UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
(Mark One) | |
FORM 10-Q
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(Mark One)
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[x]
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR |
For the quarterly period ended September 30, 2017
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-09712
UNITED STATES CELLULAR CORPORATION
(Exact name of Registrant as specified in its charter)
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For the transition period from to
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| Delaware | | | | | | | | | | | | | | | | | 62-1147325 |
Commission file number 001-09712
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UNITED STATES CELLULAR CORPORATION
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(Exact name of Registrant as specified in its charter)
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Delaware
| | | 62-1147325
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(State or other jurisdiction of incorporation or organization) | | | (IRS Employer Identification No.) |
8410 West Bryn Mawr, Chicago, Illinois60631
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (773) 399-8900
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8410 West Bryn Mawr, Chicago, Illinois 60631
Securities registered pursuant to Section 12(b) of the Act: |
(AddressTitle of principal executive offices) (Zip code)
each class | | Trading Symbol | | Name of each exchange on which registered |
| Common Shares, $1 par value | | USM | | | | | | | | | | | | | | | New York Stock Exchange |
Registrant’s telephone number, including area code: (773) 399-8900
6.95% Senior Notes due 2060 | | UZA | | New York Stock Exchange |
| 7.25% Senior Notes due 2063 | | UZB | | | | | | | | | | | | | | | New York Stock Exchange |
| 7.25% Senior Notes due 2064 | Yes
| No
UZC | | New York Stock Exchange |
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| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | [x]
Yes | [ ]
☒ | No | ☐ |
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). | [x]
Yes | [ ]
☒ | No | ☐ |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. |
Large accelerated filer | [ ]
☒ | | | | | | | | Accelerated filer | [x]
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Non-accelerated filer | [ ]
☐ | (Do not check if a smaller reporting company)
| | Smaller reporting company | [ ]
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| | | | | | | | | | | | Emerging growth company | [ ]
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | [ ]
☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | [ ]
Yes | [x]
☐ | No | ☒ |
The number of shares outstanding of each of the issuer's classes of common stock, as of June 30, 2020, is 52,930,800 Common Shares, $1 par value, and 33,005,900 Series A Common Shares, $1 par value.
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Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
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Class
| | | Outstanding at September 30, 2017
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Common Shares, $1 par value
| | | 52,117,967 Shares
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Series A Common Shares, $1 par value
| | | 33,005,877 Shares
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United States Cellular Corporation |
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Quarterly Report on Form 10-Q |
For the Period Ended SeptemberJune 30, 2017 2020 |
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| United States Cellular Corporation
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis compares United States Cellular Corporation’s (U.S. Cellular) financial results for the three and
ninesix months ended
SeptemberJune 30,
2017,2020, to the three and
ninesix months ended
SeptemberJune 30,
2016.2019. It should be read in conjunction with U.S. Cellular’s interim consolidated financial statements and notes included herein, and with the description of U.S. Cellular’s business, its audited consolidated financial statements and Management's Discussion and Analysis
(MD&A) of Financial Condition and Results of Operations
(MD&A) included in U.S. Cellular’s Annual Report on Form 10-K (Form 10-K) for the year ended December 31,
2016.2019. Certain numbers included herein are rounded to millions for ease of presentation; however,
certain calculated amounts and percentages are determined using the unrounded numbers.
This report contains statements that are not based on historical facts, including the words “believes,” “anticipates,” “estimates,” “expects,” “plans,” “intends,” “projects” and similar expressions. These statements constitute and represent “forward looking statements” as this term is defined in the Private Securities Litigation Reform Act of 1995. Such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward looking statements. See Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement for additional information.
U.S. Cellular uses certain “non-GAAP financial measures” and each such measure is identified in the MD&A. A discussion of the reason U.S. Cellular determines these metrics to be useful and a reconciliation of these measures to their most directly comparable measures determined in accordance with accounting principles generally accepted in the United States of America (GAAP) are included in the Supplemental Information Relating to Non-GAAP Financial Measures section within the MD&A of this Form 10-Q Report.
General
General
U.S. Cellular owns, operates, and invests in wireless markets throughout the United States. U.S. Cellular is an 83%82%-owned subsidiary of Telephone and Data Systems, Inc. (TDS). U.S. Cellular’s strategy is to attract and retain wireless customers through a value proposition comprised of a high-quality network, outstanding customer service, and competitive devices, plans, and pricing, all provided with a localcommunity focus.
COVID-19 considerations
The impact of the global spread of coronavirus (COVID-19) on U.S. Cellular's future operations is uncertain. There are many factors, including the severity and duration of the outbreak, as well as other direct and indirect impacts, that are expected to negatively impact U.S. Cellular.
COVID-19 impacts on U.S. Cellular's business for the six months ended June 30, 2020 include a reduction in service revenues and equipment sales, and a reduction in handset subscriber gross additions and defections. The impacts of COVID-19 on this and future periods are expected to negatively affect U.S. Cellular’s results of operations, cash flows and financial position. The extent and duration of these impacts are uncertain due to many factors and could be material. Certain impacts on and actions by U.S. Cellular related to COVID-19 include, but are not limited to, the following:
Taking action to keep associates safe, including implementing a work-from-home strategy for employees whose jobs can be performed remotely. In addition, to keep associates, customers, and communities safe, U.S. Cellular temporarily closes retail stores for enhanced cleanings, continues to operate with reduced store hours, and provides associates with personal protective equipment to be worn during customer interactions. U.S. Cellular has also implemented a daily health check process for associates and requires social distancing and mask wearing in all company facilities, including stores. Throughout this period of change, U.S. Cellular has continued serving its customers and ensuring its wireless network remains fully operational.
Participated in the FCC Keep Americans Connected Pledge, through June 30, 2020, to not turn-off service or charge late fees due to a customer’s inability to pay their bill due to circumstances related to COVID-19. This resulted in a reduction in non-pay defections, as well as reduced service revenues, for the six months ended June 30, 2020. Non-pay defections are expected to increase in future periods as the FCC Keep Americans Connected Pledge ended on June 30, 2020 and certain accounts that were part of the Pledge are expected to terminate due to non-payment.
Waiving overage charges and certain other charges. This resulted in reduced service revenues during the three and six months ended June 30, 2020.
OPERATIONS
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• | Supporting the communities in which U.S. Cellular operates. Through U.S. Cellular’s partnership with the Boys & Girls Clubs, U.S. Cellular has contributed to the Boys & Girls Clubs’ COVID-19 Relief Fund to support children, families and communities. These funds are dispersed directly to more than 50 clubs in U.S. Cellular’s service regions to support the most immediate needs of youth in areas of importance such as providing food for children who rely on their Boys & Girls Clubs for their dinner, care for children of essential workers and first responders, and digital learning resources. In additional to monetary donations, in-person volunteerism has been replaced by virtual volunteerism, with associates participating in events such as reading for the visually impaired and mentoring for students. |
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| Recognizing income tax benefits associated with the enactment of the CARES Act. This legislation resulted in a reduction to income tax expense for the three and six months ended June 30, 2020. The CARES Act is also projected to result in a reduction of income tax expense recognized throughout the 2020 tax year as part of the estimated annual effective tax rate, and a cash refund in 2021 of taxes paid in prior years. |
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| • | Monitoring its supply chain to assess impacts to availability and costs of device inventory and network equipment and services, including monitoring the dependency on third parties to continue network related projects. Various states' stay-at-home orders could cause delays in municipal permitting and other contractor work. At this time, U.S. Cellular expects to be able to meet customer demand for devices and services and to be able to continue its 4G LTE network modernization and 5G deployment with no significant disruptions. |
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| • | Tracking increased customer usage and the impact of the removal of data caps. At this time, U.S. Cellular believes its network capacity is sufficient to accommodate expected increased usage. |
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| • | Monitoring roaming behaviors. Both inbound and outbound roaming traffic have been dampened by COVID-19 as wireless customers are reducing travel. The extent to which roaming traffic will be impacted by the pandemic in the future will depend upon governmental mandates and customer behavior in response to the outbreak. |
See the following areas within this MD&A for additional discussion of the impacts of COVID-19:
Operational Overview
Financial Overview — Income tax expense
Liquidity and Capital Resources
Risk Factors
OPERATIONS
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| ▪ | Serves customers with approximately 5.14.9 million connections including 4.54.4 million postpaid, 0.5 million prepaid and 0.1 million reseller and other connections |
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| ▪ | Employs approximately 6,0005,400 associatesHeadquartered in Chicago, Illinois6,436 |
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| ▪ | 6,673 cell sites including 4,051 owned towers in service |
U.S. Cellular Mission and Strategy
U.S. Cellular’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 mid-sized and rural markets served.
In 2017,
U.S. Cellular
continuesplans to continue to execute on its strategies to
grow and protect its
current customer base, grow revenues,
by attracting new customers through economical offerings and identifying new revenue opportunities, and drive improvements in
itsthe overall cost
structure.structure, and invest in its network and system capabilities. Strategic efforts include:
U.S. Cellular continues to devote efforts to enhance its network capabilities. During the first half of 2017, U.S. Cellular commercially deployed VoLTE technology for the first time in one key market and will continue to build out VoLTE services over the next few years. The next commercial launch is expected to occur in several additional operating markets in early 2018. VoLTE technology allows customers to utilize a 4G LTE network for both voice and data services, and offers enhanced services such as high definition voice, video calling and simultaneous voice and data sessions. In addition, the deployment of VoLTE technology expands U.S. Cellular’s ability to offer roaming services to other carriers. U.S. Cellular continues to enhance its spectrum position and monetize non-strategic assets by participating in auctions and entering into agreements with third parties. During the nine months ended September 30, 2017, the FCC announced by way of public notice that U.S. Cellular was the winning bidder for 188 licenses for an aggregate purchase price of $329 million. In addition, U.S. Cellular closed on certain license exchange agreements and received $15 million of cash and recognized gains of $19 million. See Note 5 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to certain of these transactions.U.S. Cellular is focused on expanding its solutions available to business and government customers, including a growing suite of connected machine-to-machine solutions and software applications across various categories. U.S. Cellular will continue to enhance its advanced wireless services and connected solutions for consumer, business and government customers.
Significant Financial Matter
Net loss attributable to U.S. Cellular shareholders was $299 million and $261 million for the three and nine months ended September 30, 2017, respectively. Such net losses include a non-cash charge related to goodwill impairment of $370 million ($309 million, net of tax), which was recorded for the three months ended September 30, 2017. See Note 6 — Intangible Assets for a detailed discussion regarding the goodwill impairment. Refer to Supplemental Information to Non-GAAP Financial Measures within this MD&A for a reconciliation of the goodwill impairment, net of tax.
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| ▪ | U.S. Cellular 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 accessories and device protection plans and from new services such as home internet. In addition, U.S. Cellular is focused on expanding its solutions available to business and government customers. |
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| ▪ | U.S. Cellular continues to devote efforts to enhance its network capabilities. VoLTE technology is now available to nearly 90% of U.S Cellular's subscribers, and deployments in additional operating markets are expected later in 2020. VoLTE technology allows customers to utilize a 4G LTE network for both voice and data services and offers enhanced services such as high definition voice and simultaneous voice and data sessions. |
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| ▪ | U.S. Cellular has launched commercial 5G services in Iowa and Wisconsin and will continue to launch in additional areas throughout 2020 and beyond. 5G technology is expected to help address customers' growing demand for data services as well as create opportunities for new services requiring high speed, reliability and low latency. In addition to the deployment of 5G technology, U.S. Cellular is also modernizing its 4G LTE network to further enhance 4G LTE speeds. |
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| ▪ | U.S. Cellular 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, U.S. Cellular actively seeks attractive opportunities to acquire wireless spectrum, including pursuant to FCC auctions such as Auctions 103 and 105. |
Terms UsedUsed by U.S. Cellular
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 broadband technology.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 1000, 1001, and 1002 – Auction 1000 is an FCC auction of 600 MHz spectrum licenses that started in 2016 and continued into 2017 involving: (1) a “reverse auction” in which broadcast television licensees submit bids to voluntarily relinquish spectrum usage rights in exchange for payments (referred to as Auction 1001); (2) a “repacking” of the broadcast television bands in order to free up certain broadcast spectrum for other uses; and (3) a “forward auction” of licenses for spectrum cleared through this process to be used for wireless communications (referred to as Auction 1002).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. This includes smartphones, feature phones, tablets, modems, hotspots, and machine-to-machine devices.Connected Devices – non-handset devices that connect directly to the U.S. Cellular network. Connected devices include products such as tablets, modems, and hotspots.EBITDA – refers to earnings before interest, taxes, depreciation, amortization and accretion and is used in the non-GAAP metric Adjusted EBITDA throughout this document. FCC – Federal Communications Commission.Gross Additions – represents the total number of new connections added during the period, without regard to connections that were terminated during that period.Machine-to-Machine or M2M – technology that involves the transmission of data between networked devices, as well as the performance of actions by devices without human intervention. U.S. Cellular sells and supports M2M solutions to customers, provides connectivity for M2M solutions via the U.S. Cellular network, and has agreements with device manufacturers and software developers which offer M2M solutions.Net Additions – 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. Postpaid Average Billings per Account (Postpaid ABPA) – non-GAAP metric is calculated by dividing total postpaid service revenues plus equipment installment plan billings by the average number of postpaid accounts and by the number of months in the period.Postpaid Average Billings per User (Postpaid ABPU) – non-GAAP metric is calculated by dividing total postpaid service revenues plus equipment installment plan billings by the average number of postpaid connections and by the number of months in the period.Postpaid Average Revenue per Account (Postpaid ARPA) – metric 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 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.
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| ▪ | 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. |
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| ▪ | 5G – fifth generation wireless technology that is expected to help address customers’ growing demand for data services as well as create opportunities for new services requiring high speed and reliability as well as low latency. |
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| ▪ | 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. |
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| ▪ | Auctions 103 and 105 – Auction 103 is an FCC auction of 37, 39, and 47 GHz wireless spectrum licenses that started in December 2019 and concluded in March 2020. Auction 105 is an FCC auction of 3.5 GHz wireless spectrum licenses and bidding commenced in July 2020. |
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| ▪ | 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. |
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| ▪ | 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 U.S. Cellular network. |
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| ▪ | Connected Devices – non-handset devices that connect directly to the U.S. Cellular network. Connected devices include products such as tablets, wearables, modems, and hotspots. |
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| ▪ | 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. |
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| ▪ | 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. |
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| ▪ | FCC Keep Americans Connected Pledge – voluntary FCC initiative in response to the COVID-19 pandemic to ensure that Americans do not lose their broadband or telephone connectivity as a result of the exceptional circumstance. |
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| ▪ | 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. |
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| ▪ | Gross Additions – represents the total number of new connections added during the period, without regard to connections that were terminated during that period. |
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| ▪ | Net Additions (Losses) – represents the total number of new connections added during the period, net of connections that were terminated during that period. |
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| ▪ | 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. |
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| ▪ | 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. |
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| ▪ | 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. |
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| ▪ | Retail Connections – the sum of postpaid connections and prepaid connections. |
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| ▪ | 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. |
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| ▪ | 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
| | | | | | Q3 | Q3 | YTD | YTD |
| | | | | 2017 | 2016 | 2017 | 2016 |
| Postpaid Activity and Churn | | | | |
| | Gross Additions: | 191,000 | 174,000 | 511,000 | 586,000 |
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| | | | Handsets | 139,000 | 115,000 | 357,000 | 363,000 |
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| | | | Connected Devices | 52,000 | 59,000 | 154,000 | 223,000 |
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As of September 30, | | | Net Additions (Losses): | 35,000 | (6,000) | 31,000 | 75,000 |
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| | 2017 | | 2016 | | | | | Handsets | 29,000 | (27,000) | 20,000 | (45,000) |
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Retail Connections – End of Period | | | | | Connected Devices | 6,000 | 21,000 | 11,000 | 120,000 |
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| Postpaid | 4,513,000 | | 4,484,000 | | | Churn: | 1.16% | 1.34% | 1.19% | 1.27% |
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| Prepaid | 515,000 | | 480,000 | | | | | Handsets | 0.96% | 1.22% | 0.98% | 1.17% |
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| Total | 5,028,000 | | 4,964,000 | | | | | Connected Devices | 2.33% | 2.04% | 2.41% | 1.97% |
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| As of June 30, | | 2020 | | 2019 |
| Retail Connections – End of Period | | |
| | Postpaid | | 4,372,000 | | 4,414,000 |
| | Prepaid | | 496,000 | | 500,000 |
| | Total | | 4,868,000 | | 4,914,000 |
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The increase in
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| | Q2 2020 | | Q2 2019 | | Q2 2020 vs. Q2 2019 | | YTD 2020 | | YTD 2019 | YTD 2020 vs. YTD 2019 |
| Postpaid Activity and Churn | |
| Gross Additions | | | | | | | | | | |
| Handsets | 85,000 |
| | 102,000 |
| | (17 | )% | | 175,000 |
| | 203,000 |
| (14 | )% |
| Connected Devices | 44,000 |
| | 35,000 |
| | 26 | % | | 86,000 |
| | 70,000 |
| 23 | % |
| Total Gross Additions | 129,000 |
| | 137,000 |
| | (6 | )% | | 261,000 |
| | 273,000 |
| (4 | )% |
| Net Additions (Losses) | | | | | | | | | | |
| Handsets | 3,000 |
| | (11,000 | ) | | N/M |
| | (17,000 | ) | | (25,000 | ) | 32 | % |
| Connected Devices | 9,000 |
| | (15,000 | ) | | N/M |
| | 3,000 |
| | (33,000 | ) | N/M |
|
| Total Net Additions (Losses) | 12,000 |
| | (26,000 | ) | | N/M |
| | (14,000 | ) | | (58,000 | ) | 76 | % |
| Churn | | | | | | | | | | |
| Handsets | 0.71 | % | | 0.97 | % | | | | 0.83 | % | | 0.98 | % | |
| Connected Devices | 2.24 | % | | 3.01 | % | | | | 2.67 | % | | 3.05 | % | |
| Total Churn | 0.89 | % | | 1.23 | % | | | | 1.05 | % | | 1.24 | % | |
N/M - Percentage change not meaningful
Total postpaid handset net additions increased for the three months ended SeptemberJune 30, 2017,2020, when compared to the same period last year. Handset defections decreased as a result of lower consumer switching activity related to COVID-19, as well as a reduction in non-pay defections related to the FCC Keep Americans Connected Pledge. Partially offsetting the decrease in defections were lower gross additions resulting from lower consumer switching activity.
Total postpaid handset net additions increased for the six months ended June 30, 2020, when compared to the same period last year. Handset defections decreased as a result of lower consumer switching activity related to COVID-19, as well as a reduction in non-pay defections related to the FCC Keep Americans Connected Pledge. Partially offsetting the decrease in defections were lower gross additions resulting from aggressive industry-wide competition in the first quarter of 2020 and lower consumer switching activity in the second quarter of 2020.
Total postpaid connected device net additions increased for the three and six months ended June 30, 2020, when compared to the same period last year. The increase is due to (i) a decrease in tablet defections and (ii) an increase in demand for internet related products given a need for remote connectivity related to COVID-19.
Non-pay defections are expected to increase in future periods as the FCC Keep Americans Connected Pledge ended on June 30, 2020 and certain accounts that were part of the Pledge are expected to terminate due to non-payment.
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| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2020 | | 2019 | | 2020 vs. 2019 | | 2020 | | 2019 | | 2020 vs. 2019 |
| Average Revenue Per User (ARPU) | $ | 46.24 |
| | $ | 45.90 |
| | 1 | % | | $ | 46.72 |
| | $ | 45.66 |
| | 2 | % |
| Average Revenue Per Account (ARPA) | $ | 120.70 |
| | $ | 119.46 |
| | 1 | % | | $ | 121.80 |
| | $ | 119.15 |
| | 2 | % |
Postpaid ARPU and Postpaid ARPA increased for the three and six months ended June 30, 2020, when compared to the same period last year,
was driven mainly by higher handsets gross additions as well as lower handsets churn. These impacts were slightly offset bydue primarily to (i) having proportionately fewer tablet connections, which on a
decline in tablet gross additions and higher tablet churn which are included in the connectedper-unit basis contribute less revenue than smartphone devices,
line above.The decrease in postpaid net additions for the nine months ended September 30, 2017, when compared to the same period last year, was driven mainly by lower tablet gross additions and(ii) an increase in tablet churn,regulatory recovery revenues, and (iii) an increase in device protection plan revenues. These increases were partially offset by an improvement in handsets net additions largely reflecting a decline in handsets churn.
Postpaid Revenue
| | Three Months Ended | | | Nine Months Ended |
| | September 30, | | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Average Revenue Per User (ARPU) | $ | 43.41 | | $ | 47.08 | | $ | 44.46 | | $ | 47.54 |
Average Billings Per User (ABPU)1 | $ | 54.71 | | $ | 56.79 | | $ | 55.21 | | $ | 56.34 |
| | | | | | | | | | | |
Average Revenue Per Account (ARPA) | $ | 116.36 | | $ | 125.31 | | $ | 119.26 | | $ | 125.21 |
Average Billings Per Account (ABPA)1 | $ | 146.65 | | $ | 151.16 | | $ | 148.12 | | $ | 148.37 |
| | | | | | | | | | | | |
1 | Postpaid ABPU and Postpaid ABPA are non-GAAP financial measures. Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of these measures. |
Postpaid ARPU and Postpaid ARPA decreased for the three and nine months ended September 30, 2017, due primarily to industry-wide price competition resulting in overall price reductions on plan offerings.
Equipment installment plans increase equipment sales revenue as customers pay for their wireless devices in installments at a total device price that is generally higher than the device price offered to customers in conjunction with alternative plans that are subject to a service contract. Equipment installment plans also have the impact of reducing service revenues as certain equipment installment plans provide for reduced monthly service charges. In order to show the trends in total service and equipment revenues received,waiving overage charges, a measure U.S. Cellular has presented Postpaid ABPU and Postpaid ABPA, which are calculated as Postpaid ARPU and Postpaid ARPA plus average monthly equipment installment plan billings per connection and account, respectively.
Equipment installment plan billings increased fortaken to assist customers during the three and nine months ended September 30, 2017, when compared to the same periods last year, mainly due to increased penetration of equipment installment plans. Postpaid ABPU and ABPA decreased for the three and nine months ended September 30, 2017, when compared to the same periods last year, as the increase in equipment installment plan billings was more than offset by the decline in Postpaid ARPU and ARPA discussed above. U.S. Cellular expects the penetration of equipment installment plans to continue to increase over time due to the fact that, effective in September 2016, all equipment sales to retail customers are made under installment plans.
COVID-19 pandemic.Financial Overview
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2020 | | 2019 | | 2020 vs. 2019 | | 2020 | | 2019 | | 2020 vs. 2019 |
| (Dollars in millions) | | | | | | | | | | | |
| Retail service | $ | 658 |
| | $ | 662 |
| | (1 | )% | | $ | 1,329 |
| | $ | 1,322 |
| | 1 | % |
| Inbound roaming | 41 |
| | 44 |
| | (8 | )% | | 77 |
| | 78 |
| | – |
|
| Other | 54 |
| | 51 |
| | 7 | % | | 109 |
| | 98 |
| | 10 | % |
| Service revenues | 753 |
| | 757 |
| | (1 | )% | | 1,515 |
| | 1,498 |
| | 1 | % |
| Equipment sales | 220 |
| | 216 |
| | 2 | % | | 422 |
| | 441 |
| | (4 | )% |
| Total operating revenues | 973 |
| | 973 |
| | – |
| | 1,937 |
| | 1,939 |
| | – |
|
| | | | | | | | | | | | |
| System operations (excluding Depreciation, amortization and accretion reported below) | 197 |
| | 193 |
| | 2 | % | | 377 |
| | 369 |
| | 2 | % |
| Cost of equipment sold | 218 |
| | 224 |
| | (3 | )% | | 435 |
| | 458 |
| | (5 | )% |
| Selling, general and administrative | 323 |
| | 344 |
| | (6 | )% | | 659 |
| | 669 |
| | (2 | )% |
| Depreciation, amortization and accretion | 178 |
| | 177 |
| | 1 | % | | 354 |
| | 345 |
| | 3 | % |
| (Gain) loss on asset disposals, net | 4 |
| | 5 |
| | (19 | )% | | 8 |
| | 7 |
| | 7 | % |
| (Gain) loss on sale of business and other exit costs, net | — |
| | — |
| | N/M |
| | — |
| | (2 | ) | | N/M |
|
| (Gain) loss on license sales and exchanges, net | — |
| | — |
| | N/M |
| | — |
| | (2 | ) | | N/M |
|
| Total operating expenses | 920 |
| | 943 |
| | (2 | )% | | 1,833 |
| | 1,844 |
| | (1 | )% |
| | | | | | | | | | | | |
| Operating income | $ | 53 |
| | $ | 30 |
| | 74 | % | | $ | 104 |
| | $ | 95 |
| | 9 | % |
| | | | | | | | | | | | |
| Net income | $ | 69 |
| | $ | 32 |
| | N/M |
| | $ | 141 |
| | $ | 90 |
| | 56 | % |
Adjusted OIBDA (Non-GAAP)1 | $ | 235 |
| | $ | 212 |
| | 11 | % | | $ | 466 |
| | $ | 443 |
| | 5 | % |
Adjusted EBITDA (Non-GAAP)1 | $ | 280 |
| | $ | 257 |
| | 9 | % | | $ | 560 |
| | $ | 537 |
| | 4 | % |
Capital expenditures2 | $ | 168 |
| | $ | 195 |
| | (14 | )% | | $ | 405 |
| | $ | 297 |
| | 36 | % |
N/M - Percentage change not meaningful
| |
1 | Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure. |
| |
2 | Refer to Liquidity and Capital Resources within this MD&A for additional information on Capital expenditures. |
Table of Contents
Operating Revenues
Financial Overview
Three Months Ended June 30, 2020 and 2019
| | | | | Three Months Ended | | Nine Months Ended |
| | | | | September 30, | | September 30, |
| | | | | | | | | 2017 vs. | | | | | 2017 vs. |
| | | | | 2017 | | 2016 | | 2016 | | 2017 | | 2016 | | 2016 |
(Dollars in millions) | | | | | | | | | | | | | | | | |
Retail service | | $ | 636 | | $ | 681 | | (7)% | | $ | 1,940 | | $ | 2,044 | | (5)% |
Inbound roaming | | | 37 | | | 45 | | (17)% | | | 94 | | | 118 | | (20)% |
Other1 | | | 64 | | | 58 | | 12% | | | 189 | | | 168 | | 13% |
| Service revenues1 | | | 737 | | | 784 | | (6)% | | | 2,223 | | | 2,330 | | (5)% |
Equipment sales | | | 226 | | | 239 | | (5)% | | | 639 | | | 655 | | (3)% |
| Total operating revenues1 | | | 963 | | | 1,023 | | (6)% | | | 2,862 | | | 2,985 | | (4)% |
| | | | | | | | | | | | | | | | | | | |
System operations (excluding Depreciation, amortization and accretion reported below) | | | 185 | | | 196 | | (6)% | | | 549 | | | 572 | | (4)% |
Cost of equipment sold | | | 261 | | | 280 | | (7)% | | | 749 | | | 799 | | (6)% |
Selling, general and administrative | | | 350 | | | 370 | | (5)% | | | 1,041 | | | 1,089 | | (4)% |
Depreciation, amortization and accretion | | | 153 | | | 155 | | (2)% | | | 460 | | | 462 | | – |
Loss on impairment of goodwill | | | 370 | | | – | | N/M | | | 370 | | | – | | N/M |
(Gain) loss on asset disposals, net | | | 5 | | | 7 | | (26)% | | | 14 | | | 16 | | (17)% |
(Gain) loss on sale of business and other exit costs, net | | | (1) | | | – | | N/M | | | (1) | | | – | | >(100)% |
(Gain) loss on license sales and exchanges, net | | | – | | | (7) | | 100% | | | (19) | | | (16) | | (16)% |
| Total operating expenses | | | 1,323 | | | 1,001 | | 32% | | | 3,163 | | | 2,922 | | 8% |
| | | | | | | | | | | | | | | | | | | |
Operating income (loss)¹ | | $ | (360) | | $ | 22 | | >(100)% | | $ | (301) | | $ | 63 | | >(100)% |
| | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (298) | | $ | 18 | | >(100)% | | $ | (259) | | $ | 54 | | >(100)% |
Adjusted OIBDA (Non-GAAP)1,2 | | $ | 167 | | $ | 177 | | (6)% | | $ | 523 | | $ | 525 | | – |
Adjusted EBITDA (Non-GAAP)2 | | $ | 204 | | $ | 216 | | (6)% | | $ | 631 | | $ | 639 | | (1)% |
Capital expenditures | | $ | 112 | | $ | 103 | | 8% | | $ | 257 | | $ | 275 | | (7)% |
| | | | | | | | | | | | | | | | | | | |
N/M - Percentage change not meaningful |
| | | | | | | | | | | | | | | | | | | |
1 | Equipment installment plan interest income is reflected as a component of Service revenues consistent with an accounting policy change effective January 1, 2017. All prior period numbers have been recast to conform to this accounting change. See Note 1 — Basis of Presentation in the Notes to Consolidated Financial Statements for additional details. |
| | | | | | | | | | | | | | | | | | | |
2 | Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure. |
Operating Revenues
Six Months Ended June 30, 2020 and 2019
(Dollars in millions)
Service revenues consist of:
| 
|
| ▪ | |
Service revenues consist of:
Retail Service –- Charges for access, airtime, roaming,voice, data and value-added services and recovery of regulatory costs and value added services, including data services and products
|
| |
| ▪ | Inbound Roaming –- Charges to other wireless carriers whose customers use U.S. Cellular’s wireless systems when roaming |
| |
| ▪ | Other Service – Primarily amounts- Amounts received from the Federal USF, imputed interest recognized on equipment installment plan contracts and tower rental revenues,Equipment and miscellaneous other service revenues consist of:
|
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 revenuesOn January 1, 2017, U.S. Cellular elected to change
Retail service revenues decreased for the
classificationthree months ended June 30, 2020, primarily as a result of
interest income on equipment installment plan contracts from Interest and dividend income to Service revenuesa decline in the
Consolidated Statementaverage number of
Operations. All prior period numbers have been recastsubscribers compared to
conform to this accounting change. See Note 1 — Basisthe second quarter of
Presentation2019, partially offset by the increase in Postpaid ARPU as previously discussed in the
Notes to Consolidated Financial StatementsOperational Overview section. Retail service revenues increased for
additional details. Servicethe six months ended June 30, 2020, primarily as a result of the increase in Postpaid ARPU, partially offset by a decline in subscribers.
Inbound roaming revenues decreased for the three and ninesix months ended SeptemberJune 30, 2017,2020, primarily driven by lower data revenues, with lower rates partially offset by higher usage.
Other service revenues increased for the three and six months ended June 30, 2020, largely due to an increase in tower rental revenues.
Equipment sales revenues increased for the three months ended June 30, 2020, due primarily to an increase in device sales volumes. This was partially offset by lower average revenue per device and a decrease in accessory sales. Equipment sales revenues decreased for the six months ended June 30, 2020, due primarily to lower average revenue per device and a decrease in accessory sales, partially offset by an increase in device sales volumes.
System operations expenses
System operations expenses increased for the three and six months ended June 30, 2020, due to increases in cell site rent expense, non-capitalizable costs to add network capacity, and costs to decommission network assets. Such factors were partially offset by a decrease in roaming expense as a result of lower data rates, partially offset by higher data roaming usage.
Cost of equipment sold
Cost of equipment sold decreased for the three and six months ended June 30, 2020, due primarily to (i)
lower average cost per device, (ii) a shift in mix from new device sales to used device sales, (iii) a decrease in
retail service revenues primarily driven by industry-wide price competition resulting in overall price reductions on plan offerings;accessory sales and
(ii)(iv) a decrease in
inbound roaming revenues primarily driven by lower roaming rates. Such reductionscharges recorded to reduce inventory to its net realizable value. These decreases were partially offset by an increase in
imputed interest income due to an increase in the total number of active equipment installment plans.Federal USF revenue remained flat at $23 million and $69 million for the three and nine months ended September 30, 2017, respectively, when compared to the same periods last year. See the Regulatory Matters section in this MD&A for a description of the FCC Mobility Fund II Order (MF2 Order) and its expected impacts on U.S. Cellular’s current Federal USF support.
Equipment sales revenues decreased for the three months ended September 30, 2017, when compared to the same period last year, due a reduction in guarantee liability amortization for equipment installment contracts as a result of changes in plan offerings and an overall reduction in the numbervolume of devices sold. See Note 3 – Equipment Installment Plans in the Notes to Consolidated Financial Statements for additional details regarding the amortization of the guarantee liability. These impacts were partially offset by a mix shift to higher end smartphone devices as well as an increase in accessories revenues.
Equipment sales revenues decreased for the nine months ended September 30, 2017, when compared to the same period last year, as a result of an overall reduction in the number of devices sold
Selling, general and as a result of changes in plan offerings, a decrease in guarantee liability amortization for equipment installment contractsadministrative expenses
Selling, general and
lower device activation fees. These impacts were partially offset by an increase in the proportion of new device sales made under equipment installment plans, a mix shift from feature phones and connected devices to smartphones and, to a lesser extent, an increase in accessories revenues.
System operations expenses
System operationsadministrative expenses decreased for the three and ninesix months ended SeptemberJune 30, 2017, when compared to the same periods last year, as a result of (i) a decrease in roaming expenses2020, driven primarily by lower roaming rates, partially offset bydecreases in bad debts expense, advertising expense and employee related expense.
Depreciation, amortization and accretion
Depreciation, amortization, and accretion increased
data roaming usage; and (ii) a decrease in customer usage expenses primarily driven by decreased circuit costs.Cost of equipment sold
The decrease in Cost of equipment sold for the three and ninesix months ended SeptemberJune 30, 2017, when compared to the same periods last year, was mainly2020, due to a reduction in the numberaccelerated depreciation of devices sold as well as a decrease in the average cost of smartphones, partially offset by a mix shift from feature phones and connected devices to higher cost smartphones. Loss on equipment, defined as Equipment sales revenues less Cost of equipment sold, was $35 million and $41 million for the three months ended September 30, 2017 and 2016, respectively, and $110 million and $144 million for the nine months ended September 30, 2017 and 2016, respectively.
Selling, general and administrative expenses
Selling expenses for the three and nine months ended September 30, 2017, decreased by $8 million and $24 million, respectively, mainlycertain assets due to lower advertising expenses, including a decreasechanges in sponsorship expenses related to the terminationnetwork technology, which will continue throughout 2020 and beyond.
Components of
a naming rights agreement during the third quarter of 2016; increases in commissions expenses were partially offsetting. General and administrative expenses for the three and nine months ended September 30, 2017, decreased $11 million and $25 million, respectively, mainly due to lower bad debts and phone program expenses together with reductions in numerous other general and administrative categories. Loss on impairment of goodwill
During the third quarter of 2017, U.S. Cellular recorded a $370 million loss on impairment related to goodwill. See Note 6 — Intangible Assets in the Notes to Consolidated Financial Statements for additional information.
(Gain) loss on license sales and exchanges, net
Net gains in 2017 and 2016 were due to gains recognized on license exchange transactions with third parties. See Note 5 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.
Other Income (Expense)
Components of Other Income (Expense) | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended | | Nine Months Ended |
| | | | | September 30, | | September 30, |
| | | | | | | | | | | 2017 vs. | | | | | | | | 2017 vs. |
| | | | | 2017 | | 2016 | | 2016 | | 2017 | | 2016 | | 2016 |
(Dollars in millions) | | | | | | | | | | | | | | | | |
Operating income (loss)¹ | | $ | (360) | | $ | 22 | | >(100)% | | $ | (301) | | $ | 63 | | >(100)% |
| | | | | | | | | | | | | | | | | | |
Equity in earnings of unconsolidated entities | | | 35 | | | 38 | | (7)% | | | 101 | | | 110 | | (8)% |
Interest and dividend income1 | | | 2 | | | 1 | | 68% | | | 6 | | | 4 | | 45% |
Interest expense | | | (28) | | | (28) | | (2)% | | | (85) | | | (84) | | (1)% |
Other, net | | | – | | | – | | 29% | | | 1 | | | – | | (9)% |
Total investment and other income1 | | | 9 | | | 11 | | (21)% | | | 23 | | | 30 | | (25)% |
| | | | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | (351) | | | 33 | | >(100)% | | | (278) | | | 93 | | >(100)% |
Income tax expense (benefit) | | | (53) | | | 15 | | >(100)% | | | (19) | | | 39 | | >(100)% |
| | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | (298) | | | 18 | | >(100)% | | | (259) | | | 54 | | >(100)% |
Less: Net income (loss) attributable to noncontrolling interests, net of tax | | | 1 | | | 1 | | (9)% | | | 2 | | | 1 | | >100% |
Net income (loss) attributable to U.S. Cellular shareholders | | $ | (299) | | $ | 17 | | >(100)% | | $ | (261) | | $ | 53 | | >(100)% |
| | | | | | | | | | | | | | | | | | |
1 | Equipment installment plan interest income is reflected as a component of Service revenues consistent with an accounting policy change effective January 1, 2017. All prior period numbers have been recast to conform to this accounting change. See Note 1 — Basis of Presentation in the Notes to Consolidated Financial Statements for additional details. |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2020 | | 2019 | | 2020 vs. 2019 | | 2020 | | 2019 | | 2020 vs. 2019 |
| (Dollars in millions) | | | | | | | | | | | |
| Operating income | $ | 53 |
| | $ | 30 |
| | 74 | % | | $ | 104 |
| | $ | 95 |
| | 9 | % |
| | | | | | | | | | | | |
| Equity in earnings of unconsolidated entities | 44 |
| | 40 |
| | 8 | % | | 89 |
| | 84 |
| | 6 | % |
| Interest and dividend income | 1 |
| | 5 |
| | (79 | )% | | 5 |
| | 11 |
| | (54 | )% |
| Interest expense | (25 | ) | | (29 | ) | | 15 | % | | (49 | ) | | (58 | ) | | 17 | % |
| Other, net | — |
| | — |
| | N/M |
| | — |
| | (1 | ) | | N/M |
|
| Total investment and other income | 20 |
| | 16 |
| | 31 | % | | 45 |
| | 36 |
| | 27 | % |
| | | | | | | | | | | | |
| Income before income taxes | 73 |
| | 46 |
| | 60 | % | | 149 |
| | 131 |
| | 14 | % |
| Income tax expense | 4 |
| | 14 |
| | (71 | )% | | 8 |
| | 41 |
| | (81 | )% |
| | | | | | | | | | | | |
| Net income | 69 |
| | 32 |
| | N/M |
| | 141 |
| | 90 |
| | 56 | % |
| Less: Net income attributable to noncontrolling interests, net of tax | 1 |
| | 1 |
| | 42 | % | | 2 |
| | 4 |
| | (51 | )% |
| Net income attributable to U.S. Cellular shareholders | $ | 68 |
| | $ | 31 |
| | N/M |
| | $ | 139 |
| | $ | 86 |
| | 62 | % |
N/M - Percentage change not meaningful
Equity in earnings of unconsolidated entities
Equity in earnings of unconsolidated entities represents U.S. Cellular’s share of net income from entities in which it has a noncontrolling interest and that are accounted for
byusing the equity method. U.S. Cellular’s investment in the Los Angeles SMSA Limited Partnership (LA Partnership) contributed
$17pretax income of $20 million
to Equity in earnings of unconsolidated entitiesand $19 million for
both the three months ended
SeptemberJune 30,
20172020 and
2016,2019, respectively, and
$50$42 million and
$57$40 million for the
ninesix months ended
SeptemberJune 30,
20172020 and
2016,2019, respectively. See Note
78 — Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.
Interest and dividend income
Interest and dividend income decreased for the three and six months ended June 30, 2020, driven by lower average investment balances and lower interest rates.
Interest expense
Interest expense decreased for the three and six months ended June 30, 2020, primarily as a result of a higher amount of capitalized interest. Also contributing to the decrease was a $100 million principal prepayment made in October 2019 on a senior term loan.
Income tax expense
U.S. Cellular’s
The effective tax rate on Income (loss) before income taxes for the three and nine months ended SeptemberJune 30, 2017,2020 and 2019, was not meaningful5.5% and 30.1%, respectively. The effective tax rate on Income before income taxes for the six months ended June 30, 2020 and 2019, was 5.2% and 31.0%, respectively. The lower effective tax rate in 2020 as compared to 2019 is due primarily to the recognitionincome tax benefits of the CARES Act enacted on March 27, 2020.
The CARES Act provides retroactive eligibility of bonus depreciation on qualified improvement property put into service after December 31, 2017 and a
loss on impairment5-year carryback of
goodwill and fornet operating losses generated in years 2018-2020. As the
three and nine months ended September 30, 2016, was 46.0% and 41.4%, respectively. Due to difficulty in reliably projecting an annualstatutory 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%, resulting in a reduction of income tax expense. U.S. Cellular calculatedprojects that the income taxes fortax effects of the nine months ended September 30, 2017, based on an estimated year-to-date tax rate.A reconciliationCARES Act will result in a reduction of U.S. Cellular’s income tax expense (benefit) computed atrecognized throughout the statutory rate to2020 tax year as part of the reported income tax expense (benefit) andestimated annual effective tax rate, is as follows:
| | | Nine Months Ended |
| | | September 30, |
| | | 2017 | | | 2016 |
| | | Amount | Rate | | | Amount | Rate |
(Dollars in millions) | | | | | | | |
Pretax income (loss) | $ | (278) | N/A | | $ | 93 | N/A |
| | | | | | | |
Statutory federal income tax expense (benefit) and rate | | (97) | 35.0 % | | | 33 | 35.0% |
Goodwill impairment1 | | 76 | (27.3)% | | | – | 0.0% |
Other differences, net | | 2 | (0.7)% | | | 6 | 6.4% |
Total tax expense (benefit) and rate | $ | (19) | 7.0 % | | $ | 39 | 41.4% |
| | | | | | | | |
1 | Goodwill impairment reflects an adjustment to increase federal and state income tax expense by $76 million related to a portion of the goodwill impairment U.S. Cellular recorded which is nondeductible for tax purposes. See Note 6 - Intangible Assets for a detailed discussion regarding the goodwill impairment. |
and a cash refund in 2021 of taxes paid in prior years.
Liquidity and Capital Resources
U.S. Cellular operates a capital-intensive business. Historically, U.S. Cellular has used internally-generated funds and also has obtained substantial funds from external sources for general corporate purposes. In the past, U.S. Cellular’s existing cash and investment balances, funds available under its revolving credit
facility,and receivables securitization agreements, funds from other financing sources, including a term loan 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 U.S. Cellular 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.
Although U.S. Cellular currently has a significant cash balance, in certain recent periods,
U.S. Cellular has incurred negative free cash flow
(non-GAAP metric defined as Cash flows from operating activities less Cash paid for additions to property, plant and equipment)at times in the past and this
will continuecould occur in the future,
if operating results do not improve or capital expenditures are not reduced. U.S. Cellular currently expects to have negative freeand forecasting future cash flow
in 2017.is more challenging with the various risks and uncertainties related to COVID-19. However, U.S. Cellular believes that existing cash and investment balances, funds available under its revolving credit,
facility,term loan and receivables securitization agreements, and expected cash flows from operating and investing activities
will provide
sufficient liquidity for U.S. Cellular to meet its normal day-to-day operating needs and debt service requirements for the coming year.
U.S. Cellular will continue to monitor the rapidly changing business and market conditions and plans to take appropriate actions, as necessary, to meet its liquidity needs.
U.S. Cellular 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 or system acquisitions,
system development and network capacity expansion,capital expenditures, debt service requirements, the repurchase of shares,
the payment of dividends, or making additional investments. It may be necessary from time to time to increase the size of the existing revolving credit
facility,agreement, to put in place
a new credit
facility,agreements, or to obtain other forms of financing in order to fund potential expenditures. U.S. Cellular
is exploring a potential securitized borrowing usingmade payments related to wireless spectrum auctions in 2020 (see Regulatory Matters - Spectrum Auctions). U.S. Cellular also expects annual capital expenditures in 2020 to be higher than in 2019, due primarily to investments to enhance network speed and capacity and to continue deploying VoLTE and 5G technology in its
equipment installment plan receivables, which may occur in 2018.network. U.S. Cellular’s liquidity would be adversely affected if, among other things, U.S. Cellular is unable to obtain
short or long-term financing on acceptable terms, U.S. Cellular makes significant
wireless spectrum license purchases,
the LA Partnership discontinuesdistributions from unconsolidated entities are discontinued or
reduces distributionssignificantly reduced compared to historical levels, or Federal USF and/or other regulatory support payments decline.
In addition, although sales of assets or businesses by U.S. Cellular have been an important source of liquidity in prior periods, U.S. Cellular does not expect a similar level of such sales in the future.U.S. Cellular’s credit rating
has beencurrently is sub-investment
grade since 2014.grade. There can be no assurance that sufficient funds will continue to be available to U.S. Cellular or its subsidiaries on terms or at prices acceptable to U.S. Cellular. Insufficient cash flows from operating activities, changes in
itsU.S. Cellular's credit ratings, defaults of the terms of debt or credit agreements, uncertainty of access to capital, deterioration in the capital markets, reduced regulatory capital at banks which in turn limits their ability to borrow and lend, other changes in the performance of U.S. Cellular or in market conditions or other factors could limit or restrict the availability of financing on terms and prices acceptable to U.S. Cellular, which could require U.S. Cellular to reduce its acquisition, capital expenditure and business development programs, reduce the acquisition of
wireless spectrum licenses, and/or reduce or cease share
repurchases and/repurchases. Any of the foregoing developments would have an adverse impact on U.S. Cellular’s business, financial condition or
the paymentresults of
dividends.operations. U.S. Cellular cannot provide assurance that circumstances that could have a material adverse effect on its liquidity or capital resources will not occur.
Any of the foregoing would have an adverse impact on U.S. Cellular’s businesses, financial condition or results of operations.
Cash and Cash Equivalents
Cash and cash equivalents include cash and money market investments. The primary objective of U.S. Cellular’s Cash and cash equivalents is for use in its operations and acquisition, capital expenditure and business development programs.programs including the purchase of wireless spectrum licenses. 
|
At December 31, 2016, U.S. Cellular’s cash and cash equivalents totaled $586 million compared to $498 million at September 30, 2017.
The majority of U.S. Cellular’s Cash and cash equivalents was 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 across a range of eligible money market investments that may include, but are not limited to, government agency repurchase agreements, government agency debt, U.S. Treasury repurchase agreements, U.S. Treasury debt, and other securities collateralized by U.S. government obligations. U.S. Cellular monitors the financial viability of the money market funds and direct investments in which it invests and believes that the credit risk associated with these investments is low.
|
|
Cash and Cash Equivalents
(Dollars in millions)
At June 30, 2020, U.S. Cellular's cash and cash equivalents totaled $418 million compared to $285 million at December 31, 2019.
The majority of U.S. Cellular’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.
Financing
Short-term investments
At September 30, 2017,In March 2020, U.S. Cellular held $50entered into a new $300 million unsecured revolving credit agreement with certain lenders and other parties. Amounts under the new revolving credit agreement may be borrowed, repaid and reborrowed from time to time until maturity in March 2025. As a result of Short-term investments which consistedthe new agreement, U.S. Cellular's previous revolving credit agreement due to expire in May 2023 was terminated. As of U.S. Treasury Bills with original maturitiesJune 30, 2020, there were no outstanding borrowings under the revolving credit agreement, except for letters of six months. For these investments, U.S. Cellular’s objective is to earn a higher rate of return on funds that are not anticipated to be required to meet liquidity needs incredit, and the immediate future while maintaining low investment risk. See Note 2 – Fair Value Measurements in the Notes to Consolidated Financial Statements for additional details on short-term investments.
Financing
unused borrowing capacity was $298 million.
In March 2020, U.S. Cellular amended its senior term loan credit agreement in order to conform the agreement with its revolving credit agreement. There were no significant changes to other key terms of the senior term loan credit agreement. In June 2020, U.S. Cellular amended and restated its senior term loan agreement and increased its borrowing capacity to $300 million. There were no significant changes to other key terms of the U.S. Cellular senior term loan credit agreement.
U.S. Cellular, through its subsidiaries, also has a
revolving credit facility available for general corporate purposes, including spectrum purchases and capital expenditures. This credit facility matures in June 2021.receivables securitization agreement to permit securitized borrowings using its equipment installment plan receivables. In April 2020, U.S. Cellular’sCellular borrowed $125 million under its receivables securitization agreement. The unused capacity under its revolving credit facilitythis agreement was $298$75 million as of SeptemberJune 30, 2017. 2020, subject to sufficient collateral to satisfy the asset borrowing base provisions of the agreement.
U.S. Cellular believes
that it was in compliance with all of the financial covenants and requirements set forth in its revolving credit
facilityagreement, senior term loan credit agreement and receivables securitization agreement as of
that date.June 30, 2020.
U.S. Cellular has
in place an effective shelf registration statement on Form S-3 to issue senior or subordinated debt securities.
Long-term debt payments due for the remainder of 2017 and the next four years represent less than 4% of U.S. Cellular’s total long-term debt obligation as of September 30, 2017.
Capital expenditures (i.e., additions to property, plant and equipment and system development expenditures)expenditures; excludes wireless spectrum license additions), which include the effects of accruals and capitalized interest, in 2017for the six months ended June 30, 2020 and 20162019, were as follows:
Capital Expenditures
(Dollars in millions)
U.S. Cellular’s capital expenditures for the six months ended June 30, 2020 and 2019, were $405 million and $297 million, respectively.
Capital expenditures for the full year 2020 are expected to be between $850 million and $950 million. These expenditures are expected to be used principally for the following purposes:
| Capital expenditures for the nine months ended September 30, 2016
|
| ▪ | Enhance and 2017 were $275 million and $257 million, respectively.Capital expenditures for the full year 2017 are expected to be approximately $500 million. These expenditures are expected to be for the following general purposes:
Expand and enhancemaintain U.S. Cellular's network coverage, including continuing to deploy VoLTE technology in certain markets and providing additional speed and capacity to accommodate increased network usage, principally data usage by current customers;Deployment of VoLTE
|
| |
| ▪ | Continue deploying 5G technology in certain markets;Expandits network; and enhance the retail store network;Consolidate |
| |
| ▪ | Invest in information technology to support existing and upgrade its office facilities;new services andDevelop and enhance billing and other systems. products. |
U.S. Cellular
plansintends to finance its capital expenditures
program for
20172020 using primarily Cash flows from operating activities,
and existing cash
balances.balances and, if required, additional debt financing from its receivables securitization agreement, senior term loan credit agreement, revolving credit agreement and/or other forms of financing.
Acquisitions, Divestitures and Exchanges
U.S. Cellular 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.spectrum licenses (including pursuant to FCC auctions). In general, U.S. Cellular may not disclose such transactions until there is a definitive agreement.
U.S. Cellular 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, U.S. Cellular reviews attractive opportunities to acquire additional wireless operating markets and wireless spectrum, including pursuant to FCC auctions. U.S. Cellular also may seek to divest outright or include in exchanges for other wireless interests those interests that are not strategic to its long-term success.In July 2016, the FCC announced U.S. Cellular as a qualified bidder in the FCC’s forward auction of 600 MHz spectrum licenses, referred to as Auction 1002. In April 2017,March 2020, the FCC announced by way of public notice that U.S. Cellular was the provisional winning bidder for 188237 wireless spectrum licenses in the 37, 39 and 47 GHz bands (Auction 103) for an aggregate purchase price of $329$146 million. Prior to commencement of the forward auction, U.S. Cellular made an upfront payment to the FCC of $143 million in June 2016. U.S. Cellular paid the remaining $186 million to the FCC and was granted the licenses during the second quarter of 2017.In February 2016, U.S. Cellular entered into an agreement with a third party to exchange certain 700 MHz licenses for certain AWS and PCS licenses and $28 $24
million of cash. This license exchange was accomplished in two closings. The first closing occurredthis amount in the second quarterthree months ended March 31, 2020 and substantially all of 2016, at which time U.S. Cellular received $13 million of cash and recorded a gain of $9 million. The second closing occurredthe remainder in April 2020. In June 2020, the first quarter of 2017, at which time U.S. Cellular received $15 million of cash and recorded a gain of $17 million.
wireless spectrum licenses from Auction 103 were granted by the FCC. Variable Interest Entities
U.S. Cellular consolidates certain “variable interest entities” as defined
under GAAP. See Note 810 — Variable Interest Entities in the Notes to Consolidated Financial Statements for additional information related to these variable interest entities. U.S. Cellular may elect to make additional capital contributions and/or advances to these variable interest entities in future periods in order to fund their operations.During the first quarter of 2017, U.S. Cellular formed USCC EIP LLC, a special purpose entity (SPE), to facilitate a potential securitized borrowing using its equipment installment plan receivables in the future. During the nine months ended September 30, 2017, net equipment installment plan receivables totaling $1,093 million were transferred to the newly formed SPE from affiliated entities. On a consolidated basis, the transfer of receivables into this SPE did not have a material impact to the financial condition of U.S. Cellular.
Common Share Repurchase Program
During the six months ended June 30, 2020, U.S. Cellular
has repurchased
and expects to continue to repurchase its803,836 Common Shares
subjectfor $23 million at an average cost per share of $29.00. As of June 30, 2020, the total cumulative amount of U.S. Cellular Common Shares authorized to
its repurchase program. Share repurchases made under this program in 2017 and 2016 were as follows: | | Nine Months Ended |
| | September 30, |
| | 2017 | | 2016 |
Number of shares | | – | | | 46,861 |
Average cost per share | $ | – | | $ | 34.77 |
Dollar amount (in millions) | $ | – | | $ | 2 |
| | | | | | |
be repurchased is 4,507,000. For additional information related to the current repurchase authorization, see Unregistered Sales of Equity Securities and Use of Proceeds.
Contractual and Other Obligations
There were no material changes outside the ordinary course of business between December 31,
20162019 and
SeptemberJune 30,
2017,2020, to the Contractual and Other Obligations disclosed in
Management’s Discussion and Analysis of Financial Condition and Results of OperationsMD&A included in U.S. Cellular’s Form 10-K for the year ended December 31,
2016.2019. In April 2020, U.S. Cellular borrowed $125 million under its receivables securitization agreement.
Off-Balance Sheet Arrangements
U.S. Cellular had no transactions, agreements or other contractual arrangements with unconsolidated entities involving “off-balance sheet arrangements,” as defined by SEC rules, that had or are reasonably likely to have a material current or future effect on its financial condition, results of operations, liquidity, capital expenditures or capital resources.
Consolidated Cash Flow Analysis
U.S. Cellular operates a capital- and marketing-intensivecapital-intensive business. U.S. Cellular 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-reducingcost-saving upgrades to U.S. Cellular’s networks. U.S. Cellular utilizes cash on hand, cash from operating activities, cash proceeds from divestitures and dispositions of investments, short-term credit facilities and long-term debt financing to fund its acquisitions (including spectrum licenses), construction costs, operating expenses and share repurchases. Cash flows may fluctuate from quarter to quarter and year to year due to seasonality, the timing of acquisitions and divestitures, capital expenditures and other factors. The following discussion summarizes U.S. Cellular's cash flow activities for the ninesix months ended SeptemberJune 30, 20172020 and 2016.20172019.
U.S. Cellular’s Cash,
and cash equivalents
decreased $88 million in 2017.and restricted cash increased $145 million. Net cash provided by operating activities was
$394$692 million
and was offset by Cash flows used for investing activitiesdue to net income of
$472$141 million
and Cash flows used for financing activities of $10 million.Net cash provided by operating activities consisted of net income adjusted for non-cash items of $477$441 million, distributions received from unconsolidated entities of $85$90 million including $30$43 million in distributions from the LA Partnership, and changes in working capital items which decreasedincreased net cash by $168$20 million. The non-cash items included a $370 million loss on impairment of goodwill. The decrease resulting from changes in working capital items was due in part to a $164 million increase in equipment installment planchanges were primarily influenced by timing of vendor payments and collections of customer and agent receivables, which are expected to continue to increasepartially offset by tax impacts from the CARES Act and further require the use of working capital in the near term.
annual employee bonus payments.
Cash flows used for investing activities were $472$631 million. Cash paid in 2017 for additions to property, plant and equipment totaled $252$471 million. Cash payments for wireless spectrum license acquisitions were $144 million.
Cash flows provided by financing activities were $84 million, reflecting the $125 million borrowed under the receivables securitization agreement, partially offset by the repurchase of $23 million of Common Shares.
2019 Commentary
U.S. Cellular’s Cash, cash equivalents and restricted cash decreased $51 million. Net cash provided by operating activities was $476 million due to net income of $90 million plus non-cash items of $366 million and distributions received from unconsolidated entities of $76 million, including $33 million in distributions from the LA Partnership. This was offset by changes in working capital items which decreased net cash by $56 million. The primary working capital changes were a reduction in accrued compensation reflecting annual employee bonus payments and a decline in the amounts due to agents driven by lower sales volume.
Cash flows used for investing activities were $506 million. Cash paid for
additions to property, plant and equipment totaled $282 million. Cash payments for wireless spectrum license acquisitions
and licenses was $189 million which included the remaining $186 million due to the FCC for licenses U.S. Cellular won in Auction 1002. Cash paid for investments was $50 million which included the purchase of short-term Treasury bills. This waswere $255 million. These were partially offset by Cash received from divestitures and exchanges of
$19$32 million.
See Note 5 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to these transactions. Cash flows used for financing activities were
$10 million, primarily for scheduled repayments of debt.2016 Commentary
U.S. Cellular’s Cash and cash equivalents decreased $41 million in 2016. Net cash provided by operating activities was $415 million in 2016 due to net income of $54 million plus non-cash items of $450 million and distributions received from unconsolidated entities of $55 million including a $10 million distribution from the LA Partnership. This was partially offset by changes in working capital items which decreased cash by $144 million. The decrease in working capital items was due primarily to a $160 million increase in equipment installment plan receivables. This was partially offset by a federal tax refund of $28 million related to an overpayment of the 2015 tax liability, which resulted from the enactment of federal bonus depreciation in December 2015.
The net cash provided by operating activities was offset by Cash flows used for investing activities of $449 million. Cash paid in 2016 for additions to property, plant and equipment totaled $280 million. In June 2016, U.S. Cellular made a deposit of $143 million to the FCC for its participation in Auction 1002. Cash paid for acquisitions and licenses in 2016 was $46 million partially offset by Cash received from divestitures and exchanges of $20 million.
Cash flows used for financing activities were $7$21 million, reflecting ordinary activity such as the scheduled repayments of debt.
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
2017 are2020 were as follows:
Cash and cash equivalents
Cash and cash equivalents decreased $88
Income taxes receivable
Income taxes receivable increased $76 million primarily reflecting future tax refunds attributable to the expected carryback of 2020 net operating losses, as allowed under the CARES Act which was enacted in March 2020.
Deferred income tax liability, net
Deferred income tax liability, net increased $106 million due primarily to
the purchasefull deductibility for tax purposes of
$50 millionqualified property placed in
short-term investments. See the Consolidated Cash Flow analysis above for a discussion of cash and cash equivalents.Short-term investments
Short-term investments increased $50 million due to the purchase of short-term investments, which consisted of U.S. Treasury Bills with original maturities of six months. See Note 2 – Fair Value Measurements in the Notes to Consolidated Financial Statements for additional details on short-term investments.
Inventory, net
Inventory, net decreased $36 million due primarily to overall improvements in inventory planning and procurement practices.
Licenses
Licenses increased $339 million due primarily to an aggregate winning bid of $329 million in FCC Auction 1002. These licenses were granted by the FCC in the second quarter of 2017. See Note 5 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for more information about this transaction.
Goodwill
Goodwill decreased $370 million due to the impairment loss recorded in the third quarter of 2017. See Note 6 — Intangible Assets in the Notes to Consolidated Financial Statements for additional information.
Accounts payable — Trade
Accounts payable — Trade decreased $50 million due primarily to reduction of expenses in 2017 as well as payment timing differences.
Accrued taxes
Accrued taxes increased $26 million due primarily to the excess of current income tax expense over federal estimated payments madeservice during the nine months ended September 30, 2017.
current year.
Supplemental Information Relating to Non-GAAP Financial Measures
U.S. Cellular sometimes uses information derived from consolidated financial information but not presented in its financial statements prepared in accordance with U.S. GAAP to evaluate the performance of its business. Specifically, U.S. Cellular has referred to the following measures in this Form 10-Q Report:
Certain of these measures are considered “non-GAAP financial measures” under U.S. Securities and Exchange Commission Rules.
Specifically, U.S. Cellular has referred to the following measures in this Form 10-Q Report:EBITDAAdjusted EBITDAAdjusted OIBDAFree cash flowPostpaid ABPU
Postpaid ABPAGoodwill impairment, net of tax
Following are explanations of each of these measures.
EBITDA, Adjusted EBITDA and Adjusted OIBDA
EBITDA, Adjusted EBITDA
isand Adjusted OIBDA are defined as net income
(loss) adjusted for the items set forth in the reconciliation below.
Adjusted OIBDA is defined as net income (loss) adjusted for the items set forth in the reconciliation below.EBITDA, Adjusted EBITDA and Adjusted OIBDA are not measures of financial performance under GAAP and should not be considered as alternatives to Net income
(loss) or Cash flows from operating activities, as indicators of cash flows or as measures of liquidity. U.S. Cellular 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
(loss)and Operating income are deemed appropriate. Management believes Adjusted EBITDA and Adjusted OIBDA are useful measures of U.S. Cellular’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 U.S. Cellular’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
measure,measures, Net income
(loss).and Operating income.
| | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
(Dollars in millions) | | | | | | | | | | | |
Net income (loss) (GAAP) | $ | (298) | | $ | 18 | | $ | (259) | | $ | 54 |
Add back: | | | | | | | | | | | |
| Income tax expense (benefit) | | (53) | | | 15 | | | (19) | | | 39 |
| Interest expense | | 28 | | | 28 | | | 85 | | | 84 |
| Depreciation, amortization and accretion | | 153 | | | 155 | | | 460 | | | 462 |
EBITDA (Non-GAAP) | | (170) | | | 216 | | | 267 | | | 639 |
Add back or deduct: | | | | | | | | | | | |
| Loss on impairment of goodwill | | 370 | | | – | | | 370 | | | – |
| (Gain) loss on sale of business and other exit costs, net | | (1) | | | – | | | (1) | | | – |
| (Gain) loss on license sales and exchanges, net | | – | | | (7) | | | (19) | | | (16) |
| (Gain) loss on asset disposals, net | | 5 | | | 7 | | | 14 | | | 16 |
Adjusted EBITDA (Non-GAAP) | | 204 | | | 216 | | | 631 | | | 639 |
Deduct: | | | | | | | | | | | |
| Equity in earnings of unconsolidated entities | | 35 | | | 38 | | | 101 | | | 110 |
| Interest and dividend income1 | | 2 | | | 1 | | | 6 | | | 4 |
| Other, net | | – | | | – | | | 1 | | | – |
Adjusted OIBDA (Non-GAAP)1 | | 167 | | | 177 | | | 523 | | | 525 |
Deduct: | | | | | | | | | | | |
| Depreciation, amortization and accretion | | 153 | | | 155 | | | 460 | | | 462 |
| Loss on impairment of goodwill | | 370 | | | – | | | 370 | | | – |
| (Gain) loss on sale of business and other exit costs, net | | (1) | | | – | | | (1) | | | – |
| (Gain) loss on license sales and exchanges, net | | – | | | (7) | | | (19) | | | (16) |
| (Gain) loss on asset disposals, net | | 5 | | | 7 | | | 14 | | | 16 |
Operating income (loss) (GAAP)¹ | $ | (360) | | $ | 22 | | $ | (301) | | $ | 63 |
| | | | | | | | | | | | | |
1 | Equipment installment plan interest income is reflected as a component of Service revenues consistent with the accounting policy change effective January 1, 2017. All prior period numbers have been recast to conform to this accounting change. See Note 1 — Basis of Presentation in the Notes to Consolidated Financial Statements for additional details. |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| (Dollars in millions) | | | | | | | |
| Net income (GAAP) | $ | 69 |
| | $ | 32 |
| | $ | 141 |
| | $ | 90 |
|
| Add back: |
| |
| |
| |
|
| Income tax expense | 4 |
| | 14 |
| | 8 |
| | 41 |
|
| Interest expense | 25 |
| | 29 |
| | 49 |
| | 58 |
|
| Depreciation, amortization and accretion | 178 |
| | 177 |
| | 354 |
| | 345 |
|
| EBITDA (Non-GAAP) | 276 |
| | 252 |
| | 552 |
| | 534 |
|
| Add back or deduct: |
| |
| |
| |
|
| (Gain) loss on asset disposals, net | 4 |
| | 5 |
| | 8 |
| | 7 |
|
| (Gain) loss on sale of business and other exit costs, net | — |
| | — |
| | — |
| | (2 | ) |
| (Gain) loss on license sales and exchanges, net | — |
| | — |
| | — |
| | (2 | ) |
| Adjusted EBITDA (Non-GAAP) | 280 |
| | 257 |
| | 560 |
| | 537 |
|
| Deduct: |
| |
| |
| |
|
| Equity in earnings of unconsolidated entities | 44 |
| | 40 |
| | 89 |
| | 84 |
|
| Interest and dividend income | 1 |
| | 5 |
| | 5 |
| | 11 |
|
| Other, net | — |
| | — |
| | — |
| | (1 | ) |
| Adjusted OIBDA (Non-GAAP) | 235 |
| | 212 |
| | 466 |
| | 443 |
|
| Deduct: |
| |
| |
| |
|
| Depreciation, amortization and accretion | 178 |
| | 177 |
| | 354 |
| | 345 |
|
| (Gain) loss on asset disposals, net | 4 |
| | 5 |
| | 8 |
| | 7 |
|
| (Gain) loss on sale of business and other exit costs, net | — |
| | — |
| | — |
| | (2 | ) |
| (Gain) loss on license sales and exchanges, net | — |
| | — |
| | — |
| | (2 | ) |
| Operating income (GAAP) | $ | 53 |
| | $ | 30 |
| | $ | 104 |
| | $ | 95 |
|
Free Cash Flow
The following table presents Free cash
flow. Management uses Free cash flow,
as a liquidity measure and itwhich 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 U.S. Cellular 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. | | Nine Months Ended September 30, |
| | 2017 | | 2016 |
(Dollars in millions) | | | | | |
Cash flows from operating activities (GAAP) | $ | 394 | | $ | 415 |
Less: Cash paid for additions to property, plant and equipment | | 252 | | | 280 |
| Free cash flow (Non-GAAP) | $ | 142 | | $ | 135 |
Postpaid ABPU and Postpaid ABPA
U.S. Cellular presents Postpaid ABPU and Postpaid ABPA to reflect the revenue shift from Service revenues to Equipment sales resulting from the increased adoption of equipment installment plans. Postpaid ABPU and Postpaid ABPA, as previously defined herein, are non-GAAP financial measures which U.S. Cellular believes are useful to investors and other users of its financial information in showing trends in both service and equipment sales revenues received from customers.
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
(Dollars and connection counts in millions) | | | | | | | | | | | |
Calculation of Postpaid ARPU | | | | | | | | | | | |
Postpaid service revenues | $ | 586 | | $ | 635 | | $ | 1,791 | | $ | 1,910 |
Average number of postpaid connections | | 4.50 | | | 4.49 | | | 4.48 | | | 4.46 |
Number of months in period | | 3 | | | 3 | | | 9 | | | 9 |
| Postpaid ARPU (GAAP metric) | $ | 43.41 | | $ | 47.08 | | $ | 44.46 | | $ | 47.54 |
| | | | | | | | | | | | | |
Calculation of Postpaid ABPU | | | | | | | | | | | |
Postpaid service revenues | $ | 586 | | $ | 635 | | $ | 1,791 | | $ | 1,910 |
Equipment installment plan billings | | 152 | | | 131 | | | 433 | | | 353 |
| Total billings to postpaid connections | $ | 738 | | $ | 766 | | $ | 2,224 | | $ | 2,263 |
Average number of postpaid connections | | 4.50 | | | 4.49 | | | 4.48 | | | 4.46 |
Number of months in period | | 3 | | | 3 | | | 9 | | | 9 |
| Postpaid ABPU (Non-GAAP metric) | $ | 54.71 | | $ | 56.79 | | $ | 55.21 | | $ | 56.34 |
| | | | | | | | | | | | | |
Calculation of Postpaid ARPA | | | | | | | | | | | |
Postpaid service revenues | $ | 586 | | $ | 635 | | $ | 1,791 | | $ | 1,910 |
Average number of postpaid accounts | | 1.68 | | | 1.69 | | | 1.67 | | | 1.69 |
Number of months in period | | 3 | | | 3 | | | 9 | | | 9 |
| Postpaid ARPA (GAAP metric) | $ | 116.36 | | $ | 125.31 | | $ | 119.26 | | $ | 125.21 |
| | | | | | | | | | | | | |
Calculation of Postpaid ABPA | | | | | | | | | | | |
Postpaid service revenues | $ | 586 | | $ | 635 | | $ | 1,791 | | $ | 1,910 |
Equipment installment plan billings | | 152 | | | 131 | | | 433 | | | 353 |
| Total billings to postpaid accounts | $ | 738 | | $ | 766 | | $ | 2,224 | | $ | 2,263 |
Average number of postpaid accounts | | 1.68 | | | 1.69 | | | 1.67 | | | 1.69 |
Number of months in period | | 3 | | | 3 | | | 9 | | | 9 |
| Postpaid ABPA (Non-GAAP metric) | $ | 146.65 | | $ | 151.16 | | $ | 148.12 | | $ | 148.37 |
|
| | | | | | | |
| | Six Months Ended
June 30, |
| | 2020 | | 2019 |
| (Dollars in millions) | | | |
| Cash flows from operating activities (GAAP) | $ | 692 |
| | $ | 476 |
|
| Less: Cash paid for additions to property, plant and equipment | 471 |
| | 282 |
|
| Free cash flow (Non-GAAP) | $ | 221 |
| | $ | 194 |
|
Goodwill impairment, net of tax
The following non-GAAP financial measure isolates the total effect on net income of the current period loss on impairment of goodwill including tax impacts. U.S. Cellular believes this measure may be useful to investors and other users of its financial information to assist in comparing the current period financial results with periods that were not impacted by such a charge.
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2017 | | 2016 | 2017 | | 2016 |
(Dollars in millions) | | | | | | | | | | | |
Goodwill impairment: | | | | | | | | | | | |
| Loss on impairment of goodwill | $ | 370 | | $ | – | | $ | 370 | | $ | – |
| Tax benefit on impairment of goodwill1 | | (61) | | | – | | | (61) | | | – |
| Goodwill impairment, net of tax (Non-GAAP) | $ | 309 | | $ | – | | $ | 309 | | $ | – |
| | | | | | | | | | | | |
1 | Tax benefit represents the amount associated with the tax-deductible portion of the loss on goodwill impairment. |
U.S. Cellular prepares its consolidated financial statements in accordance with GAAP. U.S. Cellular’s significant accounting policies are discussed in detail in Note 1 — Summary of Significant Accounting Policies and Recent Accounting Pronouncements,
Note 2 — Revenue Recognition and Note 10 — Leases in the Notes to Consolidated Financial Statements and U.S. Cellular’s Application of Critical Accounting Policies and Estimates is discussed in detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are included in U.S. Cellular’s Form 10-K for the year ended December 31,
2016. Effective January 1, 2017, U.S. Cellular elected to change the classification of interest income on equipment installment plan contracts from Interest and dividend income to Service revenues in the Consolidated Statement of Operations. All prior period numbers have been recast to conform to the current year presentation. See Note 1 — Basis of Presentation in the Notes to Consolidated Financial Statements for additional information regarding this accounting change. There were no other material changes to U.S. Cellular’s application of critical accounting policies and estimates during the nine months ended September 30, 2017.
Goodwill Interim Impairment Assessment
U.S. Cellular adopted ASU 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment,in the third quarter of 2017 and applied the guidance to interim goodwill impairment tests. During the third quarter of 2017, U.S. Cellular recorded a loss on impairment of goodwill of $370 million. Further, U.S. Cellular’s asset group was assessed for recoverability, which resulted in no impairment. See Note 6 — Intangible Assets in the Notes to Consolidated Financial Statements for additional details.
Management continues to monitor industry conditions and other economic factors such as the success of new and existing products and services, competition, and/or operational difficulties for negative trends. Such trends if identified, could adversely influence future forecasted cash flows, market prices on key assets such as spectrum licenses or recoverability of long-lived assets, which could result in possible impairments of such assets in future periods.
2019. Recent Accounting Pronouncements
See Note 1 — Basis of Presentation in the Notes to Consolidated Financial Statements for information on recent accounting pronouncements.
Regulatory Matters
FCC Auction 1002
U.S. Cellular
5G Fund
Issuance of a Notice of Proposed Rulemaking (NPRM) was approved at the FCC's Open Meeting on April 23, 2020, seeking comment on a bidderproposal to create a new fund for 5G deployment in rural areas. The proposal includes a 5G fund for rural areas, which would be implemented through a two-phase competitive process, using multi-round auctions to award support to the FCC’s forwardprovider willing to serve each area at required performance levels for the lowest amount of support. The proposed funding is $9 billion to be disbursed over ten years. The proposal seeks comments on the timing for the auction, of 600 MHz spectrum licenses, referredthe approach for determining eligible areas, minimum speed requirements, and a transition plan from legacy support to as Auction 1002, which concluded5G fund support. The NPRM proposes that the 5G fund be in March 2017. In April 2017, the FCC announced by way of public notice that U.S. Cellular was the winning bidder for 188 licenses for an aggregate purchase price of $329 million. Prior to commencementlieu of the forward auction, U.S. Cellular made an upfront payment to the FCC of $143 million in June 2016. U.S. Cellular paid the remaining $186 million to the FCC and was granted the licenses during the second quarter of 2017. FCC Mobility Fund Phase II Order
In October 2011, the FCC adopted its USF/Intercarrier Compensation Transformation Order (USF Order). Pursuant to this order, U.S. Cellular’s then current Federal USF support was to be phased down at the rate of 20% per year beginning July 1, 2012. The USF Order contemplated the establishment of a new mobile USF program and provided for a pause in the phase down if that program was not timely implemented by July 2014. Thepreviously proposed fund (the Phase II Connect America Mobility Fund (MF2) was not operational as of July 2014 and, therefore, as provided byFund) for the USF Order, the phase down was suspended at 60% of the baseline amount until such time as the FCC had taken steps to establish the MF2. In February 2017, the FCC adopted the MF2 Order addressing the framework for MF2 and the resumption of the phase down. The MF2 Order establishes a support fund of $453 million annually for ten years to be distributed through a market-based, multi-round reverse auction. The MF2 Order further states that the phase down of legacy support for areas that do not receive support under MF2 will commence on the first day of the month following the completion of the auction and will conclude two years later.
In August 2017, the FCC adopted the MF2 Challenge Process Order, which laid out procedures for establishing areas that would be eligible for support under the MF2 program. This will include a collection process to be followed by a challenge window, a challenge response window, and finally adjudication of any coverage disputes. In September 2017, the FCC issued a public notice initiating the collectiondevelopment of 4G LTE coverage data. Responses submitting the collected data are due on January 4, 2018.
In October 2017, the FCC issued a public notice proposing and seeking comment on detailed challenge procedures and a schedule for the challenge process. Under this proposal, the challenge window would begin no earlier than four weeks after the January 4 collection date and would last 150 days. No earlier than five business days after the close of the challenge window, the FCC would open a thirty-day challenge response window. Following the challenge response window, the FCC would adjudicate any disputes. This entire process must be completed before an auction can be commenced.
LTE. U.S. Cellular cannot predict at this time when the MF25G fund auction will occur, if ever, when the phase down period for its existing legacy support from the Federal USF will commence, or whether the MF25G fund auction will provide opportunities to U.S. Cellular to offset any loss in existing support. However, the
FCC has indicated that it currently plans to hold the MF2 auction in 2018. U.S. Cellular currently expects that its legacy support will continue at the current level for the remainder of 2017.FCC Notice of Proposed Rulemaking – “Restoring- Restoring Internet Freedom”
Freedom
In MayDecember 2017, the FCC adopted a Notice of Proposed Rulemaking (NPRM) proposing to reviseapproved rules reversing or revising decisions made in the FCC’s 2015 Open Internet and Title II Order (Restoring Internet Freedom). If adopted as proposed,The 2017 action reversed the item would reverse the FCC’s 2015 decision to reclassify Broadband Internet Access Services as telecommunications services subject to regulation under Title II of the Telecommunications Act. The NPRM2017 action also sought commentreversed the FCC’s 2015 restrictions on blocking, throttling and paid prioritization, and modified transparency rules adopted as partrelating to such practices. Several parties filed suit in federal court challenging the 2017 actions. On October 1, 2019, the Court of Appeals for the FCC’s previous rulemaking.The NPRM is subjectD.C. Circuit issued an order reaffirming the FCC in most respects, but limiting the FCC's ability to publicpreempt state and local net neutrality laws. On February 19, 2020, the FCC issued a Public Notice seeking comment andon three issues under further actionconsideration by the FCC and any final rulesbased on a recent D.C. Circuit decision.
A number of states, including certain states in which U.S. Cellular operates, have adopted
may differ from those proposedor considered laws intended to reinstate aspects of the foregoing net neutrality regulations that were reversed or revised by the FCC in
2017. To the
NPRM. Also, there may beextent such laws are enacted, it is expected that legal proceedings
will be pursued challenging
any rule changes that are ultimately adopted. such laws, subject now to the DC Circuit ruling limiting the FCC's preemptive authority in this matter. U.S. Cellular cannot predict the outcome of these proceedings or the impact on its business.Other Regulatory Matters
Spectrum Auctions
On July 11, 2019, the FCC released a Public Notice establishing procedures for an auction offering wireless spectrum licenses in the 37, 39 and 47 GHz bands (Auction 103). On March 12, 2020, the FCC announced by public notice that U.S. Cellular was the provisional winning bidder for 237 wireless spectrum licenses for a purchase price of $146 million. In March 2017, bothJune 2020, the U.S. Senate and U.S. House of Representatives approved a joint resolution under the Congressional Review Act to repeal regulations approvedwireless spectrum licenses from Auction 103 were granted by the FCC.
On March 2, 2020, the FCC released a Public Notice establishing procedures for an auction offering wireless spectrum licenses in October 2016 governing consumer privacy by broadband Internet service providers. The President approved the resolution in April 2017. The repeal removed the pending FCC rules, which would have gone into effect in 2017. The rules would have prohibited broadband internet service providers from sharing certain sensitive customer information unless customers opted in and expressly agreed to share such information.3.5 GHz band (Auction 105). On May 5, 2020, U.S. Cellular will continuefiled an application to protect customer informationparticipate in accordance with Section 222 ofAuction 105 and on July 1, 2020, the Telecommunications ActFCC announced that U.S. Cellular was a qualified bidder for the auction. Bidding commenced on July 23, 2020.
Rural Digital Opportunity Fund
On January 30, 2020, the FCC adopted the Rural Digital Opportunity Fund Report and its publicly available Privacy Statement until such time as regulators adopt other privacy requirements. Order, which establishes the framework for the Rural Digital Opportunity Fund (Auction 904). Auction 904 is a two phase reverse auction to provide funding for high speed fixed broadband service in underserved rural areas. Phase I is scheduled to begin on October 29, 2020. On July 15, 2020, U.S. Cellular filed an application to participate in Auction 904.
Private Securities Litigation Reform Act of 1995
Safe Harbor Cautionary Statement
This Form 10-Q, including exhibits, contains statements that are not based on historical facts and represent forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, that address activities, events or developments that U.S. Cellular intends, expects, projects, believes, estimates, plans or anticipates will or may occur in the future are forward-looking statements. The words “believes,” “anticipates,” “estimates,” “expects,” “plans,” “intends,” “projects” and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include,
but are not limited to, those set forth below, as more fully described under “Risk Factors” in U.S. Cellular’s Form 10-K for the year ended December 31,
2016.2019 and in this Form 10-Q. Each of the following risks could have a material adverse effect on U.S. Cellular’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. U.S. Cellular undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. You should carefully consider the Risk Factors in U.S. Cellular’s Form 10-K for the year ended December 31,
2016,2019, the following factors and other information contained in, or incorporated by reference into, this Form 10-Q to understand the material risks relating to U.S. Cellular’s business, financial condition or results of operations.
Intense competition in the markets in which U.S. Cellular operates could adversely affect U.S. Cellular’s revenues or increase its costs to compete.A failure by U.S. Cellular to successfully execute its business strategy (including planned acquisitions, spectrum acquisitions, divestitures and exchanges) or allocate resources or capital could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.Uncertainty in U.S. Cellular’s future cash flow and liquidity or in the ability to access capital, deterioration in the capital markets, other changes in U.S. Cellular’s performance or market conditions, changes in U.S. Cellular’s credit ratings or other factors could limit or restrict the availability of financing on terms and prices acceptable to U.S. Cellular, which could require U.S. Cellular to reduce its construction, development or acquisition programs, reduce the acquisition of spectrum licenses, and/or reduce or cease share repurchases.U.S. Cellular 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.Changes in roaming practices or other factors could cause U.S. Cellular's roaming revenues to decline from current levels, roaming expenses to increase from current levels and/or impact U.S. Cellular's ability to service its customers in geographic areas where U.S. Cellular does not have its own network, which could have an adverse effect on U.S. Cellular's business, financial condition or results of operations.A failure by U.S. Cellular 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 U.S. Cellular’s business, financial condition or results of operations.To the extent conducted by the FCC, U.S. Cellular may participate in FCC auctions of additional spectrum in the future directly or indirectly and, during certain periods, will be subject to the FCC’s anti-collusion rules, which could have an adverse effect on U.S. Cellular.Failure by U.S. Cellular to timely or fully comply with any existing applicable legislative and/or regulatory requirements or changes thereto could adversely affect U.S. Cellular’s business, financial condition or results of operations.An inability to attract people of outstanding potential, 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 U.S. Cellular's business, financial condition or results of operations.U.S. Cellular’s assets 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.U.S. Cellular’s smaller scale relative to larger competitors that may have greater financial and other resources than U.S. Cellular could cause U.S. Cellular to be unable to compete successfully, which could adversely affect its business, financial condition or results of operations.
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| ▪ | The impact of the COVID-19 pandemic on U.S. Cellular's business is uncertain, but depending on its duration and severity it could have a material adverse effect on U.S. Cellular's business, financial condition or results of operations. |
Changes in various business factors, including changes in demand, customer preferences and perceptions, price competition, churn from customer switching activity and other factors, could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations. Advances or changes in technology could render certain technologies used by U.S. Cellular obsolete, could put U.S. Cellular at a competitive disadvantage, could reduce U.S. Cellular’s revenues or could increase its costs of doing business.Complexities associated with deploying new technologies present substantial risk and U.S. Cellular investments in unproven technologies may not produce the benefits that U.S. Cellular expects.U.S. Cellular receives regulatory support and is subject to numerous surcharges and fees from federal, state and local governments, and the applicability and the amount of the support and fees are subject to great uncertainty, which could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations. Performance under device purchase agreements could have a material adverse impact on U.S. Cellular's business, financial condition or results of operations. Changes in U.S. Cellular’s enterprise value, changes in the market supply or demand for wireless licenses, adverse developments in the business or the industry in which U.S. Cellular is involved and/or other factors could require U.S. Cellular to recognize impairments in the carrying value of its licenses, goodwill and/or physical assets.Costs, integration problems or other factors associated with acquisitions, divestitures or exchanges of properties or licenses and/or expansion of U.S. Cellular’s business could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.U.S. Cellular offers customers the option to purchase certain devices under installment contracts which, compared to fixed-term service contracts, includes risks that U.S. Cellular may possibly incur greater churn, lower cash flows, increased costs and/or increased bad debts expense due to differences in contract terms, which could have an adverse impact on U.S. Cellular’s financial condition or results of operations.A failure by U.S. Cellular 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 U.S. Cellular does business, including changes in U.S. Cellular's relationships with or financial or operational difficulties of key suppliers or independent agents and third party national retailers who market U.S. Cellular’s services, could adversely affect U.S. Cellular’s business, financial condition or results of operations.U.S. Cellular has significant investments in entities that it does not control. Losses in the value of such investments could have an adverse effect on U.S. Cellular’s financial condition or results of operations.A failure by U.S. Cellular to maintain flexible and capable telecommunication networks or information technology, or a material disruption thereof, could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations. U.S. Cellular 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 U.S. Cellular's business, financial condition or results of operations.The market price of U.S. Cellular’s Common Shares is subject to fluctuations due to a variety of factors.Changes in facts or circumstances, including new or additional information, could require U.S. Cellular to record charges in excess of amounts accrued in the financial statements, which could have an adverse effect on U.S. Cellular’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 U.S. Cellular’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 U.S. Cellular’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 U.S. Cellular’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 such as pacemakers, could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
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| ▪ | Intense competition in the markets in which U.S. Cellular operates could adversely affect U.S. Cellular’s revenues or increase its costs to compete. |
| |
| ▪ | A failure by U.S. Cellular to successfully execute its business strategy (including planned acquisitions,spectrum acquisitions,divestitures and exchanges) or allocate resources or capital effectively could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations. |
| |
| ▪ | Uncertainty in U.S. Cellular’s future cash flow and liquidity or the inability to access capital, deterioration in the capital markets, other changes in U.S. Cellular’s performance or market conditions, changes in U.S. Cellular’s credit ratings or other factors could limit or restrict the availability of financing on terms and prices acceptable to U.S. Cellular, which could require U.S. Cellular to reduce its construction, development or acquisition programs, reduce the amount of wireless spectrum licenses acquired, and/or reduce or cease share repurchases. |
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| ▪ | U.S. Cellular has a significant amount of indebtedness which could adversely affect its financial performance andin turn adversely affectits ability to make payments on its indebtedness,comply with terms of debt covenants and incur additional debt. |
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| ▪ | Changes in roaming practices or other factorscould cause U.S. Cellular's roaming revenues to decline from current levels, roaming expenses to increase from current levelsand/or impact U.S. Cellular's ability to service its customers in geographic areas where U.S. Cellular does not have its own network, which could have an adverse effect on U.S. Cellular's business, financial condition or results of operations. |
| |
| ▪ | A failure by U.S. Cellular toobtain 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 U.S. Cellular’s business, financial condition or results of operations. |
| |
| ▪ | To the extent conducted by the FCC, U.S. Cellularmay participate in FCC auctions foradditional spectrumor for funding in certain Universal Service programsin the future directly or indirectly and, during certain periods, will be subject to the FCC’s anti-collusion rules, which could have an adverse effect on U.S. Cellular. |
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| ▪ | Failure by U.S.Cellular to timely or fully comply with anyexistingapplicablelegislative and/orregulatory requirementsor changes theretocould adversely affect U.S.Cellular’s business, financial condition or results of operations. |
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| ▪ | 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 havean adverse effect on U.S. Cellular's business, financial condition or results of operations. |
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| ▪ | U.S. Cellular’s assetsand revenueare concentrated in the U.S.wireless telecommunications industry. Consequently, itsoperatingresultsmay fluctuate based on factors related primarily to conditions in this industry. |
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| ▪ | U.S. Cellular’ssmallerscale relative to larger competitorsthat may have greater financial and other resources than U.S. Cellular could cause U.S. Cellular to be unable to compete successfully, whichcould adversely affect its business, financial condition or results of operations. |
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| ▪ | 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 U.S.Cellular’s business, financial condition or results of operations. |
| |
| ▪ | Advances or changes in technology could render certain technologies used by U.S. Cellular obsolete, could put U.S. Cellular at a competitivedisadvantage, could reduce U.S.Cellular’s revenues or could increase its costs of doing business. |
| |
| ▪ | Complexities associated with deploying new technologies present substantial riskand U.S. Cellular investments in unproven technologies may not produce thebenefits that U.S. Cellular expects. |
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| ▪ | U.S. Cellularreceives regulatory support andis subject to numerous surcharges and fees from federal, state and local governments, and the applicability and the amount of thesupport andfees are subject to great uncertainty, which could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations. |
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| ▪ | Changes in U.S. Cellular’s enterprise value, changes in the market supply or demand for wireless spectrum licenses, adverse developments in the business or the industry in which U.S.Cellular is involved and/or other factors could require U.S.Cellular to recognize impairments in the carrying value of its wireless spectrum licensesand/or physical assets. |
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| ▪ | Costs, integration problems or other factors associated with acquisitions, divestitures or exchanges of properties or wireless spectrum licenses and/or expansion of U.S. Cellular’s business could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations. |
| |
| ▪ | A failure by U.S.Cellular 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 U.S. Cellular does business, including changes in U.S. Cellular's relationships with or financial or operational difficulties of key suppliers or independent agents and third party national retailers who market U.S. Cellular’sservices, could adversely affect U.S.Cellular’s business, financial condition or results of operations. |
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| ▪ | U.S.Cellular has significant investments in entities that it does not control. Losses in the value of such investments could have an adverse effect on U.S. Cellular’s financial condition or results of operations. |
| |
| ▪ | A failure by U.S. Cellular to maintain flexible and capable telecommunication networks or information technology, or a material disruption thereof, could have an adverse effect on U.S. Cellular’s business, financial condition or resultsof operations. |
| |
| ▪ | U.S. Cellular has experienced, and in the future expects to experience, cyber-attacks or other breaches of network or information technology securityof varying degrees on a regular basis, whichcould have an adverse effect on U.S. Cellular's business, financial condition or results of operations. |
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| ▪ | Changes in facts or circumstances, including new or additional information, could requireU.S. Cellular to record adjustments to amountsreflectedin the financial statements, which could have an adverse effect on U.S.Cellular’s business, financial condition or results of operations. |
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| ▪ | Disruption in credit or other financialmarkets, a deterioration of U.S. or global economic conditions or other events could, among other things, impede U.S. Cellular’s access to or increase the cost of financing its operating and investment activities and/or result in reduced revenues and loweroperating income and cash flows, which would have an adverse effect on U.S. Cellular’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 U.S.Cellular’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 such as pacemakers, could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations. |
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| ▪ | Claims of infringement of intellectual property and proprietary rights of others, primarily involving patent infringement claims, could prevent U.S. Cellular from using necessary technology to provide products or services or subject U.S. Cellular to expensive intellectual property litigation or monetary penalties, which could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations. |
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| ▪ | There are potential conflicts of interests between TDS and U.S.Cellular. |
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| ▪ | Certain matters, such as control by TDS and provisions in the U.S.Cellular Restated Certificate of Incorporation, may serve to discourage or make more difficult a change in control of U.S.Cellular or have other consequences. |
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| ▪ | The market price of U.S. Cellular’s Common Shares is subject to fluctuations due to a variety of factors. |
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| ▪ | Any of the foregoing events or other eventscould 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. |
Claims of infringement of intellectual property and proprietary rights of others, primarily involving patent infringement claims, could prevent U.S. Cellular from using necessary technology to provide products or services or subject U.S. Cellular to expensive intellectual property litigation or monetary penalties, which could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.There are potential conflicts of interests between TDS and U.S. Cellular. Certain matters, such as control by TDS and provisions in the U.S. Cellular Restated Certificate of Incorporation, may serve to discourage or make more difficult a change in control of U.S. Cellular.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.
Risk Factors
In addition to the information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in U.S. Cellular’s Annual Report on Form 10-K for the year ended December 31, 2016,2019, which could materially affect U.S. Cellular’s business, financial condition or future results. The risks described in this Form 10-Q and the Form 10-K for the year ended December 31, 2016,2019, may not be the only risks that could affect U.S. Cellular. Additional unidentified or unrecognized risks and uncertainties could materially adversely affect U.S. Cellular’s business, financial condition and/or operating results. Subject to the foregoing and other than the risk factor set forth below, U.S. Cellular has not identified for disclosure any material changes to the risk factors as previously disclosed in U.S. Cellular’s Annual Report on Form 10-K for the year ended December 31, 2016.2019.
The impact of the COVID-19 pandemic on U.S. Cellular's business is uncertain, but depending on its duration and severity it could have a material adverse effect on U.S. Cellular's business, financial condition or results of operations.
The impact of the recent global spread of COVID-19 on U.S. Cellular's future operations is uncertain. Public health emergencies, such as COVID-19, pose the risk that U.S. Cellular or its associates, agents, partners and suppliers may be unable to conduct business activities for an extended period of time and/or provide the level of service expected. U.S. Cellular's ability to attract customers, maintain an adequate supply chain and execute on its business strategies and initiatives could be negatively impacted by this outbreak. Additionally, COVID-19 has caused and could continue to cause increased unemployment, economic downturn and credit market deterioration, all of which could negatively impact U.S. Cellular. The extent of the impact of COVID-19 on U.S. Cellular's business, financial condition and results of operations will depend on future circumstances, including the severity of the disease, the duration of the outbreak, actions taken by governmental authorities and other possible direct and indirect consequences, all of which are uncertain and cannot be predicted.
Quantitative and Qualitative Disclosures about Market Risk
Refer to the disclosure under Market Risk in U.S. Cellular’s Form 10-K for the year ended December 31,
2016,2019, for additional information, including information regarding required principal payments and the weighted average interest rates related to U.S. Cellular’s Long-term debt. There have been no material changes to such information
sincebetween December 31,
2016. 2019 and June 30, 2020. In April 2020, U.S. Cellular borrowed $125 million under its receivables securitization agreement.
See Note
23 — Fair Value Measurements in the Notes to Consolidated Financial Statements for additional information related to the fair value of U.S. Cellular’s Long-term debt as of
SeptemberJune 30,
2017.2020.
United States Cellular Corporation
Consolidated Statement of Operations
(Unaudited)
| | | | Three Months Ended | | Nine Months Ended |
| | | | September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
(Dollars and shares in millions, except per share amounts) | | | | | | | | | | | |
Operating revenues | | | | | | | | | | | |
| Service | $ | 737 | | $ | 784 | | $ | 2,223 | | $ | 2,330 |
| Equipment sales | | 226 | | | 239 | | | 639 | | | 655 |
| | Total operating revenues | | 963 | | | 1,023 | | | 2,862 | | | 2,985 |
| | | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | |
| System operations (excluding Depreciation, amortization and accretion reported below) | | 185 | | | 196 | | | 549 | | | 572 |
| Cost of equipment sold | | 261 | | | 280 | | | 749 | | | 799 |
| Selling, general and administrative (including charges from affiliates of $20 million and $21 million, respectively, for the three months, and $62 million and $69 million, respectively, for the nine months) | | 350 | | | 370 | | | 1,041 | | | 1,089 |
| Depreciation, amortization and accretion | | 153 | | | 155 | | | 460 | | | 462 |
| Loss on impairment of goodwill | | 370 | | | – | | | 370 | | | – |
| (Gain) loss on asset disposals, net | | 5 | | | 7 | | | 14 | | | 16 |
| (Gain) loss on sale of business and other exit costs, net | | (1) | | | – | | | (1) | | | – |
| (Gain) loss on license sales and exchanges, net | | – | | | (7) | | | (19) | | | (16) |
| | Total operating expenses | | 1,323 | | | 1,001 | | | 3,163 | | | 2,922 |
| | | | | | | | | | | | | | |
Operating income (loss) | | (360) | | | 22 | | | (301) | | | 63 |
| | | | | | | | | | | | | | |
Investment and other income (expense) | | | | | | | | | | | |
| Equity in earnings of unconsolidated entities | | 35 | | | 38 | | | 101 | | | 110 |
| Interest and dividend income | | 2 | | | 1 | | | 6 | | | 4 |
| Interest expense | | (28) | | | (28) | | | (85) | | | (84) |
| Other, net | | – | | | – | | | 1 | | | – |
| | Total investment and other income | | 9 | | | 11 | | | 23 | | | 30 |
| | | | | | | | | | | | | | |
Income (loss) before income taxes | | (351) | | | 33 | | | (278) | | | 93 |
| Income tax expense (benefit) | | (53) | | | 15 | | | (19) | | | 39 |
Net income (loss) | | (298) | | | 18 | | | (259) | | | 54 |
Less: Net income (loss) attributable to noncontrolling interests, net of tax | | 1 | | | 1 | | | 2 | | | 1 |
Net income (loss) attributable to U.S. Cellular shareholders | $ | (299) | | $ | 17 | | $ | (261) | | $ | 53 |
| | | | | | | | | | | | | | |
Basic weighted average shares outstanding | | 85 | | | 85 | | | 85 | | | 85 |
Basic earnings (loss) per share attributable to U.S. Cellular shareholders | $ | (3.51) | | $ | 0.20 | | $ | (3.07) | | $ | 0.63 |
| | | | | | | | | | | | | | |
Diluted weighted average shares outstanding | | 85 | | | 85 | | | 85 | | | 85 |
Diluted earnings (loss) per share attributable to U.S. Cellular shareholders | $ | (3.51) | | $ | 0.20 | | $ | (3.07) | | $ | 0.63 |
| | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| (Dollars and shares in millions, except per share amounts) | | | | | | | |
| Operating revenues | | | | | | | |
| Service | $ | 753 |
| | $ | 757 |
| | $ | 1,515 |
| | $ | 1,498 |
|
| Equipment sales | 220 |
| | 216 |
| | 422 |
| | 441 |
|
| Total operating revenues | 973 |
| | 973 |
| | 1,937 |
| | 1,939 |
|
| | | | | | | | |
| Operating expenses | | | | | | | |
| System operations (excluding Depreciation, amortization and accretion reported below) | 197 |
| | 193 |
| | 377 |
| | 369 |
|
| Cost of equipment sold | 218 |
| | 224 |
| | 435 |
| | 458 |
|
| Selling, general and administrative | 323 |
| | 344 |
| | 659 |
| | 669 |
|
| Depreciation, amortization and accretion | 178 |
| | 177 |
| | 354 |
| | 345 |
|
| (Gain) loss on asset disposals, net | 4 |
| | 5 |
| | 8 |
| | 7 |
|
| (Gain) loss on sale of business and other exit costs, net | — |
| | — |
| | — |
| | (2 | ) |
| (Gain) loss on license sales and exchanges, net | — |
| | — |
| | — |
| | (2 | ) |
| Total operating expenses | 920 |
| | 943 |
| | 1,833 |
| | 1,844 |
|
| | | | | | | | |
| Operating income | 53 |
| | 30 |
| | 104 |
| | 95 |
|
| | | | | | | | |
| Investment and other income (expense) | | | | | | | |
| Equity in earnings of unconsolidated entities | 44 |
| | 40 |
| | 89 |
| | 84 |
|
| Interest and dividend income | 1 |
| | 5 |
| | 5 |
| | 11 |
|
| Interest expense | (25 | ) | | (29 | ) | | (49 | ) | | (58 | ) |
| Other, net | — |
| | — |
| | — |
| | (1 | ) |
| Total investment and other income | 20 |
| | 16 |
| | 45 |
| | 36 |
|
| | | | | | | | |
| Income before income taxes | 73 |
| | 46 |
| | 149 |
| | 131 |
|
| Income tax expense | 4 |
| | 14 |
| | 8 |
| | 41 |
|
| Net income | 69 |
| | 32 |
| | 141 |
| | 90 |
|
| Less: Net income attributable to noncontrolling interests, net of tax | 1 |
| | 1 |
| | 2 |
| | 4 |
|
| Net income attributable to U.S. Cellular shareholders | $ | 68 |
| | $ | 31 |
| | $ | 139 |
| | $ | 86 |
|
| | | | | | | | |
| Basic weighted average shares outstanding | 86 |
| | 87 |
| | 86 |
| | 87 |
|
| Basic earnings per share attributable to U.S. Cellular shareholders | $ | 0.79 |
| | $ | 0.36 |
| | $ | 1.62 |
| | $ | 0.99 |
|
|
|
| |
|
| |
|
| |
|
|
| Diluted weighted average shares outstanding | 87 |
| | 88 |
| | 87 |
| | 88 |
|
| Diluted earnings per share attributable to U.S. Cellular shareholders | $ | 0.78 |
| | $ | 0.35 |
| | $ | 1.59 |
| | $ | 0.97 |
|
The accompanying notes are an integral part of these consolidated financial statements.
United States Cellular Corporation
Consolidated Statement of Cash Flows
(Unaudited)
| | | | | Nine Months Ended |
| | | | | September 30, |
| 2017 | | 2016 |
(Dollars in millions) | | | | | |
Cash flows from operating activities | | | | | |
| Net income (loss) | $ | (259) | | $ | 54 |
| Add (deduct) adjustments to reconcile net income (loss) to net cash flows | | | | | |
| | from operating activities | | | | | |
| | | Depreciation, amortization and accretion | | 460 | | | 462 |
| | | Bad debts expense | | 64 | | | 69 |
| | | Stock-based compensation expense | | 21 | | | 19 |
| | | Deferred income taxes, net | | (73) | | | 11 |
| | | Equity in earnings of unconsolidated entities | | (101) | | | (110) |
| | | Distributions from unconsolidated entities | | 85 | | | 55 |
| | | Loss on impairment of goodwill | | 370 | | | – |
| | | (Gain) loss on asset disposals, net | | 14 | | | 16 |
| | | (Gain) loss on sale of business and other exit costs, net | | (1) | | | – |
| | | (Gain) loss on license sales and exchanges, net | | (19) | | | (16) |
| | | Noncash interest | | 1 | | | 1 |
| | | Other operating activities | | – | | | (2) |
| Changes in assets and liabilities from operations | | | | | |
| | | Accounts receivable | | (16) | | | 1 |
| | | Equipment installment plans receivable | | (164) | | | (160) |
| | | Inventory | | 36 | | | 2 |
| | | Accounts payable | | (58) | | | 45 |
| | | Customer deposits and deferred revenues | | (13) | | | (41) |
| | | Accrued taxes | | 31 | | | 38 |
| | | Accrued interest | | 9 | | | 7 |
| | | Other assets and liabilities | | 7 | | | (36) |
| | | | Net cash provided by operating activities | | 394 | | | 415 |
| | | | | | | | | |
Cash flows from investing activities | | | | | |
| Cash paid for additions to property, plant and equipment | | (252) | | | (280) |
| Cash paid for licenses | | (189) | | | (46) |
| Cash paid for investments | | (50) | | | – |
| Cash received from divestitures and exchanges | | 19 | | | 20 |
| Federal Communications Commission deposit | | – | | | (143) |
| | | | Net cash used in investing activities | | (472) | | | (449) |
| | | | | | | | | |
Cash flows from financing activities | | | | | |
| Repayment of long-term debt | | (9) | | | (8) |
| Common shares reissued for benefit plans, net of tax payments | | 1 | | | 4 |
| Common shares repurchased | | – | | | (2) |
| Payment of debt issuance costs | | – | | | (2) |
| Distributions to noncontrolling interests | | (2) | | | (1) |
| Other financing activities | | – | | | 2 |
| | | | Net cash used in financing activities | | (10) | | | (7) |
| | | | | | | | | |
Net decrease in cash and cash equivalents | | (88) | | | (41) |
| | | | | | | | | |
Cash and cash equivalents | | | | | |
| Beginning of period | | 586 | | | 715 |
| End of period | $ | 498 | | $ | 674 |
| | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. |
|
| | | | | | | |
| | Six Months Ended
June 30, |
| | 2020 | | 2019 |
| (Dollars in millions) | | | |
| Cash flows from operating activities | | | |
| Net income | $ | 141 |
| | $ | 90 |
|
| Add (deduct) adjustments to reconcile net income to net cash flows from operating activities | | | |
| Depreciation, amortization and accretion | 354 |
| | 345 |
|
| Bad debts expense | 45 |
| | 48 |
|
| Stock-based compensation expense | 17 |
| | 25 |
|
| Deferred income taxes, net | 106 |
| | 27 |
|
| Equity in earnings of unconsolidated entities | (89 | ) | | (84 | ) |
| Distributions from unconsolidated entities | 90 |
| | 76 |
|
| (Gain) loss on asset disposals, net | 8 |
| | 7 |
|
| (Gain) loss on sale of business and other exit costs, net | — |
| | (2 | ) |
| (Gain) loss on license sales and exchanges, net | — |
| | (2 | ) |
| Other operating activities | — |
| | 2 |
|
| Changes in assets and liabilities from operations | | | |
| Accounts receivable | 23 |
| | 3 |
|
| Equipment installment plans receivable | 22 |
| | (11 | ) |
| Inventory | 17 |
| | (4 | ) |
| Accounts payable | 55 |
| | (7 | ) |
| Customer deposits and deferred revenues | (10 | ) | | 8 |
|
| Accrued taxes | (67 | ) | | 3 |
|
| Other assets and liabilities | (20 | ) | | (48 | ) |
| Net cash provided by operating activities | 692 |
| | 476 |
|
| | | | |
| Cash flows from investing activities | | | |
| Cash paid for additions to property, plant and equipment | (471 | ) | | (282 | ) |
| Cash paid for licenses | (144 | ) | | (255 | ) |
| Cash received from investments | 1 |
| | 11 |
|
| Cash paid for investments | (1 | ) | | (11 | ) |
| Cash received from divestitures and exchanges | 1 |
| | 32 |
|
| Advance payments for license acquisitions | (16 | ) | | — |
|
| Other investing activities | (1 | ) | | (1 | ) |
| Net cash used in investing activities | (631 | ) | | (506 | ) |
| | | | |
| Cash flows from financing activities | | | |
| Issuance of long-term debt | 125 |
| | — |
|
| Repayment of long-term debt | (4 | ) | | (10 | ) |
| Common Shares reissued for benefit plans, net of tax payments | (8 | ) | | (8 | ) |
| Repurchase of Common Shares | (23 | ) | | — |
|
| Payment of debt issuance costs | (4 | ) | | — |
|
| Distributions to noncontrolling interests | (1 | ) | | (2 | ) |
| Other financing activities | (1 | ) | | (1 | ) |
| Net cash provided by (used in) financing activities | 84 |
| | (21 | ) |
| | | | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | 145 |
| | (51 | ) |
| | | | |
| Cash, cash equivalents and restricted cash | | | |
| Beginning of period | 291 |
| | 583 |
|
| End of period | $ | 436 |
| | $ | 532 |
|
The accompanying notes are an integral part of these consolidated financial statements.
United States Cellular Corporation
Consolidated Balance Sheet
— Assets(Unaudited)
| September 30, | | December 31, |
| 2017 | | 2016 |
(Dollars in millions) | | | | | |
Current assets | | | | | |
| Cash and cash equivalents | $ | 498 | | $ | 586 |
| Short-term investments | | 50 | | | – |
| Accounts receivable | | | | | |
| | Customers and agents, less allowances of $52 and $51, respectively | | 691 | | | 658 |
| | Roaming | | 25 | | | 16 |
| | Affiliated | | – | | | 2 |
| | Other, less allowances of $1 and $1, respectively | | 41 | | | 51 |
| Inventory, net | | 102 | | | 138 |
| Prepaid expenses | | 76 | | | 84 |
| Other current assets | | 21 | | | 23 |
| | | Total current assets | | 1,504 | | | 1,558 |
| | | | | | | | |
Assets held for sale | | 5 | | | 8 |
| | | | | | | | |
Licenses | | 2,225 | | | 1,886 |
Goodwill | | – | | | 370 |
Investments in unconsolidated entities | | 429 | | | 413 |
| | | | | | | | |
Property, plant and equipment | | | | | |
| In service and under construction | | 7,576 | | | 7,712 |
| Less: Accumulated depreciation and amortization | | 5,313 | | | 5,242 |
| | | Property, plant and equipment, net | | 2,263 | | | 2,470 |
| | | | | | | | |
Other assets and deferred charges | | 354 | | | 405 |
| | | | | | | | |
Total assets1 | $ | 6,780 | | $ | 7,110 |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. |
|
| | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
| (Dollars in millions) | | | |
| Current assets | | | |
| Cash and cash equivalents | $ | 418 |
| | $ | 285 |
|
| Accounts receivable | | | |
| Customers and agents, less allowances of $69 and $70, respectively | 874 |
| | 919 |
|
| Roaming | 23 |
| | 27 |
|
| Affiliated | 1 |
| | 1 |
|
| Other, less allowances of $2 and $1, respectively | 56 |
| | 63 |
|
| Inventory, net | 145 |
| | 162 |
|
| Prepaid expenses | 50 |
| | 50 |
|
| Income taxes receivable | 122 |
| | 46 |
|
| Other current assets | 29 |
| | 20 |
|
| Total current assets | 1,718 |
| | 1,573 |
|
| | | | |
| Licenses | 2,621 |
| | 2,471 |
|
| | | | |
| Investments in unconsolidated entities | 445 |
| | 447 |
|
| | | | |
Property, plant and equipment | | | |
| In service and under construction | 8,481 |
| | 8,293 |
|
| Less: Accumulated depreciation and amortization | 6,223 |
| | 6,086 |
|
| Property, plant and equipment, net | 2,258 |
| | 2,207 |
|
| | | | |
| Operating lease right-of-use assets | 914 |
| | 900 |
|
| | | | |
| Other assets and deferred charges | 544 |
| | 566 |
|
| | | | |
Total assets1 | $ | 8,500 |
| | $ | 8,164 |
|
The accompanying notes are an integral part of these consolidated financial statements.
United States Cellular Corporation
Consolidated Balance Sheet — Liabilities and Equity
(Unaudited)
| September 30, | | December 31, |
| 2017 | | 2016 |
(Dollars and shares in millions, except per share amounts) | | | | | |
Current liabilities | | | | | |
| Current portion of long-term debt | $ | 18 | | $ | 11 |
| Accounts payable | | | | | |
| | Affiliated | | 11 | | | 12 |
| | Trade | | 259 | | | 309 |
| Customer deposits and deferred revenues | | 176 | | | 190 |
| Accrued taxes | | 65 | | | 39 |
| Accrued compensation | | 68 | | | 73 |
| Other current liabilities | | 76 | | | 84 |
| | | Total current liabilities | | 673 | | | 718 |
| | | | | | | | |
Deferred liabilities and credits | | | | | |
| Deferred income tax liability, net | | 753 | | | 826 |
| Other deferred liabilities and credits | | 321 | | | 302 |
| | | | | | | | |
Long-term debt, net | | 1,626 | | | 1,618 |
| | | | | | | | |
Commitments and contingencies | | | | | |
| | | | | | | | |
Noncontrolling interests with redemption features | | 1 | | | 1 |
| | | | | | | | |
Equity | | | | | |
| U.S. Cellular 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 85 shares (33 Series A Common and 52 Common Shares) | | | | | |
| | | Par Value ($1.00 per share) ($33 Series A Common and $55 Common Shares) | | 88 | | | 88 |
| | Additional paid-in capital | | 1,543 | | | 1,522 |
| | Treasury shares, at cost, 3 Common Shares | | (120) | | | (136) |
| | Retained earnings | | 1,884 | | | 2,160 |
| | | Total U.S. Cellular shareholders' equity | | 3,395 | | | 3,634 |
| | | | | | | | |
| Noncontrolling interests | | 11 | | | 11 |
| | | | | | | | |
| | Total equity | | 3,406 | | | 3,645 |
| | | | | | | | |
Total liabilities and equity1 | $ | 6,780 | | $ | 7,110 |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. |
| | | | | | | | |
| | | | | | | | |
1 | The consolidated total assets as of September 30, 2017 and December 31, 2016, include assets held by consolidated variable interest entities (VIEs) of $777 million and $827 million, respectively, which are not available to be used to settle the obligations of U.S. Cellular. The consolidated total liabilities as of September 30, 2017 and December 31, 2016, include certain liabilities of consolidated VIEs of $20 million and $19 million, respectively, for which the creditors of the VIEs have no recourse to the general credit of U.S. Cellular. See Note 8 — Variable Interest Entities for additional information. |
|
| |
| |
|
| | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
| (Dollars and shares in millions, except per share amounts) | | | |
| Current liabilities | | | |
| Current portion of long-term debt | $ | 4 |
| | $ | 8 |
|
| Accounts payable | | | |
| Affiliated | 9 |
| | 8 |
|
| Trade | 285 |
| | 296 |
|
| Customer deposits and deferred revenues | 139 |
| | 148 |
|
| Accrued taxes | 30 |
| | 30 |
|
| Accrued compensation | 53 |
| | 76 |
|
| Short-term operating lease liabilities | 112 |
| | 105 |
|
| Other current liabilities | 65 |
| | 79 |
|
| Total current liabilities | 697 |
| | 750 |
|
| | | | |
| Deferred liabilities and credits | | | |
| Deferred income tax liability, net | 613 |
| | 507 |
|
| Long-term operating lease liabilities | 874 |
| | 865 |
|
| Other deferred liabilities and credits | 346 |
| | 319 |
|
| | | | |
| Long-term debt, net | 1,625 |
| | 1,502 |
|
| | | | |
| Commitments and contingencies |
|
| |
|
|
| | | | |
| Noncontrolling interests with redemption features | 11 |
| | 11 |
|
| | | | |
| Equity | | | |
| U.S. Cellular 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 | 1,646 |
| | 1,629 |
|
| Treasury shares, at cost, 2 Common Shares | (70 | ) | | (70 | ) |
| Retained earnings | 2,657 |
| | 2,550 |
|
| Total U.S. Cellular shareholders' equity | 4,321 |
| | 4,197 |
|
| | | | |
| Noncontrolling interests | 13 |
| | 13 |
|
| | | | |
| Total equity | 4,334 |
| | 4,210 |
|
| | | | |
Total liabilities and equity1 | $ | 8,500 |
| | $ | 8,164 |
|
The accompanying notes are an integral part of these consolidated financial statements.
| |
1 | The consolidated total assets as of June 30, 2020 and December 31, 2019, include assets held by consolidated variable interest entities (VIEs) of $1,101 million and $930 million, respectively, which are not available to be used to settle the obligations of U.S. Cellular. The consolidated total liabilities as of June 30, 2020 and December 31, 2019, include certain liabilities of consolidated VIEs of $21 million and $22 million, respectively, for which the creditors of the VIEs have no recourse to the general credit of U.S. Cellular. See Note 10 — Variable Interest Entities for additional information. |
United States Cellular Corporation
Consolidated Statement of Changes in Equity
(Unaudited)
| | U.S. Cellular Shareholders | | | | | | |
| | Series A Common and Common shares | | Additional paid-in capital | | Treasury shares | | Retained earnings | | Total U.S. Cellular shareholders' equity | | Noncontrolling interests | | Total equity |
| |
| |
| |
(Dollars in millions) | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2016 | $ | 88 | | $ | 1,522 | | $ | (136) | | $ | 2,160 | | $ | 3,634 | | $ | 11 | | $ | 3,645 |
Net loss attributable to U.S. Cellular shareholders | | – | | | – | | | – | | | (261) | | | (261) | | | – | | | (261) |
Net income attributable to noncontrolling interests classified as equity | | – | | | – | | | – | | | – | | | – | | | 2 | | | 2 |
Incentive and compensation plans | | – | | | – | | | 16 | | | (15) | | | 1 | | | – | | | 1 |
Stock-based compensation awards | | – | | | 21 | | | – | | | – | | | 21 | | | – | | | 21 |
Distributions to noncontrolling interests | | – | | | – | | | – | | | – | | | – | | | (2) | | | (2) |
Balance, September 30, 2017 | $ | 88 | | $ | 1,543 | | $ | (120) | | $ | 1,884 | | $ | 3,395 | | $ | 11 | | $ | 3,406 |
| | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Cellular Shareholders | | | | |
| | Series A Common and Common shares | | Additional paid-in capital | | Treasury shares | | Retained earnings | | Total U.S. Cellular shareholders' equity | | Noncontrolling interests | | Total equity |
| (Dollars in millions) | | | | | | | | | | | | | |
| March 31, 2020 | $ | 88 |
| | $ | 1,636 |
| | $ | (92 | ) | | $ | 2,620 |
| | $ | 4,252 |
| | $ | 12 |
| | $ | 4,264 |
|
| Cumulative effect of accounting changes | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) | | — |
| | (1 | ) |
| Net income attributable to U.S. Cellular shareholders | — |
| | — |
| | — |
| | 68 |
| | 68 |
| | — |
| | 68 |
|
| Net income attributable to noncontrolling interests classified as equity | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Incentive and compensation plans | — |
| | — |
| | 22 |
| | (30 | ) | | (8 | ) | | — |
| | (8 | ) |
| Stock-based compensation awards | — |
| | 10 |
| | — |
| | — |
| | 10 |
| | — |
| | 10 |
|
| June 30, 2020 | $ | 88 |
| | $ | 1,646 |
| | $ | (70 | ) | | $ | 2,657 |
| | $ | 4,321 |
| | $ | 13 |
| | $ | 4,334 |
|
The accompanying notes are an integral part of these consolidated financial statements.
United States Cellular Corporation
Consolidated Statement of Changes in Equity
(Unaudited)
| | U.S. Cellular Shareholders | | | | | | |
| | Series A Common and Common shares | | Additional paid-in capital | | Treasury shares | | Retained earnings | | Total U.S. Cellular shareholders' equity | | Noncontrolling interests | | Total equity |
| |
| |
| |
(Dollars in millions) | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2015 | $ | 88 | | $ | 1,497 | | $ | (157) | | $ | 2,133 | | $ | 3,561 | | $ | 10 | | $ | 3,571 |
Net income attributable to U.S. Cellular shareholders | | – | | | – | | | – | | | 53 | | | 53 | | | – | | | 53 |
Net income attributable to noncontrolling interests classified as equity | | – | | | – | | | – | | | – | | | – | | | 1 | | | 1 |
Repurchase of Common shares | | – | | | – | | | (2) | | | – | | | (2) | | | – | | | (2) |
Incentive and compensation plans | | – | | | – | | | 23 | | | (19) | | | 4 | | | – | | | 4 |
Stock-based compensation awards | | – | | | 19 | | | – | | | – | | | 19 | | | – | | | 19 |
Distributions to noncontrolling interests | | – | | | – | | | – | | | – | | | – | | | (1) | | | (1) |
Balance, September 30, 2016 | $ | 88 | | $ | 1,516 | | $ | (136) | | $ | 2,167 | | $ | 3,635 | | $ | 10 | | $ | 3,645 |
| | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Cellular Shareholders | | | | |
| | Series A Common and Common shares | | Additional paid-in capital | | Treasury shares | | Retained earnings | | Total U.S. Cellular shareholders' equity | | Noncontrolling interests | | Total equity |
| (Dollars in millions) | | | | | | | | | | | | | |
| March 31, 2019 | $ | 88 |
| | $ | 1,599 |
| | $ | (63 | ) | | $ | 2,497 |
| | $ | 4,121 |
| | $ | 13 |
| | $ | 4,134 |
|
| Cumulative effect of accounting changes | — |
| | — |
| | — |
| | 2 |
| | 2 |
| | — |
| | 2 |
|
| Net income attributable to U.S. Cellular shareholders | — |
| | — |
| | — |
| | 31 |
| | 31 |
| | — |
| | 31 |
|
| Net income attributable to noncontrolling interests classified as equity | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Incentive and compensation plans | — |
| | — |
| | 13 |
| | (21 | ) | | (8 | ) | | — |
| | (8 | ) |
| Stock-based compensation awards | — |
| | 16 |
| | — |
| | — |
| | 16 |
| | — |
| | 16 |
|
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| June 30, 2019 | $ | 88 |
| | $ | 1,615 |
| | $ | (50 | ) | | $ | 2,509 |
| | $ | 4,162 |
| | $ | 13 |
| | $ | 4,175 |
|
The accompanying notes are an integral part of these consolidated financial statements.
United States Cellular Corporation
Consolidated Statement of Changes in Equity
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Cellular Shareholders | | | | |
| | Series A Common and Common shares | | Additional paid-in capital | | Treasury shares | | Retained earnings | | Total U.S. Cellular 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 | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) | | — |
| | (1 | ) |
| Net income attributable to U.S. Cellular shareholders | — |
| | — |
| | — |
| | 139 |
| | 139 |
| | — |
| | 139 |
|
| Net income attributable to noncontrolling interests classified as equity | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Repurchase of Common Shares | — |
| | — |
| | (23 | ) | | — |
| | (23 | ) | | — |
| | (23 | ) |
| Incentive and compensation plans | — |
| | — |
| | 23 |
| | (31 | ) | | (8 | ) | | — |
| | (8 | ) |
| Stock-based compensation awards | — |
| | 17 |
| | — |
| | — |
| | 17 |
| | — |
| | 17 |
|
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| June 30, 2020 | $ | 88 |
| | $ | 1,646 |
| | $ | (70 | ) | | $ | 2,657 |
| | $ | 4,321 |
| | $ | 13 |
| | $ | 4,334 |
|
The accompanying notes are an integral part of these consolidated financial statements.
United States Cellular Corporation
Consolidated Statement of Changes in Equity
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Cellular Shareholders | | | | |
| | Series A Common and Common shares | | Additional paid-in capital | | Treasury shares | | Retained earnings | | Total U.S. Cellular 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 U.S. Cellular shareholders | — |
| | — |
| | — |
| | 86 |
| | 86 |
| | — |
| | 86 |
|
| Net income attributable to noncontrolling interests classified as equity | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| | 5 |
|
| Incentive and compensation plans | — |
| | — |
| | 15 |
| | (23 | ) | | (8 | ) | | — |
| | (8 | ) |
| Stock-based compensation awards | — |
| | 25 |
| | — |
| | — |
| | 25 |
| | — |
| | 25 |
|
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) |
| June 30, 2019 | $ | 88 |
|
| $ | 1,615 |
|
| $ | (50 | ) |
| $ | 2,509 |
| | $ | 4,162 |
| | $ | 13 |
| | $ | 4,175 |
|
The accompanying notes are an integral part of these consolidated financial statements.
United States Cellular Corporation
Notes to Consolidated Financial Statements
Note 1 Basis of Presentation
United States Cellular Corporation (U.S. Cellular), a Delaware
corporation,Corporation, is an
83%82%-owned subsidiary of Telephone and Data Systems, Inc. (TDS).
The accounting policies of U.S. Cellular conform to accounting principles generally accepted in the United States of America (GAAP) as set forth in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC).
Unless otherwise specified, references to accounting provisions and GAAP in these notes refer to the requirements of the FASB ASC. The consolidated financial statements include the accounts of U.S. Cellular, subsidiaries in which it has a controlling financial interest, general partnerships in which U.S. Cellular has a majority partnership interest and certain entities in which U.S. Cellular has a variable interest that
requirerequires consolidation under GAAP.
All material intercompanyIntercompany accounts and transactions have been eliminated.
The unaudited consolidated financial statements included herein have been prepared by U.S. Cellular pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in
annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, U.S. Cellular believes that the disclosures included herein are adequate to make the information presented not misleading. Certain numbers included herein are rounded to millions for ease of presentation; however,
certain calculated amounts and percentages are determined using the unrounded numbers. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in U.S. Cellular’s Annual Report on Form 10-K (Form 10-K) for the year ended December 31,
2016.2019.
The accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring items, unless otherwise disclosed) necessary for the fair statement of U.S. Cellular’s financial position as of
SeptemberJune 30,
20172020 and December 31,
2016,2019 and its results of operations
for the three and nine months ended September 30, 2017 and 2016, and its cash flows and changes in equity for the
ninethree and six months ended
SeptemberJune 30,
20172020 and
2016.2019, and its cash flows for the six months ended June 30, 2020 and 2019. The Consolidated Statement of Comprehensive Income was not included because comprehensive income for the three and
ninesix months ended
SeptemberJune 30,
20172020 and
2016,2019, equaled net income. These results are not necessarily indicative of the results to be expected for the full year. U.S. Cellular has not changed its significant accounting and reporting policies from those disclosed in its Form 10-K for the year ended December 31,
2016,2019 except as
described below.Equipment Installment Plans
noted below for the estimation of credit losses.
Restricted Cash
U.S. Cellular
equipment revenue under equipment installment plan contracts is recognized at the time the device is delivered to the end-user customer for the selling price of the device, net of any deferred imputed interest or trade-in right, if applicable. Imputed interest is reflected as a reduction to the receivable balancepresents restricted cash with cash and
recognized over the duration of the plan as Service revenues. See Note 3 — Equipment Installment Plans. Effective January 1, 2017, U.S. Cellular elected to change the classification of interest income on equipment installment plan contracts from Interest and dividend income to Service revenuescash equivalents in the Consolidated Statement of
Operations. U.S. Cellular believes this classification is preferable because financingCash Flows. The following table provides a reconciliation of
devices as part of enrolling customers for service is an activity that is central to U.S. Cellular’s operations,Cash and
it is consistent with the presentation by otherscash equivalents and restricted cash reported in the
industry. Comparative financial statementsConsolidated Balance Sheet to the total of
prior years have been adjusted to apply the
new classification retrospectively. As a resultamounts in the Consolidated Statement of
this change in classification, Service revenues for the three and nine months ended September 30, 2016, increased by $13 million and $37 million, respectively, from previously reported amounts, with a corresponding decrease in Interest and dividend income. In comparison, Service revenues for the three and nine months ended September 30, 2017, include $19 million and $52 million, respectively, of equipment installment plan interest income. This change did not have an impact on Income before income taxes, Net income, or Earnings per share for the three or nine months ended September 30, 2016, nor did it have a cumulative impact to Retained earningsCash Flows as of
any date presented.June 30, 2020 and December 31, 2019.
|
| | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
| (Dollars in millions) | | | |
| Cash and cash equivalents | $ | 418 |
| | $ | 285 |
|
| Restricted cash included in Other current assets | 18 |
| | 6 |
|
| Cash, cash equivalents and restricted cash in the statement of cash flows | $ | 436 |
| | $ | 291 |
|
Recently Adopted Accounting Pronouncements
In December 2016, the FASB issued Accounting Standards Update 2016-19 Technical Corrections and Improvements (ASU 2016-19). ASU 2016-19 includes an amendment to Accounting Standards Codification Subtopic 350-40, Intangibles – Goodwill and Other – Internal-Use Software, which clarifies that a software license within the scope of the Subtopic will be accounted for as the acquisition of an intangible asset and the incurrence of a liability to the extent that the license fees are not fully paid at acquisition. U.S. Cellular adopted this standard prospectively for all arrangements entered into or materially modified after January 1, 2017.
In January 2017, the FASB issued Accounting Standards Update 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04 eliminates Step 2 of the current goodwill impairment test. Goodwill impairment loss will be measured as the amount by which a reporting unit’s carrying amount exceeds its fair value. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU is effective prospectively for fiscal years beginning after December 15, 2019. Early adoption is permitted. U.S. Cellular elected to early adopt ASU 2017-04 and applied the new guidance to interim goodwill impairment testing performed during the third quarter of 2017. See Note 6 – Intangible Assets for the discussion of U.S. Cellular’s goodwill impairment.
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASU 2014-09) and has since amended the standard with Accounting Standards Update 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, Accounting Standards Update 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net), Accounting Standards Update 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, Accounting Standards Update 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, and Accounting Standards Update 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. These standards replace existing revenue recognition rules with a single comprehensive model to use in accounting for revenue arising from contracts with customers. ASU 2014-09, as amended, impacts U.S. Cellular’s revenue recognition related to the allocation of contract revenues between various services and equipment, and the timing of when those revenues are recognized. In addition, ASU 2014-09 requires deferral of incremental contract acquisition and fulfillment costs and subsequent expense recognition over the contract period or expected customer life. Upon adoption, the cumulative effect adjustment is expected to include the establishment of contract asset and contract liability accounts with a corresponding adjustment to retained earnings to reflect the reallocation of revenues between service and equipment performance obligations for which control is transferred to customers in different periods. Reallocation impacts generally arise when bundle discounts are provided in a contract arrangement that includes equipment and service performance obligations. In these cases, the revenue will be reallocated according to the relative stand-alone selling prices of the performance obligations included in the bundle and this may be different than how the revenue is billed to the customer and recognized under current guidance. In addition, contract cost assets will be established to reflect costs that will be deferred as incremental contract acquisition costs. Incremental contract acquisition costs generally relate to commissions paid to sales associates. U.S. Cellular is required to adopt ASU 2014-09, as amended, on January 1, 2018. Early adoption as of January 1, 2017, is permitted; however, U.S. Cellular did not adopt early. U.S. Cellular expects to transition to the new standard under the modified retrospective transition method whereby a cumulative effect adjustment to retained earnings is recognized upon adoption and the guidance is applied prospectively. U.S. Cellular has identified that new systems, processes and controls are required to adopt ASU 2014-09, as amended. U.S. Cellular has substantially completed the design and development of new systems to perform revenue recognition accounting under the provisions of ASU 2014-09, as amended, and is currently engaged in the process of testing these new systems. U.S. Cellular is evaluating the effects that adoption of ASU 2014-09, as amended, will have on its financial position and results of operations.
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (ASU 2016-02). ASU 2016-02 requires lessees to record a right-of-use asset and lease liability for almost all leases. This ASU does not substantially impact the lessor accounting model. However, some changes to the lessor accounting guidance were made to align with lessee accounting changes within Accounting Standards Codification (ASC) 842, Leases and certain key aspects of ASC 606, Revenue from Contracts with Customers. U.S. Cellular is required to adopt ASU 2016-02 on January 1, 2019. Early adoption is permitted. Upon adoption of ASU 2016-02, U.S. Cellular expects a substantial increase to assets and liabilities on its balance sheet. U.S. Cellular is evaluating the full effect that adoption of ASU 2016-02 will have on its financial condition, results of operations and disclosures.
In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments –- Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 and subsequently amended the standard with additional Accounting Standards Updates, collectively referred to as ASC 326. This standard requires entities to use a new forward-looking, expected loss model to estimate credit losses. It alsolosses and requires additional disclosuredisclosures relating to the credit quality of trade and other receivables, including information relating to management’s estimate of credit allowances.receivables. U.S. Cellular is required to adopt ASU 2016-13adopted the provisions of ASC 326 on January 1, 2020. Early adoption as of January 1, 2019 is permitted.2020, using a modified retrospective method. Under this method, U.S. Cellular applied the new accounting standard only to the most recent period presented, recognizing the cumulative effect of the accounting change, if any, as an adjustment to the beginning balance of retained earnings. Accordingly, prior periods have not been recast to reflect the new accounting standard. The cumulative effect of applying the provisions of ASC 326 had no material impact on retained earnings.
U.S. Cellular’s accounts receivable consist primarily of amounts owed by customers for wireless services and equipment sales, including sales of certain devices and accessories under installment plans, by agents and third-party distributors for sales of equipment to them, by third party vendors and by other wireless carriers whose customers have used U.S. Cellular’s wireless systems.
U.S. Cellular 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 doubtful accounts is
evaluating the
effects that adoptionbest estimate of
ASU 2016-13 willthe amount of expected credit losses related to existing accounts receivable. U.S. Cellular does not have
onany off-balance sheet credit exposure related to its
financial position, results of operations and disclosures.customers.
In February 2017,August 2018, the FASB issued Accounting Standards Update 2017-05, 2018-15, Intangibles - Goodwill and Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets: Clarifying the Scope of Asset Derecognition Guidance and- Internal-Use Software: Customer's Accounting for Partial Sales of Nonfinancial Assets (ASU 2017-05)Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15). ASU 2017-05 clarifies how entities account2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the derecognitionexisting guidance for capitalizing implementation costs for an arrangement that has a software license. The service element of a nonfinancial asset and adds guidance for partial saleshosting arrangement will continue to be expensed as incurred. Any capitalized implementation costs will be amortized over the period of nonfinancial assets.the service contract. U.S. Cellular's hosting arrangements that are service contracts consist primarily of software used to perform administrative functions. U.S. Cellular is required to adoptadopted ASU 2017-052018-15 on January 1, 2018. Early adoption is permitted.2020, using the prospective method. The adoption of ASU 2017-05 is2018-15 did not expected to have a significant impact on U.S. Cellular’sCellular's financial position or results of operations. Note 2 Revenue Recognition
Disaggregation of Revenue
In
May 2017, the
FASB issued Accounting Standards Update 2017-09, Compensation – Stock Compensation (ASU 2017-09). ASU 2017-09 clarifies when changes tofollowing table, U.S. Cellular's revenues are disaggregated by type of service, which represents the terms or conditionsrelevant categorization of share-based payment awards must be accountedrevenues for as modifications. U.S. Cellular, is required to adopt ASU 2017-09 on January 1, 2018. Early adoption is permitted. The adoptionand timing of ASU 2017-09 is not expected to have a significant impact on U.S. Cellular’s financial position or results of operations.In July 2017, the FASB issued Accounting Standards Update 2017-11, Earnings Per Share, Distinguishing Liabilities from Equity, Derivativesrecognition. Service revenues are recognized over time and Hedging: I. Accounting for Certain Financial Instruments with Down Round Features, II.Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (ASU 2017-11). The amendmentsEquipment sales are point in Part I of ASU 2017-11 that relate to liability or equity classification of financial instruments (or embedded features) affect all entities that issue financial instruments (for example, warrants or convertible instruments) that include down round features. The amendments in Part II ASU 2017-11 do not have an accounting effect since the amendments only replace the indefinite deferral of certain guidance with a scope exception. U.S. Cellular is required to adopt ASU 2017-11 on January 1, 2019. Early adoption is permitted. The adoption of ASU 2017-11 is not expected to have a significant impact on U.S. Cellular’s financial position or results of operations.
time. Table of Contents
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| (Dollars in millions) | | | | | | | |
| Revenues from contracts with customers: | | | | | | | |
| Retail service | $ | 658 |
| | $ | 662 |
| | $ | 1,329 |
| | $ | 1,322 |
|
| Inbound roaming | 41 |
| | 44 |
| | 77 |
| | 78 |
|
| Other service | 35 |
| | 35 |
| | 71 |
| | 66 |
|
| Service revenues from contracts with customers | 734 |
| | 741 |
| | 1,477 |
| | 1,466 |
|
| Equipment sales | 220 |
| | 216 |
| | 422 |
| | 441 |
|
| Total revenues from contracts with customers | 954 |
| | 957 |
| | 1,899 |
| | 1,907 |
|
| Operating lease income | 19 |
| | 16 |
| | 38 |
| | 32 |
|
| Total operating revenues | $ | 973 |
| | $ | 973 |
| | $ | 1,937 |
| | $ | 1,939 |
|
In August 2017, the FASB issued Accounting Standards Update 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting
Contract Balances
The following table provides balances for
Hedging Activities (ASU 2017-12). ASU 2017-12 amends hedge accounting recognition and presentation requirements to improve transparency and understandability of information disclosed in the financials as well as simplifies the application of hedge accounting guidance. U.S. Cellular is required to adopt ASU 2017-12 on January 1, 2019. Early adoption is permitted. The adoption of ASU 2017-12 is not expected to have a significant impact on U.S. Cellular’s financial position or results of operations.Amounts Collectedcontract assets from Customers and Remitted to Governmental Authorities
U.S. Cellular records amounts collected fromcontracts with customers, and remitted to governmental authorities on a net basis within a tax liability account if the tax is assessed upon the customer and U.S. Cellular merely acts as an agent in collecting the tax on behalf of the imposing governmental authority. If the tax is assessed upon U.S. Cellular, then amounts collected from customers as recovery of the taxwhich are recorded in ServiceOther 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 amounts remittedOther deferred liabilities and credits in the Consolidated Balance Sheet.
|
| | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
| (Dollars in millions) | | | |
| Contract assets | $ | 9 |
| | $ | 7 |
|
| Contract liabilities | $ | 151 |
| | $ | 154 |
|
Revenue recognized related to governmental authoritiescontract liabilities existing at January 1, 2020 was $110 million for the six months ended June 30, 2020.
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 June 30, 2020 and may vary from actual results. As practical expedients, revenue related to contracts of less than one year, generally month-to-month contracts, and contracts with a fixed per-unit price and variable quantity, are excluded from these estimates.
|
| | | |
| | Service Revenues |
| (Dollars in millions) | |
| Remainder of 2020 | $ | 158 |
|
| 2021 | 116 |
|
| Thereafter | 175 |
|
| Total | $ | 449 |
|
Contract Cost Assets
U.S. Cellular expects that commission fees paid as a result of obtaining contracts are recoverable and, therefore, U.S. Cellular 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 $123 million at June 30, 2020, and $133 million at December 31, 2019, 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 $26 million and $53 million for the three and six months ended June 30, 2020, respectively, and $27 million and $55 million for the three and six months ended June 30, 2019, respectively, and was included 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 $14 million and $42 million for the three and nine months ended September 30, 2017, respectively, and $15 million and $49 million for the three and nine months ended September 30, 2016, respectively.expenses.
Note 23 Fair Value Measurements As of
SeptemberJune 30,
20172020 and December 31,
2016,2019, U.S. Cellular 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.
U.S. Cellular 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 | | September 30, 2017 | | December 31, 2016 |
| | | | Book Value | | Fair Value | | Book Value | | Fair Value |
(Dollars in millions) | | | | | | | | | | | | | |
Cash and cash equivalents | 1 | | $ | 498 | | $ | 498 | | $ | 586 | | $ | 586 |
Short-term Investments | 1 | | | 50 | | | 50 | | | – | | | – |
Long-term debt | | | | | | | | | | | | | |
| Retail | 2 | | | 917 | | | 970 | | | 917 | | | 929 |
| Institutional | 2 | | | 534 | | | 572 | | | 533 | | | 532 |
| Other | 2 | | | 194 | | | 194 | | | 203 | | | 203 |
| | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | | | June 30, 2020 | | December 31, 2019 |
| | Level within the Fair Value Hierarchy | | Book Value | | Fair Value | | Book Value | | Fair Value |
| (Dollars in millions) | | | | | | | | | |
| Cash and cash equivalents | 1 | | $ | 418 |
| | $ | 418 |
| | $ | 285 |
| | $ | 285 |
|
| Long-term debt | | | | | | | | | |
| Retail | 2 | | 917 |
| | 916 |
| | 917 |
| | 943 |
|
| Institutional | 2 | | 535 |
| | 630 |
| | 534 |
| | 594 |
|
| Other | 2 | | 208 |
| | 208 |
| | 83 |
| | 83 |
|
The fair
valuevalues of Cash and cash equivalents and Short-term investments approximate their book values due to the short-term nature of these financial instruments. Long-term debt excludes
capital lease obligations,
product financingother installment arrangements, 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 the
6.95% Senior Notes, 7.25% 2063 Senior Notes,
and 7.25% 2064
Senior Notes and 6.95% Senior Notes. U.S. Cellular’s “Institutional” debt consists of the 6.7% Senior Notes which are traded over the counter. U.S. Cellular’s “Other” debt consists of a senior term loan credit
facility.agreement and receivables securitization agreement. U.S. Cellular estimated the fair value of its Institutional and Other debt through a discounted cash flow analysis using the interest rates or estimated yield to maturity for each borrowing, which ranged from
3.90%1.77% to
6.21%5.09% and
3.78%3.55% to
6.93%5.73% at
SeptemberJune 30,
20172020 and December 31,
2016,2019, respectively.
SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | | |
| | | UNITED STATES CELLULAR CORPORATION | |
| | (Registrant)
| (Registrant) |
| | | | |
Date: | November 8, 2017
| August 6, 2020 | /
| /s/ Kenneth R. MeyersLaurent C. Therivel |
| | | Kenneth R. Meyers
| Laurent C. Therivel President and Chief Executive Officer (principal executive officer) | |
| | | | |
Date: | November 8, 2017
| August 6, 2020 | | /s/ Steven T. CampbellDouglas W. Chambers |
| | | Steven T. Campbell
Executive
| Douglas W. Chambers Senior Vice President-Finance,President, Chief Financial Officer and Treasurer (principal financial officer) | |
| | | | |
Date: | November 8, 2017
| August 6, 2020 | | /s/ Douglas D. ShumaAnita J. Kroll |
| | | Douglas D. Shuma
| Anita J. Kroll (principal accounting officer) | |
| | | | |
Date: | November 8, 2017
| August 6, 2020 | | /s/ Douglas W. ChambersJeffrey S. Hoersch |
| | | Douglas W. Chambers
| Jeffrey S. Hoersch Vice President and Controller | |
