflows | 42 | | | 11 | |
Disposition of assets | (1) | | | (1) | |
Accretion expense | 16 | | | 14 | |
| | | |
Balance at end of year | $ | 315 | | | $ | 249 | |
Note 12 Debt
Revolving Credit Agreement
At December 31, 2021, UScellular had a revolving credit agreement available for general corporate purposes. Amounts under the revolving credit agreement may be borrowed, repaid and reborrowed from time to time until maturity in July 2026.
The following table summarizes the revolving credit agreement as of December 31, 2021:
| | | | | |
(Dollars in millions) | |
Maximum borrowing capacity | $ | 300 | |
Letters of credit outstanding | $ | — | |
Amount borrowed | $ | — | |
Amount available for use | $ | 300 | |
Borrowings under the revolving credit agreement bear interest at a rate of Secured Overnight Financing Rate (SOFR) plus 1.60%. 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 UScellular and approved by the lenders). UScellular’s credit spread and commitment fees on its revolving credit agreement may be subject to increase if its current credit rating from nationally recognized credit rating agencies is lowered, and may be subject to decrease if the rating is raised.
In connection with UScellular’s revolving credit agreement, TDS and UScellular entered into a subordination agreement together with the administrative agent for the lenders under UScellular’s revolving credit agreement. Pursuant to this subordination agreement, (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 agreement) in excess of $105 million and (ii) refinancing indebtedness in excess of $250 million will be subordinated and made junior in right of payment to the prior payment in full of obligations to the lenders under UScellular’s revolving credit agreement. As of December 31, 2021, UScellular had no outstanding consolidated funded indebtedness or refinancing indebtedness that was subordinated to the revolving credit agreement pursuant to the subordination agreement.
The continued availability of the revolving credit agreement requires UScellular to comply with certain negative and affirmative covenants, maintain certain financial ratios and make representations regarding certain matters at the time of each borrowing.
The revolving credit agreement includes the following financial covenants:
▪Consolidated Interest Coverage Ratio may not be less than 3.00 to 1.00 as of the end of any fiscal quarter.
▪Consolidated Leverage Ratio may not be greater than 3.75 to 1.00 as of the end of any fiscal quarter.
Certain UScellular wholly-owned subsidiaries have jointly and severally unconditionally guaranteed the payment and performance of the obligations of UScellular under the revolving credit agreement. Other subsidiaries that meet certain criteria will be required to provide a similar guaranty in the future. UScellular believes it was in compliance with all of the financial and other covenants and requirements set forth in its revolving credit agreement as of December 31, 2021.
In January 2022, UScellular borrowed $75 million under its revolving credit agreement and in February 2022, repaid the entire borrowing.
Term Loan Agreements
At December 31, 2021, UScellular had senior term loan credit agreements available for general corporate purposes.
The following table summarizes the term loan credit agreements as of December 31, 2021:
| | | | | |
(Dollars in millions) | |
Maximum borrowing capacity | $ | 800 | |
Amount borrowed and outstanding | $ | 299 | |
Amount borrowed and repaid | $ | 1 | |
Amount available for use | $ | 500 | |
In July 2021, UScellular amended and restated its term loan agreement to allow for an additional $200 million of borrowing capacity. Principal reductions on the existing borrowings are due and payable in quarterly installments of $0.75 million beginning in December 2021. Amounts borrowed under the existing term loan agreement will bear interest at a rate of SOFR plus 2.10% and are due and payable in July 2028. Borrowings under the additional $200 million borrowing capacity may be drawn in one or more advances by the one-year anniversary of the date of the agreement, which is July 30, 2022; amounts not drawn by that time will cease to be available. Borrowings bear interest at a rate of SOFR plus 2.60% and are due and payable in July 2031. Principal reductions on any new borrowings will be due and payable in quarterly installments beginning in December 2022 at a rate of 0.25% of the initial outstanding principal balance through September 2026 and at a rate of 0.625% of the initial outstanding principal balance from December 2026 through the maturity date. In January 2022, UScellular borrowed $100 million under the term loan agreement.
In December 2021, UScellular entered into an additional $300 million term loan agreement. The agreement may be drawn in one or more advances by the three-month anniversary of the date of the agreement which is March 9, 2022; amounts not drawn by that time will cease to be available. Borrowings bear interest at a rate of SOFR plus 1.60% and are due and payable in July 2026. Principal reductions on any borrowings will be due and payable in quarterly installments beginning in March 2023 at a rate of 0.625% of the initial outstanding principal balance through December 2023; at a rate of 1.25% of the initial outstanding principal balance from March 2024 through December 2025; and at a rate of 2.50% of the initial outstanding principal balance from March 2026 through the maturity date. In February 2022, UScellular borrowed $225 million under the term loan agreement.
In connection with UScellular’s term loan credit agreements, TDS and UScellular entered into subordination agreements together with the administrative agent for the lenders under UScellular’s term loan credit agreements, which is substantially the same as the subordination agreement for UScellular as described above under the “Revolving Credit Agreement.” As of December 31, 2021, UScellular had no outstanding consolidated funded indebtedness or refinancing indebtedness that was subordinated to the term loan agreements pursuant to these subordination agreements.
The senior term loan credit agreements contain financial covenants and subsidiary guarantees that are consistent with the revolving credit agreements described above. UScellular believes that it was in compliance with all of the financial and other covenants and requirements set forth in its term loan credit agreements as of December 31, 2021.
Export Credit Financing Agreement
In December 2021, UScellular entered into a $150 million term loan 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. The agreement may be drawn in one or more advances by the three-month anniversary of the date of the agreement which is March 17, 2022; amounts not drawn by that time will cease to be available. Borrowings bear interest at a rate of SOFR plus 1.60% and are due and payable on the five-year anniversary of the first borrowing, which is in January 2027. As of December 31, 2021, there were no outstanding borrowings under the credit facility and the unused borrowing capacity was $150 million. In January 2022, UScellular borrowed $150 million under the agreement.
In connection with UScellular export credit financing agreement, TDS and UScellular entered into a subordination agreement together with the administrative agent for the lenders under UScellular’s export credit financing agreement, which is substantially the same as the subordination agreement for UScellular as described above under the “Revolving Credit Agreement.” As of December 31, 2021, UScellular had no outstanding consolidated funded indebtedness or refinancing indebtedness that was subordinated to the export credit financing agreement pursuant to this subordination agreement.
The export credit financing agreement contains financial covenants and subsidiary guarantees that are consistent with the revolving credit agreements described above. TDS believes that UScellular was in compliance with all of the financial and other covenants and requirements set forth in their export credit financing agreement as of December 31, 2021.
Receivables Securitization Agreement
At December 31, 2021, UScellular, through its subsidiaries, had a receivables securitization agreement for securitized borrowings using its equipment installment receivables for general corporate purposes. In June 2021, UScellular increased the borrowing capacity under the receivables securitization agreement to $450 million. Amounts under the receivables securitization agreement may be borrowed, repaid and reborrowed from time to time until maturity in December 2022. Unless the agreement is amended to extend the maturity date, repayments based on receivable collections commence in January 2023. UScellular intends to extend the maturity date of the facility. The outstanding borrowings bear interest at floating rates. As of December 31, 2021, UScellular has borrowed the full amount available under the agreement of $450 million. As of December 31, 2021, the USCC Master Note Trust held $638 million of assets available to be 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, UScellular 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 14 — Variable Interest Entities for additional information.
UScellular entered into a performance guaranty whereby UScellular guarantees the performance of certain wholly-owned subsidiaries of UScellular under the receivables securitization agreement.
The continued availability of the receivables securitization agreement requires UScellular to comply with certain negative and affirmative covenants, maintain certain financial ratios and provide representations on certain matters at the time of each borrowing. The covenants include the same financial covenants for UScellular as described above under the “Revolving Credit Agreement.” UScellular believes that it was in compliance as of December 31, 2021, with all of the financial covenants and requirements set forth in its 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 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 1.25%. Although the lender holds a security interest in the receivables, the repo subsidiary retains effective control 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. The expiration date of the repurchase agreement is in January 2023. As of January 31, 2022, UScellular held $455 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 February 2022, the repo subsidiary borrowed $60 million under the repurchase agreement.
UScellular entered into a performance guaranty whereby UScellular guarantees the performance of the repo subsidiary under the repurchase agreement.
Other Long-Term Debt
Long-term debt as of December 31, 2021 and 2020, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2021 | | December 31, 2020 |
| Issuance date | Redemption date | Maturity date | Call date (any time on or after) | Principal Amount | | Less Unamortized discount and debt issuance costs | | Total | | Principal Amount | | Less Unamortized discount and debt issuance costs | | Total |
(Dollars in millions) | | | | | | | | | | | | |
Unsecured Senior Notes | | | | | | | | | | | | |
6.700% | Dec 2003 and June 2004 | | Dec 2033 | Dec 2003 and June 2004 | $ | 544 | | | $ | 12 | | | $ | 532 | | | $ | 544 | | | $ | 13 | | | $ | 531 | |
6.950% | May 2011 | Sep 2021 | May 2060 | May 2016 | — | | | — | | | — | | | 342 | | | 11 | | | 331 | |
7.250% | Dec 2014 | May 2021 | Dec 2063 | Dec 2019 | — | | | — | | | — | | | 275 | | | 10 | | | 265 | |
7.250% | Nov 2015 | Jun 2021 | Dec 2064 | Dec 2020 | — | | | — | | | — | | | 300 | | | 10 | | | 290 | |
6.250% | Aug 2020 | | Sep 2069 | Sep 2025 | 500 | | | 17 | | | 483 | | | 500 | | | 17 | | | 483 | |
5.500% | Dec 2020 | | Mar 2070 | Mar 2026 | 500 | | | 17 | | | 483 | | | 500 | | | 17 | | | 483 | |
5.500% | May 2021 | | Jun 2070 | Jun 2026 | 500 | | | 16 | | | 484 | | | — | | | — | | | — | |
Term Loan | | | | | 299 | | | 3 | | | 296 | | | 83 | | | 3 | | | 80 | |
EIP Securitization | | | | 450 | | | — | | | 450 | | | 25 | | | — | | | 25 | |
Finance lease obligations | | 3 | | | — | | | 3 | | | 3 | | | — | | | 3 | |
Total long-term debt | | $ | 2,796 | | | $ | 65 | | | $ | 2,731 | | | $ | 2,572 | | | $ | 81 | | | $ | 2,491 | |
Long-term debt, current | | | | | | $ | 3 | | | | | | | $ | 2 | |
Long-term debt, noncurrent | | | | | | $ | 2,728 | | | | | | | $ | 2,489 | |
In May 2021, UScellular issued $500 million of 5.5% Senior Notes due in June 2070, and received cash proceeds of $484 million after payment of debt issuance costs of $16 million. These funds will be used for general corporate purposes. Interest on these notes is payable quarterly beginning in September 2021. UScellular may redeem these notes, in whole or in part, at any time after June 2026 at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest.
UScellular redeemed outstanding Senior Notes in 2021. At time of redemption, $31 million of interest expense was recorded related to unamortized debt issuance costs for the notes. The notes were redeemed at a price of 100% of the principal amount, including accrued and unpaid interest to the redemption date.
UScellular may redeem its 6.25% Senior Notes, 5.5% March 2070 Senior Notes and 5.5% June 2070 Senior Notes, in whole or in part at any time after the respective call date, at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest. UScellular may redeem the 6.7% Senior Notes, in whole or in part, at any time prior to maturity at a redemption price equal to the greater of (a) 100% 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, 2021, is payable quarterly, with the exception of the 6.7% Senior Notes for which interest is payable semi-annually.
The annual requirements for principal payments on long-term debt are approximately $3 million, $3 million, $3 million, $3 million and $3 million for the years 2022 through 2026, respectively. These amounts do not include payments on the $450 million of outstanding borrowings under the receivables securitization agreement. If the maturity date of the facility is not extended, principal repayments begin in January 2023. Principal repayments are not scheduled but are instead based on actual receivable collections. UScellular intends to extend the maturity date of the facility.
The covenants associated with UScellular’s long-term debt obligations, among other things, restrict UScellular’s 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.
Note 13 Commitments and Contingencies
Indemnifications
UScellular 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 UScellular to perform under these indemnities are transaction specific; however, these agreements may require UScellular to indemnify the counterparty for costs and losses incurred from litigation or claims arising from the underlying transaction. UScellular 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, UScellular has not made any significant indemnification payments under such agreements.
Legal Proceedings
UScellular 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 UScellular 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. UScellular had no accrual with respect to legal proceedings and unasserted claims as of December 31, 2021. UScellular accrued less than $1 million with respect to legal proceedings and unasserted claims as of December 31, 2020.
In April 2018, the United States Department of Justice (DOJ) notified UScellular and its parent, 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 25% 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 UScellular and TDS 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. UScellular believes that its arrangements with the limited partnerships and the limited partnerships’ participation in the FCC auctions complied with applicable law and FCC rules. At this time, UScellular cannot predict the outcome of any proceeding.
Note 14 Variable Interest Entities
Consolidated VIEs
UScellular consolidates VIEs in which it has a controlling financial interest as defined by GAAP and is therefore deemed the primary beneficiary. UScellular 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 UScellular’s Form 10-K for the year ended December 31, 2021.
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 UScellular 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, UScellular has the most significant level of exposure to the variability associated with the economic performance of the VIEs, indicating that UScellular is the primary beneficiary of the VIEs. Therefore, in accordance with GAAP, these VIEs are consolidated.
UScellular 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.
The following table presents the classification and balances of the consolidated VIEs’ assets and liabilities in UScellular’s Consolidated Balance Sheet.
| | | | | | | | | | | |
December 31, | 2021 | | 2020 |
(Dollars in millions) | | | |
Assets | | | |
Cash and cash equivalents | $ | 22 | | | $ | 18 | |
Short-term investments | — | | | 3 | |
Accounts receivable | 693 | | | 639 | |
Inventory, net | 2 | | | 3 | |
Other current assets | 44 | | | 21 | |
| | | |
Licenses | 639 | | | 639 | |
Property, plant and equipment, net | 124 | | | 111 | |
Operating lease right-of-use assets | 47 | | | 39 | |
Other assets and deferred charges | 383 | | | 348 | |
Total assets | $ | 1,954 | | | $ | 1,821 | |
Liabilities | | | |
Current liabilities | $ | 30 | | | $ | 28 | |
| | | |
Long-term operating lease liabilities | 41 | | | 36 | |
Other deferred liabilities and credits | 25 | | | 20 | |
Total liabilities1 | $ | 96 | | | $ | 84 | |
1Total liabilities does not include amounts borrowed under the receivables securitization agreement. See Note 12 – Debt for additional information.
Unconsolidated VIEs
UScellular 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.
UScellular’s total investment in these unconsolidated entities was $4 million and $5 million at December 31, 2021 and 2020, respectively, and is included in Investments in unconsolidated entities in UScellular’s Consolidated Balance Sheet. The maximum exposure from unconsolidated VIEs is limited to the investment held by UScellular in those entities.
Other Related Matters
UScellular made contributions, loans or advances to its VIEs totaling $36 million, $111 million and $255 million during 2021, 2020 and 2019, respectively; of which $83 million in 2020 and $214 million in 2019 are related to USCC EIP LLC as discussed above. UScellular 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. UScellular 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 UScellular will be able to obtain additional financing on commercially reasonable terms or at all to provide such financial support.
The limited partnership agreement of Advantage Spectrum also provides the general partner with a put option whereby the general partner may require the limited partner, a subsidiary of UScellular, to purchase its interest in the limited partnership. The general partner’s put option related to its interest in Advantage Spectrum was not exercised during the first exercise period and will be exercisable again in the third quarter of 2022. 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 UScellular is recorded as Noncontrolling interests with redemption features in UScellular’s 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 UScellular’s Consolidated Statement of Operations.
Note 15 Noncontrolling Interests
UScellular’s 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 UScellular 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, 2021, net of estimated liquidation costs, is $32 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, 2021, was $14 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 UScellular’s share, of the appreciation of the underlying net assets of these subsidiaries is reflected in the consolidated financial statements.
Note 16 Common Shareholders’ Equity
Series A Common Shares
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 10 votes per share, compared to 1 vote for each Common Share. The Series A Common Shares are entitled to elect 75% of the directors (rounded down), and the Common Shares elect 25% of the directors (rounded up). As of December 31, 2021, a majority of UScellular’s outstanding Common Shares and all of UScellular’s outstanding Series A Common Shares were held by TDS.
Common Share Repurchase Program
In November 2009, UScellular announced by Form 8-K that the Board of Directors of UScellular authorized the repurchase of up to 1,300,000 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 zero to 1,300,000 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, 2021, the total cumulative amount of Common Shares authorized to be purchased is 3,517,000. 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.
Tax-Deferred Savings Plan
At December 31, 2021, UScellular has reserved 67,000 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 in a UScellular Common Share fund, a TDS Common Share fund or certain unaffiliated funds.
Note 17 Stock-Based Compensation
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, 2021, 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, 2021, UScellular had reserved 11,370,000 Common Shares for equity awards granted and to be granted under the Long-Term Incentive Plans and 84,000 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-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, 2021 and 2020 were 378,000 units at $42.18 and 418,000 units at $42.23, respectively. All stock options are exercisable and expire between 2022 and 2026.
The aggregate intrinsic value of UScellular stock options exercised in 2021 and 2019 was less than $1 million and $3 million, respectively. No stock options were exercised in 2020.
Long-Term Incentive Plans–Restricted Stock Units
Restricted stock unit awards granted to key employees generally vest after three years. The restricted stock unit awards currently outstanding were granted in 2019, 2020 and 2021 and will vest in 2022, 2023 and 2024, 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 2021 is presented in the table below:
| | | | | | | | | | | |
Common Restricted Stock Units | Number | | Weighted Average Grant Date Fair Value |
Nonvested at December 31, 2020 | 1,660,000 | | | $ | 36.43 | |
Granted | 672,000 | | | $ | 36.68 | |
Vested | (609,000) | | | $ | 39.10 | |
Forfeited | (122,000) | | | $ | 35.77 | |
Nonvested at December 31, 2021 | 1,601,000 | | | $ | 35.57 | |
The total fair value of restricted stock units that vested during 2021, 2020 and 2019 was $22 million, $20 million and $25 million, respectively. The weighted average grant date fair value per share of the restricted stock units granted in 2021, 2020 and 2019 was $36.68, $29.18 and $46.81, 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 three years. Beginning with the 2021 grants, each recipient may be entitled to shares of UScellular common stock equal to 0% to 200% 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 grants is Return on Capital.
Prior to the 2021 grants, each recipient was entitled to shares of UScellular common stock equal to 50% to 200% 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 50% of the target opportunity as of their grant dates. The performance share units currently outstanding were granted in 2019, 2020 and 2021 and will vest in 2022, 2023 and 2024, 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 100% 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 2021 is presented in the table below:
| | | | | | | | | | | |
Common Performance Share Units | Number | | Weighted Average Grant Date Fair Value |
Nonvested at December 31, 2020 | 1,305,000 | | | $ | 36.60 | |
Granted | 394,000 | | | $ | 37.67 | |
Vested | (601,000) | | | $ | 39.50 | |
Change in units based on approved performance factors | 42,000 | | | $ | 28.94 | |
Forfeited | (91,000) | | | $ | 35.13 | |
Nonvested at December 31, 2021 | 1,049,000 | | | $ | 35.17 | |
The total fair value of performance share units that vested during 2021, 2020 and 2019 was $22 million, $11 million and less than $1 million, respectively. The weighted average grant date fair value per share of the performance share units granted in 2021, 2020 and 2019 was $37.67, $29.71 and $46.43, respectively.
Long-Term Incentive Plans–Deferred Compensation Stock 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 33% 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 25% match for amounts deferred up to 50% of their total annual bonus and a 33% 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 three years.
Compensation of Non-Employee Directors
UScellular issued 20,000, 19,000 and 13,000 Common Shares in 2021, 2020 and 2019, respectively, under its Non-Employee Director compensation plan.
Stock‑Based Compensation Expense
The following table summarizes stock‑based compensation expense recognized during 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
(Dollars in millions) | | | | | |
| | | | | |
Restricted stock unit awards | 16 | | | 21 | | | 22 | |
Performance share unit awards | 10 | | | 10 | | | 18 | |
Awards under Non-Employee Director compensation plan | 1 | | | 1 | | | 1 | |
Total stock-based compensation expense, before income taxes | 27 | | | 32 | | | 41 | |
Income tax benefit | (7) | | | (8) | | | (10) | |
Total stock-based compensation expense, net of income taxes | $ | 20 | | | $ | 24 | | | $ | 31 | |
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:
| | | | | | | | | | | | | | | | | |
December 31, | 2021 | | 2020 | | 2019 |
(Dollars in millions) | | | | | |
Selling, general and administrative expense | $ | 23 | | | $ | 28 | | | $ | 36 | |
System operations expense | 4 | | | 4 | | | 5 | |
Total stock-based compensation expense | $ | 27 | | | $ | 32 | | | $ | 41 | |
At December 31, 2021, unrecognized compensation cost for all UScellular stock‑based compensation awards was $41 million and is expected to be recognized over a weighted average period of 2.3 years.
UScellular’s tax benefits realized from the exercise of stock options and the vesting of other awards totaled $11 million in 2021.
Note 18 Supplemental Cash Flow Disclosures
Following are supplemental cash flow disclosures regarding interest paid and income taxes paid. | | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
(Dollars in millions) | | | | | |
Interest paid | $ | 143 | | | $ | 105 | | | $ | 107 | |
Income taxes paid, net of (refunds received) | 6 | | | (38) | | | 78 | |
Following are supplemental cash flow disclosures regarding transactions related to stock-based compensation awards. In certain situations, UScellular withholds 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. UScellular then pays the amount of the required tax withholdings to the taxing authorities in cash. | | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
(Dollars in millions) | | | | | |
Common Shares withheld | 438,000 | | | 376,000 | | | 452,000 | |
| | | | | |
Aggregate value of Common Shares withheld | $ | 16 | | | $ | 11 | | | $ | 23 | |
| | | | | |
Cash receipts upon exercise of stock options | — | | | — | | | 1 | |
Cash disbursements for payment of taxes | (16) | | | (11) | | | (10) | |
Net cash receipts (disbursements) from exercise of stock options and vesting of other stock awards | $ | (16) | | | $ | (11) | | | $ | (9) | |
Note 19 Certain Relationships and Related Transactions
The following persons are partners of Sidley Austin LLP, the principal law firm of UScellular and its subsidiaries: Walter C.D. Carlson, a director of UScellular, a director and non-executive Chairman of the Board of Directors of TDS and a trustee and beneficiary of a voting trust that controls TDS; and John P. Kelsh, the General Counsel and/or an Assistant Secretary of TDS and UScellular and certain other subsidiaries of TDS. Walter C.D. Carlson does not provide legal services to TDS, UScellular or their subsidiaries. UScellular and its subsidiaries incurred legal costs from Sidley Austin LLP of $7 million, $9 million and $7 million in 2021, 2020 and 2019, respectively.
UScellular is billed for all services it receives from TDS, pursuant to the terms of various agreements between it and TDS. These billings are included in UScellular's Systems operations and Selling, general and administrative expenses. Some of these agreements were established at a time prior to UScellular's initial public offering when TDS owned more than 90% of UScellular's outstanding capital stock and may not reflect terms that would be obtainable from an unrelated third party through arms-length negotiations. Billings from TDS and certain of its subsidiaries to UScellular are based on expenses specifically identified to UScellular and on allocations of common expenses. Such allocations are based on the relationship of UScellular's assets, employees, investment in property, plant and equipment and expenses relative to all subsidiaries in the TDS consolidated group. Management believes the method TDS uses to allocate common expenses is reasonable and that all expenses and costs applicable to UScellular are reflected in its financial statements. Billings to UScellular from TDS totaled $89 million, $81 million and $82 million in 2021, 2020 and 2019, respectively.
The Audit Committee of the Board of Directors of UScellular 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.
Reports of Management
Management’s Responsibility for Financial Statements
Management of United States Cellular Corporation 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 238), 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 United States Cellular Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheet of United States Cellular Corporation and its subsidiaries (“the Company” or “UScellular”)as of December 31, 2021 and 2020, and the related consolidatedstatements of operations, of changes in equity, and of cash flowsfor each of the three years in the period ended December 31, 2021, 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, 2021, 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, 2021 and 2020,and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021in 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, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
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.
Intangible Asset Impairment Assessment – Wireless Spectrum Licenses (UScellular Licenses)
As described in Notes 1 and 7 to the consolidated financial statements, the UScellular’s consolidated licenses balance was $4,088 million as of December 31, 2021. Management performs its annual impairment assessment of licenses as of November 1 of each year or more frequently if there are events or circumstances that cause management to believe it is more likely than not that the carrying value of licenses exceeds fair value. A qualitative impairment assessment was performed as of November 1, 2021, to determine whether the wireless spectrum licenses were impaired. As disclosed by management, the qualitative assessment 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 this assessment, management concluded that it was not more likely than not that the carrying value of the wireless spectrum licenses in each unit of accounting exceeded their respective fair values. Therefore, no quantitative impairment evaluation was completed.
The principal considerations for our determination that performing procedures relating to the intangible asset impairment assessment for the UScellular Licenses is a critical audit matter are (i) the significant judgment by management when performing the qualitative impairment assessment; and (ii) a high degree of auditor judgment and subjectivity in performing procedures and evaluating management’s qualitative impairment assessment.
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 management’s annual intangible asset impairment assessment, including management’s review of qualitative factors affecting the UScellular Licenses. These procedures also included, among others, evaluating management’s qualitative assessment by (i) obtaining analyst estimates of wireless spectrum license values; and (ii) considering recent UScellular and other market participant transactions and external market and industry data.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 17, 2022
We have served as the Company’s auditor since 2002.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
U.S. CellularUScellular 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 U.S. Cellular’sUScellular’s 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), U.S. CellularUScellular 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 U.S. Cellular’sUScellular’s 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 U.S. Cellular’sUScellular’s disclosure controls and procedures were effective as of December 31, 2019,2021, at the reasonable assurance level.
Management’s Report on Internal Control overOver 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. U.S. Cellular’sUScellular’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 accounting principles generally accepted in the United States of America (GAAP). U.S. Cellular’sUScellular’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 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 U.S. Cellular’sUScellular’s management, including its principal executive officer and principal financial officer, U.S. CellularUScellular conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2019,2021, 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 U.S. CellularUScellular maintained effective internal control over financial reporting as of December 31, 2019,2021, based on criteria established in the 2013 version of Internal Control — Integrated Framework issued by the COSO.
The effectiveness of U.S. Cellular’sUScellular’s internal control over financial reporting as of December 31, 2019,2021, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in the firm’s report which is incorporated by reference intoincluded in Item 8 of this Annual Report on Form 10-K from Exhibit 13 filed herewith.10-K.
Changes in Internal Control overOver Financial Reporting
There were no changes in U.S. Cellular’sUScellular’s internal control over financial reporting during the fourth quarter of 20192021 that have materially affected, or are reasonably likely to materially affect, U.S. Cellular’sUScellular’s internal control over financial reporting.
Item 9B. Other Information
The following information is being providedOn February 15, 2022 Peter L. Sereda, a director of UScellular, informed the Chairman that given his pending retirement from TDS, he no longer wishes to update prior disclosures made pursuantbe considered for re-election to the requirementsBoard of Form 8-K, Directors of UScellular.
Item 2.03 – Creation9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
U.S. Cellular did not borrow or repay any cash amounts under its revolving credit facility in the fourth quarter of 2019 or through the filing date of this Form 10-K, and had no cash borrowings outstanding under its revolving credit facility as of December 31, 2019, or as of the filing date of this Form 10-K.
Further, U.S. Cellular did not borrow or repay any cash amounts under its receivables securitization facility in the fourth quarter of 2019 or through the filing date of this Form 10-K, and had no cash borrowings outstanding under its receivables securitization facility as of December 31, 2019, or as of the filing date of this Form 10-K.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Incorporated by reference from Proxy Statement sections entitled “Election of Directors,” “Corporate Governance” and “Executive Officers.”
Item 11. Executive Compensation
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
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
Incorporated by reference from Proxy Statement sections entitled “Corporate Governance” and “Certain“Other Relationships and Related Transactions.”
Item 14. Principal Accountant Fees and Services
Incorporated by reference from Proxy Statement section entitled “Fees Paid to Principal Accountants.”
PART IV
Item 15. Exhibits and Financial Statement Schedules
|
| | | | | | | | | | |
(a) | The following documents are filed as part of this report: |
| | |
| (1) | Financial Statements |
| | | |
| | | Annual Report* |
| | | Annual Report* |
| | | Annual Report* |
| | | Annual Report* |
| | | Annual Report* |
| | Management's Report on Internal Control Over Financial Reporting | Annual Report* |
| | | Annual Report* |
| | Consolidated Quarterly Information (Unaudited) | Annual Report* |
| | | |
| (2) | *Incorporated by reference from Exhibit 13.Exhibits | |
| | |
| (2) | Financial Statement Schedules |
| | | Location |
| | Los Angeles SMSA Limited Partnership Financial Statements | S-1 |
| | Report of Independent Registered Public Accounting Firm — Ernst & Young LLP | S-2 |
| | Balance Sheets — As of December 31, 2019 and 2018 | S-3 |
| | Statements of Income — For the Years Ended December 31, 2019, 2018 and 2017 | S-4 |
| | Statements of Changes in Partners’ Capital — For the Years Ended December 31, 2019, 2018 and 2017 | S-5 |
| | Statements of Cash Flows — For the Years Ended December 31, 2019, 2018 and 2017 | S-6 |
| | Notes to Financial Statements | S-7 |
| | | |
| | All other schedules have been omitted because they are not applicable or not required or because the required information is shown in the financial statements or notes thereto. |
| | |
| (3) | Exhibits |
| | |
| | The exhibits set forth below are filed as a part of this Report. Compensatory plans or arrangements are identified below with an asterisk. |
| | | | | |
Exhibit Number | Description of Documents |
| |
Exhibit Number | Description of Documents |
| |
3.1 | |
| |
3.2 | |
| |
4.1 | |
| |
4.2 | |
| |
4.3(a) | Revolving Credit Agreement, among U.S. Cellular, Toronto Dominion (Texas) LLC, as administrative agent, and the other lenders thereto, dated as of May 10, 2018, including Schedules and Exhibits, including the form of the subsidiary Guaranty and Subordination Agreement, is hereby incorporated by reference to Exhibit 4.1 to U.S. Cellular's Form 8-K dated May 10, 2018. |
| |
4.3(b) | |
| |
4.4(a) | |
| |
4.4(b)4.3(b) | |
| |
4.4(c)4.3(c) | |
| |
4.4(d)4.3(d) | Form of SixthNinth Supplemental Indenture dated as of May 9, 2011,August 12, 2020, between U.S. CellularUScellular and BNY MidwestThe Bank of New York Mellon Trust Company, N.A., related to $342,000,000$500,000,000 of U.S. Cellular’s 6.95%UScellular's 6.25% Senior Notes due 2060, is hereby incorporated by reference to Exhibit 4.1 to U.S. Cellular’s Current Report on Form 8-K dated May 9, 2011. |
| |
4.4(e) | |
| |
4.4(f)4.3(e) | Form of EighthTenth Supplemental Indenture dated as of November 23, 2015,December 2, 2020, between U.S. CellularUScellular and BNY MidwestThe Bank of New York Mellon Trust Company, N.A., related to $300,000,000$500,000,000 of U.S. Cellular’s 7.25%UScellular's 5.5% Senior Notes due 2064,2070 is hereby incorporated by reference to Exhibit 2 to U.S. Cellular’sUScellular's Registration Statement on Form 8-A dated November 17, 2015.December 2, 2020. |
| |
4.54.3(f) | |
| |
4.4 | |
| |
4.6(a)4.5(a) | Amended and Restated Term Loan Credit Agreement, among U.S. Cellular and CoBank, ACB, as administrative agent, and the other lenders thereto, dated as of June 15, 2016, including Schedules and Exhibits, including the forms of the subsidiary Guaranty and Subordination Agreement, is hereby incorporated by reference to Exhibit 4.1 to U.S. Cellular's Form 8-K dated June 15, 2016. |
| |
4.6(b) | |
| |
4.6(c) | |
| |
4.6(d) | |
| |
4.7(a) | |
| |
4.7(b)4.5(b)*** | Omnibus Amendment No. 1 to Master Indenture, Series 2017-VFN Indenture Supplement, Note Purchase Agreement, Receivables Purchase Agreement and Transfer and Servicing Agreement dated September 30, 2019 among USCC Master Note Trust, U.S. Bank National Association, as Indenture Trustee, USCC Services, LLC, USCC Receivables Funding LLC, USCC EIP LLC, and Royal Bank of Canada, as administrative agent for owners of the notes is hereby incorporated by reference to Exhibit 4.3 to U.S. Cellular'sUScellular's Quarterly Report on Form 10-Q for the period ended September 30, 2019. |
| |
4.84.6(a) | |
|
| |
| |
4.94.6(b) | |
| |
9.14.6(c) | |
| |
4.7 | Amended and Restated Series 2017-VFN Indenture Supplement by and among USCC Master Note Trust, as Issuer, USCC Services, LLC, as Servicer, and U.S. Bank National Association, as Indenture Trustee, dated October 23, 2020, is hereby incorporated by reference to Exhibit 4.1 to UScellular's Form 8-K dated October 23, 2020. |
| |
4.8(a) | |
| |
4.8(b) | |
| |
4.9(a) | |
| |
| | | | | |
4.9(b) | |
| |
4.10 | |
| |
4.11 | Credit Agreement, among UScellular, Citibank, N.A. as administrative agent, Global Coordinator, Mandated Lead Arranger and a Lender, Export Development Canada as Mandated Lead Arranger and a Lender, and the other lenders thereto, dated as of December 17, 2021, including the form of subsidiary Guaranty and Subordination Agreement, is hereby incorporated by reference to Exhibit 4.1 to UScellular's Current Report on Form 8-K dated December 17, 2021. |
| |
4.12 | |
| |
9.1 | |
| |
10.1** | Tax Allocation Agreement between U.S. CellularUScellular and TDS is hereby incorporated by reference to an exhibit to U.S. Cellular’sUScellular’s Registration Statement on Form S-1 (Registration No. 33-16975). |
| |
10.2 | |
| |
10.3** | Registration Rights Agreement between U.S. CellularUScellular and TDS is hereby incorporated by reference to an exhibit to U.S. Cellular’sUScellular’s Registration Statement on Form S-1 (Registration No. 33-16975). |
| |
10.4** | Exchange Agreement between U.S. CellularUScellular and TDS, as amended, is hereby incorporated by reference to an exhibit to U.S. Cellular’sUScellular’s Registration Statement on Form S-1 (Registration No. 33-16975). |
| |
10.5** | Intercompany Agreement between U.S. CellularUScellular and TDS is hereby incorporated by reference to an exhibit to U.S. Cellular’sUScellular’s Registration Statement on Form S-1 (Registration No. 33-16975). |
| |
10.6** | Employee Benefit Plans Agreement between U.S. CellularUScellular and TDS is hereby incorporated by reference to an exhibit to U.S. Cellular’sUScellular’s Registration Statement on Form S-1 (Registration No. 33-16975). |
| |
10.7** | Insurance Cost Sharing Agreement between U.S. CellularUScellular and TDS is hereby incorporated by reference to an exhibit to U.S. Cellular’sUScellular’s Registration Statement on Form S-1 (Registration No. 33-16975). |
10.8(a)* | |
| |
10.8(b)* | |
| |
10.8(c)* | |
| |
10.9* | |
| |
10.10*10.10(a)* | |
| |
10.11(a)* | |
| |
10.11(b)10.10(b)* | |
| |
10.11(c)10.10(c)* | |
| |
10.12*10.10(d)* | |
| |
U.S. Cellular10.10(e)* | |
| |
10.11(a)* | |
| |
10.13(a)10.11(b)* | |
| |
U.S. Cellular10.12(a)* | |
| |
| | | | | |
10.13(b)10.12(b)* | |
| |
10.13(c)10.12(c)* | |
| |
10.13(d)10.12(d)* | |
| |
10.14*10.12(e)* | |
| |
U.S. Cellular10.12(f)* | |
| |
10.12(g)* | |
| |
10.12(h)* | |
| |
10.13* | |
| |
10.15* | |
|
| |
| |
10.16*10.14* | |
| |
10.17*10.15* | |
| |
10.18*10.16*** | |
| |
10.19* | |
| |
10.20* | |
| |
10.21* | |
| |
10.22*** | |
| |
10.23*10.17*** | |
| |
10.24*10.18*** | |
| |
10.25*10.19*** | |
| |
10.2610.20 | Series 2017-VFN Note Purchase Agreement by and among USCC Receivables Funding LLC, as transferor, USCC Master Note Trust, as issuer, USCC Services, LLC, as Servicer, U.S. Cellular as guarantor, and Royal Bank of Canada, as administrative agent for owners of the notes, dated December 20, 2017, is hereby incorporated by reference to Exhibit 10.1 to U.S. Cellular’s Form 8-K dated December 20, 2017. |
| |
10.27 | |
| |
10.2810.21 | |
| |
10.29*10.22* | |
| |
10.30* | |
| |
10.31*10.23* | |
| |
10.32*10.24*** | Omnibus Amendment No. 1 to Master Indenture, Series 2017-VFN Indenture Supplement, Note Purchase Agreement, Receivables Purchase Agreement and Transfer and Servicing Agreement dated September 30, 2019, among USCC Master Note Trust, U.S. Bank National Association, as Indenture Trustee, USCC Services, LLC, USCC Receivables Funding LLC, USCC EIP LLC, and Royal Bank of Canada, as administrative agent for owners of the notes is hereby incorporated by reference to Exhibit 4.3 to U.S. Cellular'sUScellular's Quarterly Report on Form 10-Q for the period ended September 30, 2019. |
| |
10.33*10.25* | |
| |
| | | | | |
10.26* | |
| |
10.27* | |
| |
10.28* | |
| |
10.29(a) | Amended and Restated Series 2017-VFN Note Purchase Agreement by and among USCC Receivables Funding LLC, as Transferor, USCC Master Note Trust, as Issuer, USCC Services, LLC, as Servicer, UScellular as Performance Guarantor, and Steven T. CampbellRoyal Bank of Canada, as Administrative Agent for owners of the notes, dated December 20, 2019.October 23, 2020, is hereby incorporated by reference to Exhibit 10.1 from UScellular's Form 8-K dated October 23, 2020. |
| |
10.34*10.29(b) | Amendment No. 1 to RetentionAmended and Restated Series 2017-VFN Note Purchase Agreement betweenby and among USCC Receivables Funding LLC, as Transferor, USCC Master Note Trust, as Issuer, USCC Services, LLC, as Servicer, UScellular as Performance Guarantor, and Jay M. EllisonRoyal Bank of Canada, as Administrative Agent for owners of the notes, dated June 29, 2021, is hereby incorporated by reference to Exhibit 10.3 to UScellular's Quarterly Report on Form 10-Q for the period ended June 30, 2021. |
| |
10.30* | |
| |
10.31* | |
| |
10.32* | |
| |
10.33* | |
| |
10.34 | |
| |
1310.35 | |
| |
2110.36 | |
| |
23.121 | |
| |
23 | |
| |
23.2 | |
| |
|
| |
31.1 | |
| |
31.2 | |
| |
32.1 | |
| |
32.2 | |
| |
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| |
101.SCH | Inline XBRL Taxonomy Extension Schema Document |
| |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
| |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| |
104 | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the inline document. |
| |
* | Indicates a management contract or compensatory plan or arrangement. |
| |
| | | | | |
** | Indicates a paper filing prior to the adoption of EDGAR. |
| |
*** | Portions of this Exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K promulgated under the Exchange Act. |
Item 16. Form 10-K Summary
None.
LOS ANGELES SMSA LIMITED PARTNERSHIP
FINANCIAL STATEMENTS
U.S. Cellular owns a 5.5% limited partnership interest in the Los Angeles SMSA Limited Partnership, and accounts for such interest by the equity method. The partnership’s financial statements were obtained by U.S. Cellular as a limited partner.
Report of Independent Registered Public Accounting Firm
To the Partners of Los Angeles SMSA Limited Partnership
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Los Angeles SMSA Limited Partnership (the Partnership) as of December 31, 2019 and 2018, the related statements of income, changes in partners’ capital and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Partnership at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with U.S. generally accepted accounting principles.
Adoption of New Accounting Standards
ASU No. 2016-02
As discussed in Note 2 to the financial statements, effective January 1, 2019, the Partnership changed its method of accounting for leases due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), and the related amendments, using the modified retrospective method.
ASU No. 2014-09
As discussed in Note 2 to the financial statements, effective January 1, 2018, the Partnership changed its method for recognizing revenue as a result of the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), and the amendments in ASUs 2015-14, 2016-08, 2016-10 and 2016-12 using the modified retrospective method.
Basis for Opinion
These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on the Partnership’s financial statements 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 Partnership 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 and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the 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 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 financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Partnership’s auditor since 2014.
Orlando, Florida
February 25, 2020
Los Angeles SMSA Limited Partnership
Balance Sheets - As of December 31, 2019 and 2018
|
| | | | | | | |
(Dollars in thousands) | 2019 | | 2018 |
ASSETS | | | |
| | | |
CURRENT ASSETS: | | | |
Due from affiliate | $ | 469,318 |
| | $ | 256,812 |
|
Accounts receivable, net of allowances of $7,792 and $21,886 | 375,920 |
| | 434,399 |
|
Prepaid expenses and other | 277,193 |
| | 203,571 |
|
Total current assets | 1,122,431 |
| | 894,782 |
|
| | | |
PROPERTY, PLANT AND EQUIPMENT - NET | 1,908,893 |
| | 1,998,538 |
|
| | | |
WIRELESS LICENSES | 2,075,448 |
| | 2,075,448 |
|
| | | |
OPERATING LEASE RIGHT-OF-USE ASSETS | 876,219 |
| | — |
|
| | | |
OTHER ASSETS - NET | 217,859 |
| | 432,483 |
|
| | | |
TOTAL ASSETS | $ | 6,200,850 |
| | $ | 5,401,251 |
|
| | | |
LIABILITIES AND PARTNERS' CAPITAL | | | |
| | | |
CURRENT LIABILITIES: | | | |
Accounts payable and accrued liabilities | $ | 178,906 |
| | $ | 142,805 |
|
Contract liabilities and other | 183,091 |
| | 175,863 |
|
Financing obligation | 13,348 |
| | 13,185 |
|
Current operating lease liabilities | 124,856 |
| | — |
|
Deferred rent | 7,407 |
| | 13,347 |
|
Total current liabilities | 507,608 |
| | 345,200 |
|
| | | |
LONG TERM LIABILITIES: | | | |
Financing obligation | 110,392 |
| | 111,868 |
|
Non-current operating lease liabilities | 641,652 |
| | — |
|
Deferred rent | 78,108 |
| | 143,586 |
|
Other liabilities | 27,320 |
| | 29,264 |
|
Total long term liabilities | 857,472 |
| | 284,718 |
|
| | | |
Total liabilities | 1,365,080 |
| | 629,918 |
|
| | | |
PARTNERS' CAPITAL: | | | |
General Partner's interest | 1,934,308 |
| | 1,908,533 |
|
Limited Partners' interest | 2,901,462 |
| | 2,862,800 |
|
Total partners' capital | 4,835,770 |
| | 4,771,333 |
|
| | | |
TOTAL LIABILITIES AND PARTNERS' CAPITAL | $ | 6,200,850 |
| | $ | 5,401,251 |
|
See notes to financial statements.
Los Angeles SMSA Limited Partnership
|
| | | | | | | | | | | |
(Dollars in thousands) | 2019 | | 2018 | | 2017 |
OPERATING REVENUES: | | | | | |
Service revenues | $ | 3,853,965 |
| | $ | 3,766,062 |
| | $ | 3,791,371 |
|
Equipment revenues | 1,091,380 |
| | 1,153,954 |
| | 982,251 |
|
Other revenues | 360,907 |
| | 275,896 |
| | 246,322 |
|
Total operating revenues | 5,306,252 |
| | 5,195,912 |
| | 5,019,944 |
|
| | | | | |
OPERATING EXPENSES: | |
| | |
| | |
|
Cost of services (exclusive of depreciation) | 1,217,326 |
| | 1,115,475 |
| | 1,107,614 |
|
Cost of equipment | 1,155,205 |
| | 1,212,952 |
| | 1,174,858 |
|
Depreciation | 350,005 |
| | 369,874 |
| | 355,696 |
|
Selling, general and administrative expense | 1,144,761 |
| | 1,095,048 |
| | 1,168,978 |
|
Total operating expenses | 3,867,297 |
| | 3,793,349 |
| | 3,807,146 |
|
| | | | | |
OPERATING INCOME | 1,438,955 |
| | 1,402,563 |
| | 1,212,798 |
|
| | | | | |
OTHER (EXPENSE) INCOME: | |
| | |
| | |
|
Interest income, net | 3,994 |
| | 13,332 |
| | 2,857 |
|
Other (expense) income | (22,012 | ) | | 2,702 |
| | 1,631 |
|
Total other (expense) income | (18,018 | ) | | 16,034 |
| | 4,488 |
|
| | | | | |
NET INCOME | $ | 1,420,937 |
| | $ | 1,418,597 |
| | $ | 1,217,286 |
|
| | | | | |
Allocation of Net Income: | |
| | |
| | |
|
General Partner | $ | 568,375 |
| | $ | 567,439 |
| | $ | 486,914 |
|
Limited Partners | 852,562 |
| | 851,158 |
| | 730,372 |
|
See notes to financial statements.
Los Angeles SMSA Limited Partnership
Statements of Changes in Partners' Capital - For the Years Ended December 31, 2019, 2018 and 2017
|
| | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) |
| General Partner | | Limited Partners | | |
| AirTouch Cellular Inc. | | AirTouch Cellular Inc. | | Cellco Partnership | | United States Cellular Investment Corporation of Los Angeles | | Total Partners' Capital |
BALANCE - January 1, 2017 | $ | 1,734,722 |
| | $ | 1,834,468 |
| | $ | 529,090 |
| | $ | 238,524 |
| | $ | 4,336,804 |
|
| | | | | | | | | |
Distributions | (450,000 | ) | | (475,875 | ) | | (137,250 | ) | | (61,875 | ) | | (1,125,000 | ) |
| | | | | | | | | |
Net income | 486,914 |
| | 514,912 |
| | 148,509 |
| | 66,951 |
| | 1,217,286 |
|
| | | | | | | | | |
BALANCE - December 31, 2017 | $ | 1,771,636 |
| | $ | 1,873,505 |
| | $ | 540,349 |
| | $ | 243,600 |
| | $ | 4,429,090 |
|
| | | | | | | | | |
ASC 606 opening balance sheet adjustment | 67,058 |
| | 70,914 |
| | 20,453 |
| | 9,221 |
| | 167,646 |
|
| | | | | | | | | |
Distributions | (497,600 | ) | | (526,212 | ) | | (151,768 | ) | | (68,420 | ) | | (1,244,000 | ) |
| | | | | | | | | |
Net income | 567,439 |
| | 600,067 |
| | 173,069 |
| | 78,022 |
| | 1,418,597 |
|
| | | | | | | | | |
BALANCE - December 31, 2018 | $ | 1,908,533 |
| | $ | 2,018,274 |
| | $ | 582,103 |
| | $ | 262,423 |
| | $ | 4,771,333 |
|
| | | | | | | | | |
Distributions | (542,600 | ) | | (573,800 | ) | | (165,492 | ) | | (74,608 | ) | | (1,356,500 | ) |
| | | | | | | | | |
Net income | 568,375 |
| | 601,057 |
| | 173,353 |
| | 78,152 |
| | 1,420,937 |
|
| | | | | | | | | |
BALANCE - December 31, 2019 | $ | 1,934,308 |
| | $ | 2,045,531 |
| | $ | 589,964 |
| | $ | 265,967 |
| | $ | 4,835,770 |
|
See notes to financial statements.
Los Angeles SMSA Limited Partnership
Statements of Cash Flows - For the Years Ended December 31, 2019, 2018 and 2017
|
| | | | | | | | | | | |
(Dollars in Thousands) | 2019 | | 2018 | | 2017 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
Net income | $ | 1,420,937 |
| | $ | 1,418,597 |
| | $ | 1,217,286 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation | 350,005 |
| | 369,874 |
| | 355,696 |
|
Imputed interest on financing obligation | 11,792 |
| | 11,686 |
| | 12,374 |
|
Provision for uncollectible accounts | 44,329 |
| | 43,847 |
| | 56,505 |
|
Changes in operating assets and liabilities: | | | | | |
Accounts receivable | 14,150 |
| | (39,867 | ) | | (36,907 | ) |
Prepaid expenses and other | (680,685 | ) | | (614,263 | ) | | (388,907 | ) |
Accounts payable and accrued liabilities | 20,724 |
| | (2,541 | ) | | (54,321 | ) |
Contract liabilities and other | 7,228 |
| | 25,715 |
| | 14,531 |
|
Other net changes | (79,885 | ) | | 31,672 |
| | 2,524 |
|
Net cash provided by operating activities | 1,108,595 |
| | 1,244,720 |
| | 1,178,781 |
|
| | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
Capital expenditures | (385,443 | ) | | (575,351 | ) | | (434,350 | ) |
Fixed asset transfers out | 140,458 |
| | 130,228 |
| | 15,648 |
|
Collections on deferred purchase price and purchased receivables | — |
| | 9,331 |
| | 86,009 |
|
Collections on beneficial interest - net | 718,501 |
| | 483,924 |
| | 229,330 |
|
Change in due from affiliate | (212,506 | ) | | (37,974 | ) | | 63,008 |
|
Net cash provided by investing activities | 261,010 |
| | 10,158 |
| | (40,355 | ) |
| | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
Repayments of financing obligation | (13,105 | ) | | (10,878 | ) | | (13,426 | ) |
Distributions | (1,356,500 | ) | | (1,244,000 | ) | | (1,125,000 | ) |
Net cash used in financing activities | (1,369,605 | ) | | (1,254,878 | ) | | (1,138,426 | ) |
| | | | | |
CHANGE IN CASH | — |
| | — |
| | — |
|
| | | | | |
CASH - Beginning of year | — |
| | — |
| | — |
|
| | | | | |
CASH - End of year | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | |
NONCASH TRANSACTIONS FROM OPERATING ACTIVITIES: | | | | | |
Accruals for capital expenditures | $ | 28,379 |
| | $ | 13,004 |
| | $ | 25,757 |
|
See notes to financial statements.
Los Angeles SMSALimited Partnership
Notes to Financial Statements – For the Years Ended December 31, 2019, 2018 and 2017
(Dollars in Thousands)
| |
1. | ORGANIZATION AND MANAGEMENT |
The principal activity of the Los Angeles SMSA Limited Partnership, a California Limited Partnership (Los Angeles SMSA) formed in 1984, is to provide cellular service in the Los Angeles metropolitan statistical area. Through March 2018, the financial statements included the accounts of the Los Angeles SMSA and Los Angeles Edge LLC, a wholly owned subsidiary of Los Angeles SMSA (collectively, the "Partnership"). Los Angeles Edge LLC was formed during 2015 and was a bankruptcy remote special purpose entity (SPE), created for the purpose of selling wireless device payment plan agreement receivables to third parties (see Wireless Device Payment Plans Note). The Los Angeles Edge LLC entity was dissolved on March 29, 2018 and as of this date the Partnership consists of only Los Angeles SMSA.
In accordance with the partnership agreement, AirTouch Cellular Inc., an affiliate of Cellco Partnership (Cellco), and general partner of the Partnership, is responsible for managing the operations of the Partnership.
The partners and their respective ownership percentages of the Partnership as of December 31, 2019 were as follows:
|
| | |
General Partner: | |
AirTouch Cellular Inc. | 40.0 | % |
| |
Limited Partners: | |
AirTouch Cellular Inc. | 42.3 | % |
Cellco Partnership | 12.2 | % |
United States Cellular Investment Corporation of Los Angeles | 5.5 | % |
Cellco is an indirect, wholly-owned subsidiary of Verizon Communications Inc. (Verizon). Substantially all of the Partnership’s transactions represent transactions with, or processed by, Cellco and/or certain other affiliates (collectively, Verizon Wireless).
| |
2. | SIGNIFICANT ACCOUNTING POLICIES |
Reclassification
Certain prior year amounts have been reclassified to conform to the current year presentation.
Use of estimates
The financial statements are prepared using U.S. generally accepted accounting principles (GAAP), which requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates.
Examples of significant estimates include: the allowance for uncollectible accounts, the recoverability of property, plant and equipment and long-lived assets, the incremental borrowing rate for the operating lease liability, beneficial interest associated with sold device payment plan agreement receivables, and fair values of financial instruments.
Revenue recognition
The Partnership earns revenue from contracts with customers, primarily by providing access to and usage of the Verizon Wireless telecommunications network and selling equipment. These revenues are accounted for under Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), which the Partnership adopted on January 1, 2018 using the modified retrospective approach. This standard update, along with related subsequently issued updates, clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP. The standard update also amended the guidance for the recognition of costs to obtain customer contracts such that incremental costs of obtaining customer contracts are deferred and amortized consistent with the transfer of the related good or service.
The Partnership also earns revenues that are not accounted for under Topic 606 from leasing arrangements (such as those from towers) and the interest on equipment financed under a device payment plan agreement when sold to the customer by an authorized agent.
Wireless services are offered through a variety of plans on a postpaid or prepaid basis. For wireless service, the Partnership recognizes revenue using an output method, either as the service allowance units are used or as time elapses, because it reflects the pattern by which the performance obligations are satisfied through the transfer of service to the customer. Monthly service is generally billed in advance, which results in a contract liability. See Revenue and Contract Costs Note for additional information. For postpaid plans where monthly usage exceeds the allowance, the overage usage represents options held by the customer for incremental services and the usage-based fee is recognized when the customer exercises the option (typically on a month-to-month basis).
Equipment revenue related to wireless devices and accessories is generally recognized when the products are delivered to and accepted by the customer, as this is when control passes to the customer. In addition to offering the sale of equipment on a standalone basis, Verizon Wireless has two primary offerings through which customers pay for a wireless device in connection with a service contract: fixed-term plans and device payment plans.
Under a fixed-term plan, the customer is sold the wireless device without any upfront charge or at a discounted price in exchange for entering into a fixed-term service contract (typically for a term of 24 months or less). This plan is currently only offered to business customers.
Under a device payment plan, the customer is sold the wireless device in exchange for a non-interest bearing installment note, which is repaid by the customer, typically over a 24-month term, and concurrently enters into a month-to-month contract for wireless service. Customers may be offered certain promotions that provide billing credits applied over a specified term, contingent upon the customer maintaining service. The credits are included in the transaction price, which are allocated to the performance obligations based on their relative selling price, and are recognized when earned.
A financing component exists in both fixed-term plans and device payment plans because the timing of the payment for the device, which occurs over the contract term, differs from the satisfaction of the performance obligation, which occurs at contract inception upon transfer of the device to the customer. The significance of the financing component inherent in the fixed-term and device payment plan receivables is periodically assessed at the contract level, based on qualitative and quantitative considerations, related to customer classes. These considerations include assessing the commercial objective of plans, the term and duration of financing provided, interest rates prevailing in the marketplace, and credit risks of customer classes, all of which impact the selection of appropriate discount rates. Based on current facts and circumstances, the financing component in existing direct channel device payments and fixed-term contracts with customers is not significant and therefore is not accounted for separately. See Device Payment Note for additional information on the interest on equipment financed on a device payment plan agreement when sold to the customer by an authorized agent in the indirect channel.
Roaming revenue reflects service revenue earned by the Partnership when customers not associated with the Partnership operate in the service area of the Partnership and use the Partnership’s network. The roaming rates with third-party carriers are based on agreements with such carriers. The roaming rates and methodology to determine roaming revenues charged by the Partnership to Verizon Wireless are established by Verizon Wireless and reviewed on a periodic basis and may not reflect current market rates (see Transactions with Affiliates and Related Parties Note).
Other revenues include non-service revenues such as regulatory fees, cost recovery surcharges, revenues associated with Verizon Wireless's device protection package, and interest on equipment financed under a device payment plan agreement when sold to the customer by an authorized agent. The Partnership recognizes taxes imposed by governmental authorities on revenue-producing transactions between the Partnership and its customers, which are passed through to the customers, on a net basis.
Wireless contracts
Total contract revenue, which represents the transaction price for service and equipment, is allocated between service and equipment revenue based on their estimated standalone selling prices. The standalone selling price of the device or accessory is estimated to be its retail price, excluding subsidies or conditional purchase discounts. The standalone selling price of service is estimated to be the price that is offered to customers on month-to-month contracts that can be cancelled at any time without penalty (i.e., when there is no fixed-term for service) or when service is procured without the concurrent purchase of a device. In addition, the Partnership also assesses whether the service term is impacted by certain legally enforceable rights and obligations in the contract with customers, such as penalties that a customer would have to pay to early terminate a fixed-term contract or billing credits that would cease if the month-to-month wireless service is canceled. The assessment of these legally enforceable rights and obligations involves judgment and impacts the determination of the transaction price and related disclosures.
From time to time, customers on device payment plans may be offered certain promotions that provide the right to upgrade to a new device after paying down a certain specified portion of the required device payment plan agreement amount and trading in their device in good working order. This trade-in right is accounted for as a guarantee obligation. The full amount of the trade-in right's fair value is recognized as a guarantee liability and results in a reduction to the revenue recognized upon the sale of the device. The guarantee liability was insignificant at December 31, 2019 and 2018. The total transaction price is reduced by the guarantee, which is accounted for outside the scope of Topic 606, and the remaining transaction price is allocated between the performance obligations within the contract.
Fixed-term plans generally include the sale of a wireless device at subsidized prices. This results in the creation of a contract asset at the time of sale, which represents the recognition of equipment revenue in excess of amounts billed.
For device payment plans, billing credits are accounted for as consideration payable to a customer and are included in the determination of total transaction price, resulting in a contract liability.
Verizon Wireless may provide a right of return on products and services for a short time period after a sale. These rights are accounted for as variable consideration when determining the transaction price, and accordingly the Partnership recognizes revenue based on the estimated amount to which the Partnership expects to be entitled after considering expected returns. Returns and credits are estimated at contract inception and updated at the end of each reporting period as additional information becomes available. Verizon Wireless also may provide credits or incentives on products and services for contracts with resellers, which are accounted for as variable consideration when estimating the amount of revenue to recognize. These amounts are insignificant to the financial statements.
For certain offers that also include third-party service providers, the Partnership evaluates whether the Partnership is acting as the principal or as the agent with respect to the goods or services provided to the customer. This principal versus agent assessment involves judgement and focuses on whether the facts and circumstances of the arrangement indicate that the goods or services were controlled by the Partnership prior to transferring them to the customer. To evaluate if the Partnership has control, various factors are considered including whether the Partnership is primarily responsible for fulfillment, bears risk of loss and has discretion over pricing.
Operating expenses
Operating expenses include expenses directly attributable to the Partnership, as well as an allocation of selling, general and administrative, and other operating expenses incurred by Verizon on behalf of the Partnership. Employees of Verizon provide services on behalf of the Partnership. These employees are not employees of the Partnership, therefore, operating expenses include allocated charges of salary and employee benefit costs for the services provided to the Partnership. Verizon Wireless believes such allocations, which are principally based on total subscribers, are calculated in accordance with the Partnership agreement and are determined using a reasonable method of allocating such costs (see Transactions with Affiliates and Related Parties Note).
Cost of roaming, included in cost of services, reflects costs incurred by the Partnership when customers associated with the Partnership operate and use a network in a service area not associated with the Partnership. The roaming rates with third-party carriers are based on agreements with such carriers. The roaming rates and methodology to determine roaming costs charged to the Partnership by Verizon Wireless are established by Verizon Wireless and reviewed on a periodic basis and may not reflect current market rates (see Transactions with Affiliates and Related Parties Note).
Cost of equipment is recorded upon sale of the related equipment at Verizon Wireless’s cost basis. Inventory is owned by Verizon Wireless until the moment of sale and is not recorded in the financial statements of the Partnership.
Maintenance and repairs
The cost of maintenance and repairs, including the cost of replacing minor items not constituting substantial betterments, is charged principally to cost of services as these costs are incurred.
Advertising costs
Costs for advertising products and services, as well as other promotional and sponsorship costs, are allocated from Verizon Wireless and are charged to selling, general and administrative expenses in the periods in which they are incurred (see Transactions with Affiliates and Related Parties Note).
Income taxes
The Partnership is treated as a pass-through entity for income tax purposes and therefore, is not subject to federal, state or local income taxes. Accordingly, no provision has been recorded for income taxes in the Partnership’s financial statements. The results of operations, including taxable income, gains, losses, deductions and credits, are allocated to and reflected on the income tax returns of the respective partners.
The Partnership files partnership income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. The Partnership remains subject to examination by tax authorities for tax years as early as 2016. It is reasonably possible that various current tax examinations could conclude or require reevaluations of the Partnership’s tax positions during this period. An estimate of the range of the possible change cannot be made until these tax matters are further developed or resolved.
Due to/from affiliate
Due to/from affiliate principally represents the Partnership’s cash position with Verizon. Verizon manages, on behalf of the Partnership, all operating, investing and financing activities of the Partnership. As such, the change in due to/from affiliate is reflected as a financing activity or an investing activity, respectively, in the statement of cash flows, based on the net position. In addition, cost of equipment and other operating expenses incurred by Verizon Wireless on behalf of the Partnership, as well as property, plant and equipment and wireless license transactions with Verizon Wireless, are charged to the Partnership through this account.
Interest income on due from affiliate and interest expense on due to affiliate are based on the short-term Applicable Federal Rate, which was approximately 2.1% and 2.3% for the years ended December 31, 2019 and 2018. In previous years, interest expense on due to affiliate balances was based on Verizon Wireless’s average cost of borrowing from Verizon, which was approximately 4.7% in 2017. Interest income on due from affiliate was based on the short term Applicable Federal Rate which was 1.2% in 2017. Included in interest income, net is interest income of $14,818, $12,666, and $5,928, for the years ended December 31, 2019, 2018 and 2017, respectively, related to due from affiliate.
Allowance for uncollectible accounts
Accounts receivable are recorded in the financial statements at cost, net of an allowance for credit losses, with the exception of indirect-channel device payment plan loans. Allowances for uncollectible accounts receivable, including direct-channel device payment plan agreement receivables, are maintained for estimated losses resulting from the failure or inability of customers to make required payments. Indirect-channel device payment loans are considered financial instruments and are initially recorded at fair value net of imputed interest, and credit losses are recorded as incurred. Loan balances are assessed annually for impairment and an allowance is recorded if the loan is considered impaired.
The allowance for uncollectible accounts receivable is based on management’s assessment of the collectability of specific customer accounts and includes consideration of the credit worthiness and financial condition of those customers. An allowance is recorded to reduce the receivables to the amount that is reasonably believed to be collectible.
Similar to traditional service revenue accounting treatment, direct-channel device payment plan agreement bad debt expense is recorded based on an estimate of the percentage of equipment revenue that will not be collected. This estimate is based on a number of factors, including historical write-off experience, credit quality of the customer base and other factors such as macroeconomic conditions. The aging of accounts with device payment plan agreement receivables is monitored and account balances are written-off if collection efforts are unsuccessful and future collection is unlikely.
Property, plant and equipment, and depreciation
Property, plant and equipment is recorded at cost. Property, plant and equipment is depreciated on a straight-line basis.
Leasehold improvements are amortized over the shorter of the estimated life of the improvement or the remaining term of the related lease, calculated from the time the asset was placed in service.
When depreciable assets are retired or otherwise disposed of, the related cost and accumulated depreciation are deducted from the property, plant and equipment accounts and any gains or losses on disposition are recognized in income. Transfers of property, plant and equipment between the Partnership and Verizon Wireless are recorded at net book value on the date of the transfer with an offsetting entry included in due from affiliate.
Interest expense, if any, associated with the construction of network-related assets is capitalized. Capitalized interest is reported as a reduction in interest expense and depreciated as part of the cost of the network-related assets.
Verizon Wireless and the Partnership continue to assess the estimated useful lives of property, plant and equipment and, though the timing and extent of current deployment plans are subject to ongoing analysis and modification, the current estimates of useful lives are believed to be reasonable.
Other assets
Other assets, net primarily includes beneficial interest and long-term device payment plan agreement receivables, net of allowances of $6,439 and $13,142 at December 31, 2019 and 2018, respectively.
Impairment
All long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If any indications of impairment are present, recoverability would be tested by comparing the carrying amount of the asset group to the net undiscounted cash flows expected to be generated from the asset group. If those net undiscounted cash flows do not exceed the carrying amount, the next step would be to determine the fair value of the asset and record an impairment, if any. The useful-life determinations for these long-lived assets are re-evaluated each year to determine whether events and circumstances warrant a revision to their remaining useful lives.
Wireless licenses
Wireless licenses provide the Partnership with the exclusive right to utilize the designated radio frequency spectrum to provide wireless communications services. In addition, Verizon Wireless maintains wireless licenses that provide the Partnership with the right to utilize Verizon Wireless’s designated radio frequency spectrum to provide wireless communications services (see Transactions with Related Parties and Affiliates Note). While licenses are issued for a fixed time, generally ten years, such licenses are subject to renewal by the Federal Communications Commission (FCC). License renewals, which are managed by Verizon Wireless, have historically occurred routinely and at nominal cost. Moreover, Verizon Wireless determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful lives of the wireless licenses. As a result, wireless licenses are treated as an indefinite-lived intangible asset. The useful life determination for wireless licenses is re-evaluated each year to determine whether events and circumstances continue to support an indefinite useful life.
The average remaining renewal period of the Partnership’s wireless license portfolio was 6.6 years as of December 31, 2019.
Interest expense, if any, incurred while qualifying activities are performed to ready wireless licenses for their intended use is capitalized as part of wireless licenses. The capitalization period ends when the development is discontinued or substantially complete and the license is ready for its intended use.
Wireless license balances are tested for potential impairment annually or more frequently if impairment indicators are present. When evaluating wireless licenses for impairment, Verizon Wireless and the Partnership (to the extent it owns more than one license) aggregate wireless licenses into one single unit of accounting, since they are utilized on an integrated basis. Verizon Wireless allocates to the Partnership, based on a reasonable methodology, any impairment loss recognized by Verizon Wireless for licenses included in Verizon Wireless's national footprint.
In 2019, and 2017 Verizon Wireless performed a qualitative impairment assessment to determine whether it is more likely than not that the fair value of its aggregate wireless licenses was less than the carrying amount. As part of the assessment, several qualitative factors were considered, including market transactions, the business enterprise value of Verizon Wireless, macroeconomic conditions (including changes in interest rates and discount rates), industry and market considerations (including industry revenue and EBITDA (earnings before interest, taxes, depreciation and amortization) margin projections), the recent and projected financial performance of Verizon Wireless, as well as other factors.
In 2018, Verizon Wireless performed a quantitative impairment assessment for its aggregate wireless licenses, which consisted of comparing the estimated fair value of its aggregate wireless licenses to the aggregated carrying amount as of the test date.
Verizon Wireless’s impairment assessments in 2019, 2018 and 2017 indicated that the fair value of its wireless licenses exceeded their carrying value and, therefore did not result in an impairment.
In 2019, 2018 and 2017, a qualitative impairment assessment similar to that described for Verizon Wireless was performed for the Partnership’s aggregate wireless licenses which indicated that it is more likely than not that the fair value of the Partnership's wireless licenses remained above the carrying value and, therefore, did not result in an impairment.
Financial instruments
The carrying value of the Partnership’s wireless device payment plan agreement receivables and beneficial interest approximates fair value.
Fair value measurements
Fair value of financial and non-financial assets and liabilities is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities, is as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities
Level 2 - Observable inputs, other than quoted prices, in active markets for identical assets and liabilities
Level 3 - No observable pricing inputs in the market
Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. The assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their categorization within the fair value hierarchy. As of December 31, 2019 and 2018, the Partnership did not have any assets or liabilities measured at fair value on a recurring basis.
Distributions
The Partnership is required to make distributions to its partners based upon the Partnership’s operating results, due to/from affiliate status and financing needs, as determined by the General Partner at the date of the distribution, which are typically made in arrears.
Recently adopted accounting standards
The following Accounting Standard Updates (ASUs) were issued by the Financial Accounting Standards Board (FASB), and have been recently adopted by the Partnership.
|
| | |
Description | Date of Adoption | Effect on Financial Statements |
ASU 2016-02, ASU 2018-01, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01, Leases (Topic 842) |
The FASB issued Topic 842 requiring entities to recognize assets and liabilities on the balance sheet for all leases, with certain exceptions. In addition, Topic 842 enables users of financial statements to further understand the amount, timing and uncertainty of cash flows arising from leases. Topic 842 allowed for a modified retrospective application and was early adopted as of the first quarter of 2019. Entities were required to apply the modified retrospective approach: (1) retrospectively to each prior reporting period presented in the financial statements with the cumulative-effect adjustment recognized at the beginning of the earliest comparative period presented; or (2) retrospectively at the beginning of the period of adoption (January 1, 2019) through a cumulative-effect adjustment. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. | 1/1/2019 | The Partnership early adopted Topic 842 beginning on January 1, 2019, using the modified retrospective approach. The adoption of the standard had a significant impact on the balance sheet due to the recognition of operating lease liabilities, along with operating lease right-of-use-assets. The Partnership has recognized and measured leases without revising comparative period information or disclosure. |
The effect of the changes made to the balance sheet for the adoption of Topic 842 was as follows:
|
| | | | | | | | | |
| At December 31, 2018 | Adjustments due to Topic 842 | At January 1, 2019 |
Prepaid expenses and other | $ | 203,571 |
| $ | (14,410 | ) | $ | 189,161 |
|
Operating lease right-of-use asset | — |
| 783,217 |
| 783,217 |
|
Other assets - net | 432,483 |
| (66,766 | ) | 365,717 |
|
Current operating lease liabilities | — |
| 87,958 |
| 87,958 |
|
Deferred rent | 13,347 |
| (4,987 | ) | 8,360 |
|
Non-current operating lease liabilities | — |
| 676,887 |
| 676,887 |
|
Deferred rent | 143,586 |
| (57,690 | ) | 85,896 |
|
Other liabilities | 29,264 |
| (127 | ) | 29,137 |
|
In addition to the increase to the operating lease liabilities and right-of-use assets, Topic 842 also resulted in reclassifying the presentation of prepaid and deferred rent related to operating leases to operating lease right-of-use assets. The operating lease right-of-use assets amount also includes the balance of any prepaid lease payments, unamortized initial direct costs, and lease incentives.
The Partnership elected the package of practical expedients permitted under the transition guidance within the new standard. Accordingly, the Partnership has adopted these practical expedients and did not reassess: (1) whether an expired or existing contract is a lease or contains an embedded lease; (2) lease classification of an expired or existing lease; or (3) capitalization of initial direct costs for an expired or existing lease. In addition, the Partnership has elected the land easement transition practical expedient, and did not reassess whether an existing or expired land easement is a lease or contains a lease if it has not historically been accounted for as a lease.
The Partnership leases network equipment, including towers, distributed antenna systems, and small cells, real estate, connectivity mediums, which include dark fiber; equipment; and other various types of assets for use in operations under operating leases. The Partnership assesses whether an arrangement is a lease or contains a lease at inception. For arrangements considered leases or that contain a lease that is accounted for separately, the Partnership determines the classification and initial measurement of the right-of-use asset and lease liability at the lease commencement date, which is the date that the underlying asset becomes available for use.
For operating leases, the Partnership recognizes a right-of-use asset, which represents the right to use the underlying asset for the lease term, and a lease liability, which represents the present value of an obligation to make payments arising over the lease term. The present value of the lease payments is calculated using the incremental borrowing rate. The incremental borrowing rate is determined using a portfolio approach based on the rate of interest that Verizon would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. Management uses Verizon's unsecured borrowing rate given that Verizon manages, on behalf of the Partnership, all operating, investing, and financing activities of the Partnership and risk-adjusts that rate to approximate a collateralized rate, which is updated on an annual basis.
In those circumstances where the Partnership is the lessee, the election was made to account for non-lease components associated with leases (e.g., common area maintenance costs) and lease components as a single lease component for substantially all of the asset classes.
Rent expense for operating leases is recognized on a straight-line basis over the term of the lease and is included in either cost of services or selling, general and administrative expenses in the statements of income, based on the use of the facility or equipment on which rent is being paid. Variable rent payments related to operating leases are expensed in the period incurred. The variable lease payments consist of payments dependent on various external indicators, including real estate taxes, common area maintenance charges and utility usage.
Operating leases with a term of 12 months or less are not recorded on the balance sheet; the Partnership recognizes rent expense for these leases on a straight-line basis over the lease term.
See the Leasing Arrangements Note for additional information related to leases, including disclosures required under Topic 842.
Recently issued accounting standards
The following ASU has recently been issued by the FASB.
|
| | |
Description | Date Adoption Required | Effect on Financial Statements |
ASU 2016-13, ASU 2018-19, ASU 2019-04, ASU 2019-05, Financial Instruments - Credit Losses (Topic 326) |
In June 2016, the FASB issued this standard update which requires certain financial assets be measured at amortized cost net of an allowance for estimated credit losses such that the net receivable represents the present value of expected cash collection. In addition, this standard update requires that certain financial assets be measured at amortized cost reflecting an allowance for estimated credit losses expected to occur over the life of the assets. The estimate of credit losses must be based on all relevant information including historical information, current conditions and reasonable and supportable forecasts that affect the collectability of the amounts. An entity will apply the update through a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (January 1, 2023). A prospective transition approach is required for debt securities for which an other-than-temporary impairment has been recognized before the effective date. Early adoption of this standard is permitted. | 1/1/2023 | Over the course of 2019, a cross-functional coordinated team has been evaluating the requirements and scoping the possible impacts that this standard update will have on various financial assets, which is expected to include, but is not limited to, the Partnership's device payment plan agreement receivables, beneficial interest, service receivables and contract assets. Although the evaluation of the standard update has not yet been finalized, the Partnership does not currently expect the impact of this standard update to be significant to the financial statements. The Partnership anticipates any impact will be primarily related to certain device payment plan agreement receivables and beneficial interest. |
Subsequent events
Events subsequent to December 31, 2019 have been evaluated through February 25, 2020, the date the financial statements were available to be issued.
| |
3. | REVENUE AND CONTRACT COSTS |
The Partnership earns revenue from contracts with customers, primarily through the provision of telecommunications and other services and through the sale of wireless equipment. The Partnership accounts for these revenues under Topic 606 which was early adopted on January 1, 2018, using the modified retrospective approach. Revenue is disaggregated on the statements of income by products and services, which is viewed as the relevant categorization for the Partnership. There are also revenues earned that are not accounted for under Topic 606, including from leasing arrangements (such as those for towers) and the interest on equipment financed on a device payment plan agreement when sold to the customer by an authorized agent. Revenue from arrangements that were not accounted for under Topic 606 were insignificant to the financial statements for the years ended December 31, 2019 and 2018.
The Partnership applied the new revenue recognition standard to customer contracts not completed at the date of initial adoption. For incomplete contracts that were modified before the date of adoption, the Partnership elected to use the practical expedient available under the modified retrospective method, which allows aggregating the effect of all modifications when identifying satisfied and unsatisfied performance obligations, determining the transaction price and allocating transaction price to the satisfied and unsatisfied performance obligations for the modified contract at transition. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while amounts reported for prior periods have not been adjusted and continue to be reported under accounting standards in effect for those periods. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while amounts reported for prior periods have not been adjusted and continue to be reported under accounting standards in effect for those periods.
Prior to the adoption of Topic 606, the Partnership was required to limit the revenue recognized when a wireless device was sold to the amount of consideration that was not contingent on the provision of future services, which was typically limited to the amount of consideration received from the customer at the time of sale.
Under Topic 606, the total consideration in the contract is allocated between wireless equipment and service based on their relative standalone selling prices. This change primarily impacts our arrangements that include sales of wireless devices at subsidized prices in conjunction with a fixed-term plan, also known as the subsidy model, for service. Accordingly, under Topic 606, generally more equipment revenue is recognized upon sale of the equipment to the customer and less service revenue is recognized over the contract term than was previously recognized under the prior "Revenue Recognition" (Topic 605) standard. At the time the equipment is sold, this allocation results in the recognition of a contract asset equal to the difference between the amount of revenue recognized and the amount of consideration received from the customer. Verizon Wireless only offers new fixed-term plans with subsidized equipment pricing to business customers.
Topic 606 also requires the deferral of incremental costs incurred to obtain a customer contract, which are then amortized to expense, as a component of Selling, general and administrative expense, over the respective periods of expected benefit. As a result, a significant amount of sales commission costs, which were historically expensed as incurred under previous accounting, relating to contracts to provide wireless services, are now deferred and amortized under Topic 606.
Finally, under Topic 605, at the time of the sale of a device, risk adjusted interest is imputed on the device payment plan agreement receivables. The imputed interest is recorded as a reduction to the related accounts receivable and interest income was recognized over the financed device payment term. Under Topic 606, while there continues to be a financing component in both the fixed-term plans and device payment plans, also known as the installment model. This financing component for customer classes in the direct channels for wireless devices is not significant and therefore interest is no longer imputed for these contracts. This change results in additional revenue recognized upon the sale of wireless devices and no interest income recognized over the device payment term.
A reconciliation of the adjustments from the adoption of Topic 606 relative to Topic 605 on certain impacted financial statement line items in the statements of income for the year ended December 31, 2018 are as follows:
|
| | | | | | | | | |
| As reported | Balances without adoption of Topic 606 | Adjustments |
OPERATING REVENUE | | | |
Service revenue | $ | 3,766,062 |
| $ | 3,818,424 |
| $ | (52,362 | ) |
Equipment revenue | 1,153,954 |
| 1,060,106 |
| 93,848 |
|
Other | 275,896 |
| 278,334 |
| (2,438 | ) |
Total Operating Revenues | 5,195,912 |
| 5,156,864 |
| 39,048 |
|
| | | |
OPERATING EXPENSES | | | |
Cost of equipment | 1,212,952 |
| 1,206,710 |
| 6,242 |
|
Selling, general and administrative | 1,095,048 |
| 1,159,066 |
| (64,018 | ) |
| | | |
NET INCOME | $ | 1,418,597 |
| $ | 1,321,773 |
| $ | 96,824 |
|
Remaining performance obligations
When allocating the total contract transaction price to identified performance obligations, a portion of the total transaction price may relate to service performance obligations which were not satisfied or are partially satisfied as of the end of the reporting period. Below we disclose information relating to these unsatisfied performance obligations. The Partnership has elected to apply certain practical expedients available under Topic 606, including the option to exclude the expected revenues arising from unsatisfied performance obligations related to contracts that have an original expected duration of one year or less, which primarily relate to certain month-to-month service contracts.
Additionally, certain contracts provide customers the option to purchase additional services. The fee related to the additional services is recognized when the customer exercises the option (typically on a month-to-month basis).
Customer contracts are generally either month-to-month and cancellable at any time (typically under a device payment plan) or contain terms ranging from greater than one month to up to two years (typically under a fixed-term plan). Additionally, customers may incur charges based on usage or additional optional services in conjunction with entering into a contract that can be cancelled at any time and therefore are not included in the transaction price. When a service contract is longer than one month, the service contract term will generally be two years or less.
The customers also include other telecommunications companies who utilize Verizon Wireless’s network to resell wireless service to their respective end customers. Reseller arrangements occur on a month-to-month basis or include a stated contract term, which generally extends longer than two years. Arrangements with a stated contract term generally include an annual minimum revenue commitment over the term of the contract for which revenues will be recognized in future periods.
Accounts receivable and contract balances
The timing of revenue recognition may differ from the time of billing to customers. Receivables presented in the balance sheet represent an unconditional right to consideration. Contract balances represent amounts from an arrangement when either the performance obligation has been satisfied by transferring goods and/or services to the customer in advance of receiving all or partial consideration for such goods and/or services from the customer, or the customer has made payment in advance of obtaining control of the goods and/or services promised to the customer in the contract.
Contract assets primarily relate to rights to consideration for goods and/or services provided to the customers but for which there is not an unconditional right at the reporting date. Under a fixed-term plan, the total contract revenue is allocated between wireless services and equipment revenues, as discussed above. In conjunction with these arrangements, a contract asset is created, which represents the difference between the amount of equipment revenue recognized upon sale and the amount of consideration received from the customer. The contract asset is recognized as accounts receivable as wireless services are provided and billed. The right to bill the customer is obtained as service is provided over time, which results in the right to the payment being unconditional. The contract asset balances are presented in the balance sheet as prepaid expenses and other, and other assets - net. Contract assets are assessed for impairment on an annual basis and an impairment charge is recognized to the extent the carrying amount is not recoverable. The impairment charge related to contract assets was insignificant for the years ended December 31, 2019 and 2018. Increases in the contract asset balances were primarily due to new contracts and increases in sales promotions recognized upfront, driven by customer activity related to wireless services, while decreases were due to reclassifications to accounts receivable due to billings on the existing contracts and insignificant impairment charges.
Contract liabilities arise when customers are billed and consideration is received in advance of providing the goods and/or services promised in the contract. The majority of the contract liability at each year end is recognized during the following year as these contract liabilities primarily relate to advanced billing of fixed monthly fees for service that are recognized within the following month when services are provided to the customer. The contract liability balances are presented in the balance sheet as contract liabilities and other, and other liabilities. Increases in contract liabilities were primarily due to increases in sales promotions recognized over time and upfront fees, as well as increases in deferred revenue related to advanced billings, while decreases in contract liabilities were primarily due to the satisfaction of performance obligations related to wireless services.
The balance of receivables from contracts with customers, contract assets and contract liabilities recorded in the balance sheet were as follows:
|
| | | | | | | | | |
| At December 31, 2019 | At December 31, 2018 | At January 1, 2018 |
Receivables(1) | $ | 284,102 |
| $ | 206,856 |
| $ | 211,388 |
|
Device payment plan agreement receivables(2) | 101,466 |
| 162,619 |
| 1,678 |
|
Contract assets | 38,358 |
| 41,193 |
| 46,964 |
|
Contract liabilities | 190,886 |
| 178,905 |
| 148,797 |
|
(1) Balances do not include receivables related to the following contracts: leasing arrangements (such as towers) and the interest on equipment financed on a device payment plan agreement when sold to the customer by an authorized agent.
(2) Included in device payment plan agreement receivables presented in Device Payment Plans Note. Balances do not include receivables related to contracts completed prior to January 1, 2018 and receivables derived from the sale of equipment on a device payment plan through an authorized agent.
Contract costs
As discussed in the Significant Accounting Policies Note, Topic 606 requires the recognition of an asset for incremental costs to obtain a customer contract, which is then amortized to expense, over the respective period of expected benefit. The Partnership recognizes a contract asset for incremental commission costs paid to Verizon Wireless personnel and agents in conjunction with obtaining customer contracts. The costs are only deferred when it is determined the commissions are incremental costs that would not have been incurred absent the customer contract and are expected to be recovered. Costs to obtain a contract are amortized and recorded ratably as commission expense over the period representing the transfer of goods or services to which the assets relate. Costs to obtain contracts are amortized over the customers' estimated device upgrade cycle of two to three years, as such costs are typically incurred each time a customer upgrades their equipment.
The amortization periods for the costs incurred to obtain a customer contract are determined at a portfolio level due to the similarities within these customer contract portfolios.
Other costs, such as general costs or costs related to past performance obligations, are expensed as incurred.
Deferred contract costs are classified as current or non-current within prepaid expenses and other, and other assets - net, respectively. The balances of deferred contract costs as of December 31, 2019 and 2018, included in the balance sheet were as follows: |
| | | | | | | |
| 2019 | | 2018 |
Assets | | | |
Prepaid expenses | $ | 116,807 |
| | $ | 99,062 |
|
Other assets - net | 67,117 |
| | 70,062 |
|
Total | $ | 183,924 |
| | $ | 169,124 |
|
For the years ended December 31, 2019 and 2018, the Partnership recognized expense of $128,593and$97,782, respectively, associated with the amortization of deferred contract costs, within selling, general and administrative expenses in the statements of income.
Deferred contract costs are assessed for impairment on an annual basis. An impairment charge is recognized to the extent the carrying amount of a deferred cost exceeds the remaining amount of consideration expected to be received in exchange for the goods and services related to the cost, less the expected costs related directly to providing those goods and services that have not yet been recognized as expenses. There have been no impairment charges recognized for the year ended December 31, 2019 and 2018.
| |
4. | WIRELESS DEVICEPAYMENTPLANS
|
Under the Verizon Wireless device payment program, eligible customers can purchase wireless devices under a device payment plan agreement. Customers that activate service on devices purchased under the device payment program pay lower service fees as compared to those under fixed-term service plans, and their device payment plan charge is included on their wireless monthly bill. Verizon Wireless only offers fixed-term plans to business customers.
Wireless device payment plan agreement receivables
The following table displays device payment plan agreement receivables, net, that are recognized in the accompanying balance sheets as of December 31, 2019 and 2018.
|
| | | | | | | |
| 2019 | | 2018 |
Device payment plan agreement receivables, gross | $ | 185,173 |
| | $ | 332,680 |
|
Unamortized imputed interest | (7,893 | ) | | (7,196 | ) |
Device payment plan agreement receivables, net of unamortized imputed interest | 177,280 |
| | 325,484 |
|
Allowance for credit losses | (7,674 | ) | | (24,869 | ) |
Device payment plan agreement receivables, net | $ | 169,606 |
| | $ | 300,615 |
|
| | | |
Classified on the balance sheets: | | | |
Accounts receivable, net | $ | 95,441 |
| | $ | 159,289 |
|
Other assets | 74,165 |
| | 141,326 |
|
Device payment plan agreement receivables, net | $ | 169,606 |
| | $ | 300,615 |
|
Certain promotions are offered that allow a customer to trade in their owned device in connection with the purchase of a new device. Under these types of promotions, the customer receives a credit for the value of the trade-in device. In addition, the customer may be provided with additional future credits that will be applied against the customer’s monthly bill as long as service is maintained. A liability is recognized for the customer's right to trade-in the device measured at fair value, which is determined by considering several factors, including the weighted-average selling prices obtained in recent resales of similar devices eligible for trade-in. Future credits are recognized when earned by the customer. Device payment plan agreement receivables, net does not reflect the trade-in device liability. At December 31, 2019 and 2018, the amount of the trade-in liability was insignificant to the financial statements.
For indirect channel contracts with customers, risk adjusted interest is imputed on the device payment plan agreement receivables. The imputed interest is recorded as a reduction to the related accounts receivable. Interest income, which is included within other revenue in the statements of income, is recognized over the financed device payment term. See Revenue and Contract Costs Note for additional information on financing considerations with respect to direct channel contracts with customers.
When originating device payment plan agreements for consumer customers, Verizon Wireless uses internal and external data sources to create a credit risk score to measure the credit quality of a customer and to determine eligibility for the device payment program. If a customer is either new to Verizon Wireless or has 45 days or less of customer tenure with Verizon Wireless, the credit decision process relies more heavily on external data sources. If the customer has more than 45 days of customer tenure with Verizon Wireless (an existing customer), the credit decision process relies on a combination of internal and external data sources. External data sources include obtaining a credit report from a national consumer credit reporting agency, if available. Verizon Wireless uses its internal data and/or credit data obtained from the credit reporting agencies to create a custom credit risk score. The custom credit risk score is generated automatically (except with respect to a small number of applications where the information needs manual intervention) from the applicant’s credit data using Verizon Wireless’s proprietary custom credit models, which are empirically derived and demonstrably and statistically sound. The credit risk score measures the likelihood that the potential customer will become severely delinquent and be disconnected for non-payment. For a small portion of new customer applications, a traditional credit report is not available from one of the national credit reporting agencies because the potential customer does not have sufficient credit history. In those instances, alternative credit data is used for the risk assessment.
Based on the custom credit risk score, Verizon Wireless assigns each customer to a credit class, each of which has specified offers of credit, including an account level spending limit and either a maximum amount of credit allowed per device or a required down payment percentage. During the fourth quarter of 2018, Verizon Wireless moved all consumer customers, new and existing, from a required down payment percentage, between zero and 100%, to a maximum amount of credit per device.
Subsequent to origination, the delinquency and write-off experience is monitored as key credit quality indicators for the portfolio of device payment plan agreement receivables and fixed-term service plans. The extent of collection efforts with respect to a particular customer are based on the results of proprietary custom empirically derived internal behavioral-scoring models that analyze the customer’s past performance to predict the likelihood of the customer falling further delinquent. These customer-scoring models assess a number of variables, including origination characteristics, customer account history and payment patterns. Based on the score derived from these models, accounts are grouped by risk category to determine the collection strategy to be applied to such accounts. Collection performance results and the credit quality of device payment plan agreement receivables are continuously monitored based on a variety of metrics, including aging. An account is considered to be delinquent and in default status if there are unpaid charges remaining on the account on the day after the bill’s due date.
At December 31, 2019 and 2018, the balance and aging of the device payment plan agreement receivables on a gross basis was as follows:
|
| | | | | | | |
| 2019 | | 2018 |
Unbilled | $ | 172,049 |
| | $ | 317,307 |
|
Billed: | | | |
Current | 10,605 |
| | 12,270 |
|
Past due | 2,519 |
| | 3,103 |
|
Device payment plan agreement receivables, gross | $ | 185,173 |
| | $ | 332,680 |
|
Activity in the allowance for credit losses for the device payment plan agreement receivables was as follows:
|
| | | | | | | |
| 2019 | | 2018 |
Balance at January 1 | $ | 24,869 |
| | $ | 33,897 |
|
Provision for uncollectible accounts | 21,086 |
| | 23,932 |
|
Write-offs | (20,941 | ) | | (21,035 | ) |
Allowance related to receivables sold | (16,259 | ) | | (16,803 | ) |
Other | (1,081 | ) | | 4,878 |
|
Balance at December 31 | $ | 7,674 |
| | $ | 24,869 |
|
Receivables purchase agreement
In 2015 and 2016, Verizon Wireless established programs pursuant to a Receivables Purchase Agreement (original RPA) to sell from time to time, on an uncommitted basis, eligible device payment plan agreement receivables to a group of primarily relationship banks (Purchasers) on both a revolving and non-revolving basis, collectively the Programs. Under the Programs, Los Angeles SMSA would transfer the eligible receivables to Los Angeles Edge (Seller), who would transfer the device payment plan agreement receivables to the Purchasers for upfront cash proceeds and additional consideration upon settlement of the receivables, referred to as the deferred purchase price. In December 2017, the original RPA and all other related transaction documents were terminated and as of December 31, 2017 neither Verizon Wireless nor Los Angeles SMSA Limited Partnershiphave continuing involvement with any of the receivables sold under the original RPA program. There were no sales of device payment plan agreement receivables under the Programs during 2017 or thereafter.
Collections of deferred purchase price were $86,009 during 2017. During 2017, Verizon Wireless repurchased all outstanding receivables previously sold to the Purchasers in exchange for the obligation to pay the associated deferred purchase price to the wholly-owned subsidiaries that are bankruptcy remote special purpose entities. At December 31, 2017, the deferred purchase price receivable was fully satisfied. Collections following the repurchase of receivables was insignificant during 2019, $9,331 in 2018 and insignificant during 2017. Collections of both deferred purchase price and repurchased receivables were recorded within cash flows from investing activities in the statements of cash flows.
Asset Backed Securities
Beginning in September of 2016, Verizon Wireless has and continues to offer notes and enter into financing facilities collateralized by device payment plan agreement receivables (collectively, Asset Backed Securities or ABS arrangements) with a number of financial institutions (the Lenders), and through registered debt. In connection with these ABS arrangements, Los Angeles SMSA transfers device payment plan receivables to a trust entity through a two-step transfer - in which Los Angeles SMSA first sells eligible device payment plan receivables to Verizon ABS LLC, a securitization SPE wholly owned and consolidated by Verizon Wireless pursuant to a Receivable Purchase Agreement (RPA), and from Verizon ABS LLC to a designated trust entity (also wholly owned and consolidated by Verizon Wireless). Los Angeles SMSA has also entered into Transfer and Servicing Agreements with the Verizon ABS LLC and Verizon Wireless governing the ongoing servicing of the receivables after their sale to Verizon ABS LLC.
The receivables sold to the trust entity through this two step transfer are no longer considered assets of the Partnership. In exchange for the sale of these receivables, the Partnership receives upfront cash proceeds and a beneficial interest, which represents a form of deferred purchase price. The initial proceeds received from the ABS arrangements and the subsequent collection of beneficial interest are recorded within cash flows from operating activities and investing activities, respectively, on the statements of cash flows.
Under the terms of the ABS arrangements, the Lenders make advances under asset-backed loans backed by device payment plan agreement receivables. There is a two year revolving period, which may be extended, during which Verizon Wireless may transfer additional receivables to Verizon ABS LLC. Subject to certain conditions, Verizon Wireless may also remove receivables from Verizon ABS LLC. Verizon Wireless may prepay the outstanding amounts of the loans without penalty, but in certain cases, with breakage costs. In such instances, as a result of the True-up Trust agreements between Verizon Wireless, Los Angeles SMSA, and the other Verizon legal entities originating device payment plan receivables (collectively, the Originators), each Originator is required to contribute a proportional portion of the prepayment based on its respective share of the debt. In consideration for any such prepayment contributions, the Partnership receives additional beneficial interest in the sold receivables. Additionally, the Partnership may receive repayments of beneficial interest in the form of proportional draw downs as well as excess cash collections. The Partnership's net collections on beneficial interest are recorded within cash flows from investing activities on the statements of cash flows.
During 2019, 2018, and 2017, Verizon Wireless sold $935,829, $830,795, and $706,729, respectively, of device payment plan agreement receivables related to the Partnership, net of allowances and imputed interest, to Verizon ABS LLC, and received proceeds of $224,619, $358,148 and $368,238, respectively, received beneficial interest and recorded insignificant gains and losses. The Partnership had a short-term beneficial interest balance of $105,543 and $43,684 in prepaid expenses and other as of December 31, 2019 and 2018, respectively, as well as a long-term beneficial interest balance of $61,576 and $138,074, as of December 31, 2019 and 2018, respectively, which was recorded within other assets - net on the balance sheets.
Variable interest entities (VIEs)
VIEs are entities that lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, have equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, do not have the obligation to absorb the expected losses or do not have the right to receive the residual returns of the entity. The Partnership consolidates the assets and liabilities of VIEs when it is deemed to be the primary beneficiary. The primary beneficiary is the party that has the power to make the decisions that most significantly affect the economic performance of the VIE and has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
Under the ABS arrangements, the trust’s sole business consists of holding collected receivables that are sold by the Partnership to Verizon Wireless under the terms of the ABS arrangements. The activity of servicing the receivables and distribution of the cash collected is the activity that has the most significant impact on the trust. Verizon Wireless is the master and special servicer for the receivables but does not have a direct variable interest in the trust. The Partnership holds a beneficial interest in the trust, which represents the residual interest in the trust and, as such are, variable interests. Since Verizon Wireless maintains decision making rights as servicer and has an obligation to absorb losses, it is the primary beneficiary in the trust.
Beneficial interest
Under the ABS arrangements, the beneficial interest is initially recorded at fair value, based on the remaining device payment amounts expected to be collected, adjusted, as applicable, for the time value of money and credit risk. The initial fair value measurements are considered to be Level 3 measurements within the fair value hierarchy. The collection of the beneficial interest is contingent on collections from customers.
Continuing involvement
Verizon Wireless has continuing involvement with the sold receivables as it services the receivables pursuant to the ABS arrangements on behalf of the Partnership. Verizon Wireless services the related receivables, including facilitating customer payment collection in exchange for an insignificant servicing fee. While servicing the receivables, the same policies and procedures are applied to the sold receivables that apply to owned receivables, and normal relationships are maintained with customers. The credit quality of the customers Verizon Wireless continues to service was consistent throughout the periods presented.
In addition, the Partnership has continuing involvement related to the sold receivables as the Partnership is responsible for absorbing additional credit losses pursuant to the ABS arrangements. Credit losses on receivables sold were $21,040 during 2019 and $17,359 during 2018. The Partnership’s maximum exposure to loss related to the sold receivables is limited to the amount of the outstanding beneficial interest, which was $167,119 and $181,757 as of December 31, 2019 and 2018, respectively. The maximum exposure to loss represents an estimated loss that would be incurred under severe, hypothetical circumstances whereby the Partnership would not receive the total portion of the proceeds withheld by the trust. As the probability of these circumstances occurring is believed to be remote, the maximum exposure to loss is not an indication of the Partnership’s expected loss.
The outstanding device payment plan agreement receivables derecognized from the Partnership’s balance sheets, but which Verizon Wireless continues to service, was $822,169 and $690,576 at December 31, 2019 and 2018, respectively.
| |
5. | PROPERTY, PLANT AND EQUIPMENT, NET |
Property, plant and equipment consists of the following at December 31, 2019 and 2018:
|
| | | | | | | |
| 2019 | | 2018 |
Land | $ | 7,716 |
| | $ | 7,716 |
|
Buildings and improvements (15-45 years) | 1,164,210 |
| | 1,108,936 |
|
Wireless plant and equipment (3-50 years) | 4,193,491 |
| | 4,084,825 |
|
Furniture, fixtures and equipment (3-10 years) | 56,029 |
| | 58,986 |
|
Leasehold improvements (5-7 years) | 503,158 |
| | 494,914 |
|
| | | |
| 5,924,604 |
| | 5,755,377 |
|
| | | |
Less: accumulated depreciation | (4,015,711 | ) | | (3,756,839 | ) |
| | | |
Property, plant and equipment, net | $ | 1,908,893 |
| | $ | 1,998,538 |
|
Verizon Wireless, on behalf of the Partnership and the Partnership itself enter into various lease arrangements for network equipment, including towers, distributed antenna systems, and small cells; real estate; connectivity mediums, including dark fiber; equipment; and other various types of assets for use in operations. The leases have remaining lease terms ranging from 1 year to 28 years, some of which include options to extend the leases term for up to 25 years, and some of which include options to terminate the leases. For the majority of leases entered into during the current period, the Partnership concluded it is not reasonably certain that the Partnership would exercise the options to extend the lease or terminate the lease. Therefore, as of the lease commencement date, our lease terms generally do not include these options. The Partnership includes options to extend the lease within the lease term when it is reasonably certain that the option will be exercised.
The components of net lease cost were as follows:
|
| | | | |
| Classification | For Year Ended December 31, 2019 |
Operating lease cost(1) | Cost of services Selling, general and administrative expense | $ | 181,294 |
|
Short-term lease cost(1) | Cost of services Selling, general and administrative expense | 393 |
|
Variable lease cost(1) | Cost of services Selling, general and administrative expense | 4,954 |
|
Sublease income | Other revenues | (420 | ) |
Total net lease cost | | $ | 186,221 |
|
(1) All operating lease costs, including short-term and variable lease costs, are split between cost of services and selling, general and administrative expense in the statements of income based on the use of the facility that the rent is being paid on. See Significant Accounting Policies Note for additional information. Variable lease costs represent payments that are dependent on a rate or index, or on usage of the asset.
Supplemental disclosure for the statement of cash flows related to operating leases were as follows:
|
| | | |
| For Year Ended December 31, 2019 |
Cash Flows from Operating Activities | |
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 143,413 |
|
Supplemental lease cash flow disclosures | |
Operating lease right-of-use assets obtained in exchange for new operating lease liabilities | $ | 298,763 |
|
The weighted-average remaining lease term and the weighted-average discount rate of operating leases were as follows:
|
| | | |
| | As of December 31, 2019 |
Weighted-average remaining lease term (years) | | 10 |
|
Weighted-average discount rate | | 3.90 | % |
The Partnership's maturity analysis of operating lease liabilities as of December 31, 2019 were as follows:
|
| | | | |
Years | | As of December 31, 2019 |
2020 | | $ | 152,772 |
|
2021 | | 132,808 |
|
2022 | | 116,020 |
|
2023 | | 101,884 |
|
2024 | | 83,820 |
|
2025 and thereafter | | 424,798 |
|
Total operating lease payments | | 1,012,102 |
|
Less interest | | (245,594 | ) |
Present value of lease liabilities | | 766,508 |
|
Less current obligations | | (124,856 | ) |
Long-term obligations | | $ | 641,652 |
|
As of December 31, 2019, the Partnership has legally obligated lease payments for various other operating leases that have not yet commenced for which the total obligation was not significant. The Partnership has certain rights and obligations for these leases, but have not recognized an operating lease right-of-use asset or an operating lease liability since they have not yet commenced.
Disclosures related to Periods Prior to Adoption of Topic 842
Total rent expense under operating leases amounted to $147,944 and $134,337 in 2018 and 2017, respectively.
| |
7. | TOWER MONETIZATION TRANSACTION |
Prior to 2017, Verizon completed various transactions with unrelated third-parties pursuant to which the counterparties acquired exclusive rights to lease and operate certain Verizon Wireless towers and assumed the interest in the underlying ground leases related to the towers for an upfront cash payment. Under the terms of these arrangements, the counterparties have exclusive rights to lease and operate the towers over a long term period. In certain arrangements, the counterparty has fixed-price purchase options to acquire the towers based on their fair market values at the end of the lease terms. Verizon Wireless has subleased capacity on the third-party towers for use in its operations.
The Partnership participated in certain of these arrangements and received upfront payments that were accounted for as deferred rental income and as a financing obligation. The deferred rent represents unearned rental income and relates to the portion of the towers for which the right-of-use has passed to the counterparty. The deferred rental income is being recognized on a straight-line basis over the average lease term, which is included in other net changes within the operating section on the statements of cash flows. The financing obligation relates to the portion of the towers that continue to be occupied and used for the Partnership’s network operations. Sublease payments are recorded as repayments of financing obligation within financing activities on the statements of cash flows. The Partnership continues to include the towers in property, plant and equipment, net in the balance sheets and depreciates them accordingly. In addition, the minimum future payments for the ground leases have been included in the Partnership's operating lease commitments (See Leasing Arrangements Note). As part of the rights obtained during the transaction, the counterparty is responsible for the payment of the ground leases, and the Partnership does not expect to be required to make payments unless the counterparty defaults, which the Partnership determined to be remote.
At December 31, 2019 and 2018, the deferred rental income related to the transactions were $85,515 and $84,944, respectively, recorded in deferred rent on the balance sheet.
Accounts payable and accrued liabilities consist of the following as of December 31, 2019 and 2018.
|
| | | | | | | |
| 2019 | | 2018 |
Accounts payable | $ | 164,285 |
| | $ | 130,668 |
|
Accrued liabilities | 14,621 |
| | 12,137 |
|
Accounts payable and accrued liabilities | $ | 178,906 |
| | $ | 142,805 |
|
Contract liabilities and other consists of the following as of December 31, 2019 and 2018:
|
| | | | | | | |
| 2019 | | 2018 |
Contract liabilities | $ | 179,274 |
| | $ | 160,626 |
|
Customer deposits | 3,531 |
| | 14,737 |
|
Guarantee liability | 286 |
| | 500 |
|
Contract liabilities and other | $ | 183,091 |
| | $ | 175,863 |
|
| |
9. | TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES |
In addition to fixed-asset purchases, substantially all of service revenues, equipment revenues, other revenues, cost of services, cost of equipment and selling, general and administrative expenses of the Partnership represent transactions processed by Verizon Wireless on behalf of the Partnership, or represent transactions with affiliates. These transactions consist of: (1) revenues and expenses that pertain to the Partnership, which are processed by Verizon Wireless and directly attributed to or directly charged to the Partnership; (2) roaming revenue when customers of Verizon Wireless outside the Partnership use the network of the Partnership, or roaming cost when customers associated with the Partnership use the network of Verizon Wireless; (3) certain revenues and expenses processed or incurred by Verizon Wireless that are allocated to the Partnership principally based on total subscribers; and (4) service arrangements with Verizon Wireless, where the Partnership has the ability to utilize certain spectrum owned by Verizon Wireless. These transactions do not necessarily represent arm’s-length transactions and may not represent all revenues and costs that would be present if the Partnership operated on a stand-alone basis. Verizon Wireless periodically reviews the methodology and allocation bases for allocating certain revenues, operating costs and selling, general and administrative expenses to the Partnership. Resulting changes, if any, in the allocated amounts have historically not been significant, other than the roaming revenue and cost impacts discussed below.
Service revenues
Service revenues include monthly customer billings processed by Verizon Wireless on behalf of the Partnership and roaming revenues relating to customers of other affiliated markets that are specifically identified to the Partnership. For the years ended December 31, 2019, 2018 and 2017, roaming revenues were $549,201, $527,038 and $510,521, respectively. During 2017, Verizon Wireless updated its roaming rates and methodology for determining roaming volumes charged for postpaid, prepaid and reseller roaming revenue, resulting in a net decrease of $145,797 in roaming revenue as compared to prior periods. Service revenues also include usage and certain revenue reductions, including revenue concessions and bill incentive credits, which are processed by Verizon Wireless, and allocated to the Partnership based on certain factors deemed appropriate by Verizon Wireless.
Equipment revenues
Equipment revenues include equipment sales processed by Verizon Wireless and specifically identified to the Partnership, as well as certain handset and accessory revenues, and contra-revenues, including equipment concessions and equipment manufacturer rebates, that are processed by Verizon Wireless and allocated to the Partnership based on certain factors deemed appropriate by Verizon Wireless. The Partnership also recognizes commission revenue on the sale of devices to customers whose service contract is with an affiliate market.
Other revenues
Other revenues include other fees and surcharges charged to the customer that are specifically identified to the Partnership.
Cost of service
Cost of services includes roaming costs relating to customers associated with the Partnership that are roaming in other affiliated markets and switch costs that are incurred by Verizon Wireless and allocated to the Partnership based on certain factors deemed appropriate by Verizon Wireless. For the years ended December 31, 2019, 2018 and 2017 roaming costs were $684,200, $651,083 and $637,264, respectively. During 2017, Verizon Wireless updated its roaming rates and methodology for determining roaming amounts charged for postpaid, prepaid and reseller roaming cost, resulting in a net decrease of $182,169 to roaming cost as compared to prior periods. Cost of service also includes cost of telecom and long-distance that are incurred by Verizon Wireless and allocated to the Partnership based on certain factors deemed appropriate by Verizon Wireless. The Partnership also has service arrangements to utilize additional spectrum owned by Verizon Wireless. See Significant Accounting Policies Note for further information regarding these arrangements.
Cost of equipment
Cost of equipment is recorded at Verizon Wireless’s cost basis (see Significant Accounting Policies Note). Cost of equipment includes certain costs related to handsets, accessories and other costs incurred by Verizon Wireless and allocated to the Partnership based on certain factors deemed appropriate by Verizon Wireless.
Selling, general and administrative
Selling, general and administrative expenses include commissions, customer billing, customer care, and salaries that are specifically identified to the Partnership, as well as costs incurred by Verizon Wireless and allocated to the Partnership based on certain factors deemed appropriate by Verizon Wireless. The Partnership was allocated $108,020, $94,132 and $100,183 in advertising costs for the years ended December 31, 2019, 2018 and 2017, respectively.
Property, plant and equipment
Property, plant and equipment includes assets purchased by Verizon Wireless and directly charged to the Partnership, as well as assets transferred between Verizon Wireless and the Partnership (see Significant Accounting Policies Note).
Spectrum service agreements
The Partnership has also entered into certain agreements with Verizon Wireless to utilize certain wireless spectrum from Verizon Wireless that overlaps the Los Angeles metropolitan statistical area. Total expense under these wireless spectrum service arrangements amounted to $126,941, $126,288 and $125,608 in 2019, 2018 and 2017, respectively, which is included in cost of service in the statements of income.
Based on the terms of these service agreements as of December 31, 2019, future wireless spectrum service agreement obligations to Verizon Wireless are as follows:
|
| | | | |
Years | | Amount |
2020 | | 127,620 |
|
2021 | | 128,319 |
|
2022 | | 129,031 |
|
2023 | | 129,758 |
|
2024 | | 130,500 |
|
2025 and thereafter | | 855,035 |
|
Total minimum payments | | $ | 1,500,263 |
|
Verizon Wireless and the Partnership are subject to lawsuits and other claims, including class actions, product liability, patent infringement, intellectual property, antitrust, partnership disputes and claims involving relations with resellers and agents. Verizon Wireless is also currently defending lawsuits filed against it and other participants in the wireless industry, alleging various adverse effects as a result of wireless phone usage. Various consumer class-action lawsuits allege that Verizon Wireless violated certain state consumer-protection laws and other statutes and defrauded customers through misleading billing practices or statements. These matters may involve indemnification obligations by third parties and/or affiliated parties covering all or part of any potential damage awards against Verizon Wireless and the Partnership and/or insurance coverage. All of the above matters are subject to many uncertainties, and the outcomes are not currently predictable.
The Partnership may incur or be allocated a portion of the damages that may result upon adjudication of these matters, if the claimants prevail in their actions. At December 31, 2019 and 2018, the Partnership had no accrual for any pending matters. An estimate of the reasonably possible loss or range of loss with respect to these matters as of December 31, 2019 cannot be made at this time due to various factors typical in contested proceedings, including: (1) uncertain damage theories and demands; (2) a less-than-complete factual record; (3) uncertainty concerning legal theories and their resolution by courts or regulators and (4) the unpredictable nature of the opposing party and its demands. Verizon Wireless and the Partnership continuously monitor these proceedings as they develop and will adjust any accrual or disclosure as needed. It is not expected that the ultimate resolution of any pending regulatory or legal matter in future periods will have a material effect on the financial condition of the Partnership, but it could have a material effect on the results of operations for a given reporting period.
SIGNATURES
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.
|
| | | | | | | | | | |
| UNITED STATES CELLULAR CORPORATION | |
| | | |
| By: | /s/ Kenneth R. MeyersLaurent C. Therivel |
| | Kenneth R. Meyers
Laurent C. Therivel President and Chief Executive Officer (principal executive officer)
|
| | | |
| By: | /s/ Douglas W. Chambers |
| | Douglas W. Chambers Senior Executive Vice President, Chief Financial Officer and Treasurer
(principal financial officer)
|
| | | |
| By: | /s/ Anita J. Kroll |
| | Anita J. Kroll Chief Accounting Officer
(principal accounting officer)
|
| | | |
| By: | /s/ Jeffrey S. Hoersch |
| | Jeffrey S. Hoersch Vice President and Controller |
Dated: February 25, 202017, 2022
Each person whose signature appears below constitutes and appoints LeRoy T. Carlson, Jr. as his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for him or her and in his or her name, place, and stead, in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K under the Securities Exchange Act of 1934, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do so and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all the said attorney-in fact and agent or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
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.
| | | | | | | | | | | | | | |
Signature | | Title | | Date |
| | | | |
| | | | |
/s/ LeRoy T. Carlson, Jr. | | Director | | February 17, 2022 |
LeRoy T. Carlson, Jr. | | | | |
| | | | |
/s/ Laurent C. Therivel | | Director | | February 17, 2022 |
Laurent C. Therivel | | | | |
| | | | |
/s/ Walter C. D. Carlson | | Director | | February 17, 2022 |
Walter C. D. Carlson | | | | |
| | | | |
/s/ J. Samuel Crowley | | Director | | February 17, 2022 |
J. Samuel Crowley | | | | |
| | | | |
/s/ Ronald E. Daly | | Director | | February 17, 2022 |
Ronald E. Daly | | | | |
| | | | |
/s/ Deirdre C. Drake | | Director | | February 17, 2022 |
Deirdre C. Drake | | | | |
| | | | |
/s/ Harry J. Harczak, Jr. | | Director | | February 17, 2022 |
Harry J. Harczak, Jr. | | | | |
| | | | |
/s/ Michael S. Irizarry | | Director | | February 17, 2022 |
Michael S. Irizarry | | | | |
| | | | |
Signature | | Title | | Date |
| | | | |
| | | | |
/s/ LeRoy T. Carlson, Jr. | | Director | | February 25, 2020 |
LeRoy T. Carlson, Jr. | | | | |
| | | | |
/s/ Kenneth R. Meyers | | Director | | February 25, 2020 |
Kenneth R. Meyers | | | | |
| | | | |
/s/ Steven T. Campbell | | Director | | February 25, 2020 |
Steven T. Campbell | | | | |
| | | | |
/s/ Walter C. D. Carlson | | Director | | February 25, 2020 |
Walter C. D. Carlson | | | | |
| | | | |
/s/ J. Samuel Crowley | | Director | | February 25, 2020 |
J. Samuel Crowley | | | | |
| | | | |
/s/ Ronald E. Daly | | Director | | February 25, 2020 |
Ronald E. Daly | | | | |
| | | | |
/s/ Harry J. Harczak, Jr. | | Director | | February 25, 2020 |
Harry J. Harczak, Jr. | | | | |
| | | | |
/s/ Gregory P. Josefowicz | | Director | | February 25, 202017, 2022 |
Gregory P. Josefowicz | | | | |
| | | | |
/s/ Peter L. Sereda | | Director | | February 25, 202017, 2022 |
Peter L. Sereda | | | | |
| | | | |
/s/ Cecelia D. Stewart | | Director | | February 25, 202017, 2022 |
Cecelia D. Stewart | | | | |
| | | | |
/s/ Kurt B. Thaus | | Director | | February 25, 2020 |
Kurt B. Thaus | | | | |