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 | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
As of March 31, 2018 2017 Retail Connections – End of Period Postpaid 4,481,000 4,455,000 Prepaid 525,000 480,000 Total 5,006,000 4,935,000 Quarter Ended March 31, 2018 2017 Postpaid Activity: Gross Additions 129,000 146,000 Net Losses (37,000) (27,000) Churn 1.23% 1.29% year. The increase in gross additions was partly offset by higher handset disconnects but drove improved net postpaid activity on a year-over-year basis. Three Months Ended March 31, 2018 2017 Average Revenue Per User (ARPU) $ $ Average Billings Per User (ABPU)1 $ $ Average Revenue Per Account (ARPA) $ $ Average Billings Per Account (ABPA)1 $ $ 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. Three Months Ended March 31, 2018 vs. 2018¹ 2017 2017 (Dollars in millions) Retail service $ $ (1)% Inbound roaming 3% Other (23)% Service revenues (3)% Equipment sales 14% Total operating revenues 1% System operations (excluding Depreciation, amortization and accretion reported below) 2% Cost of equipment sold (4)% Selling, general and administrative (4)% Depreciation, amortization and accretion 3% (Gain) loss on asset disposals, net (62)% (Gain) loss on license sales and exchanges, net 61% Total operating expenses (1)% Operating income $ $ 21% Net income $ $ 97% Adjusted OIBDA (Non-GAAP)2 $ $ 13% Adjusted EBITDA (Non-GAAP)2 $ $ 13% Capital expenditures $ $ 14% 1 As of January 1, 2018, U.S. Cellular adopted ASU 2014-09 using a modified retrospective approach. Under this method, the new accounting standard is applied only to the most recent period presented. See Note 2 — Revenue Recognition in the Notes to Consolidated Financial Statements for additional information. 2 Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure. three months ended March 31, 2019, primarily driven by higher data usage, partially offset by lower rates. Depreciation, amortization and accretion Three Months Ended March 31, 2018 vs. 2018¹ 2017 2017 (Dollars in millions) Operating income $ $ 21% Equity in earnings of unconsolidated entities 16% Interest and dividend income 32% Interest expense (3)% Other, net (22)% Total investment and other income 69% Income before income taxes 27% Income tax expense (33)% Net income 97% Less: Net income attributable to noncontrolling interests, net of tax >100% Net income attributable to U.S. Cellular shareholders $ $ 69% 1 As of January 1, 2018, U.S. Cellular adopted ASU 2014-09 using a modified retrospective approach. Under this method, the new accounting standard is applied only to the most recent period presented. See Note 2 — Revenue Recognition in the Notes to Consolidated Financial Statements for additional information. Act. U.S. Cellular has an unsecured revolving credit March 31, 2019. 2019. agreements. As of March 31, 2018. 2018.GeneralU.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 local focus.OPERATIONS
OPERATIONS
Serves customers with approximately 5.15.0 million connections including 4.54.4 million postpaid, 0.5 million prepaid and 0.1 million reseller and other connections▪ Operates in 2221 states▪ Employs approximately 5,9005,500 associates▪ 6,4736,537 cell sites including 4,0994,106 owned towers in serviceU.S. Cellular Mission and StrategyU.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 2018,2019, U.S. Cellular continues to execute on its strategies to grow and protect its current customer base, grow revenues, drive improvements in the overall cost structure, and invest in its network and online platforms.system capabilities. Strategic efforts include:U.S. Cellular continues to offer 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 fixed wireless broadband. In addition, 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 continues to devote efforts to enhance its network capabilities. VoLTE technology has been launched successfully in Iowa and Wisconsin, and deployments in several additional operating markets will occur later this year. 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. In addition, the deployment of VoLTE technology expands U.S. Cellular’s ability to offer roaming services to other wireless carriers. U.S. Cellular is committed to continuous technology innovation as demonstrated by its ongoing evaluation of 5G technology. U.S. Cellular has successfully tested 5G technology in both indoor and outdoor environments and is currently engaged in efforts related to the development of 5G standards and identifying potential use cases for the technology. When deployed commercially, 5G technology 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.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. ▪ U.S. Cellular continues to offer 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 fixed wireless broadband. In addition, 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 continues to devote efforts to enhance its network capabilities. VoLTE technology has been launched successfully in California, Iowa, Oregon, Washington and Wisconsin, and deployments in several additional operating markets will occur in 2019. 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. In addition, the deployment of VoLTE technology expands U.S. Cellular’s ability to offer roaming services to other wireless carriers.▪ U.S. Cellular also is committed to continuous technology innovation and has begun to deploy 5G technology. 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. U.S. Cellular is working with leading companies in the wireless infrastructure and handset ecosystem to provide rich 5G experiences for customers. In addition, in the markets where U.S. Cellular commercially deploys 5G technology, customers using U.S. Cellular’s 4G LTE network will experience increased network speed due to U.S. Cellular's modernization efforts. ▪ 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.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.5G – fifth generation 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.ASU 2014-09 – the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers,including any subsequent modifications to such guidance. This ASU replaces existing revenue recognition rules with a single comprehensive model to use in accounting for revenue arising from contracts with customers.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. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information.Eligible Telecommunications Carrier (ETC) – designation by states for providing specified services in “high cost” areas which enables participation in universal service support mechanisms.Free Cash Flow – non-GAAP metric defined as Cash flows from operating activities less Cash paid for additions to property, plant and equipment.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. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information.Postpaid Average Billings per Account (Postpaid ABPA) – non-GAAP metric which 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 which 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 which is calculated by dividing total postpaid service revenues by the average number of postpaid accounts and by the number of months in the period.Postpaid Average Revenue per User (Postpaid ARPU) – metric which is calculated by dividing total postpaid service revenues by the average number of postpaid connections and by the number of months in the period.Retail Connections – the sum of postpaid connections and prepaid connections.Tax Act – refers to comprehensive federal tax legislation enacted on December 22, 2017, which made broad and complex changes to the U.S. tax code. Now titled H.R.1, the Tax Act was originally identified as the Tax Cuts and Jobs Act of 2017.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.▪ 4G LTE – fourth generation Long-Term Evolution, which is a wireless technology that enables more network capacity for more data per user as well as faster access to data compared to third generation (3G) technology.▪ 5G – fifth generation wireless technology that 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.▪ 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.▪ Churn Rate – represents the percentage of the connections that disconnect service each month. These rates represent the average monthly churn rate for each respective period.▪ Connections – individual lines of service associated with each device activated by a customer. Connections are associated with all types of devices that connect directly to the U.S. Cellular network.▪ 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.▪ 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.▪ Free Cash Flow – non-GAAP metric defined as Cash flows from operating activities less Cash paid for additions to property, plant and equipment. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information.▪ Gross Additions – represents the total number of new connections added during the period, without regard to connections that were terminated during that period.▪ Machine-to-Machine (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. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information.▪ Partial Economic Areas – service areas of certain FCC licenses based on geography.▪ Postpaid Average Revenue per Account (Postpaid ARPA) – metric which is calculated by dividing total postpaid service revenues by the average number of postpaid accounts and by the number of months in the period.▪ Postpaid Average Revenue per User (Postpaid ARPU) – metric which is calculated by dividing total postpaid service revenues by the average number of postpaid connections and by the number of months in the period.▪ Retail Connections – the sum of postpaid connections and prepaid connections.▪ Tax Act – refers to comprehensive federal tax legislation enacted on December 22, 2017, which made broad changes to the U.S. tax code. Now titled H.R.1, the Tax Act was originally identified as the Tax Cuts and Jobs Act of 2017.▪ Universal Service Fund (USF) – a system of telecommunications collected fees and support payments managed by the FCC intended to promote universal access to telecommunications services in the United States.▪ VoLTE – Voice over Long-Term Evolution is a technology specification that defines the standards and procedures for delivering voice communications and related services over 4G LTE networks.Operational Overview As of March 31, 2019 2018 Retail Connections – End of Period Postpaid 4,440,000 4,481,000 Prepaid 503,000 525,000 Total 4,943,000 5,006,000 
Q1 2019 Q1 2018 Q1 2019 vs.Q1 2018Postpaid Activity and Churn Gross Additions Handsets 102,000 96,000 6 % Connected Devices 35,000 33,000 6 % Total Gross Additions 137,000 129,000 6 % Net (Losses) Handsets (14,000 ) (16,000 ) 13 % Connected Devices (18,000 ) (21,000 ) 14 % Total Net (Losses) (32,000 ) (37,000 ) 14 % Churn Handsets 0.99 % 0.97 % Connected Devices 3.08 % 2.79 % Total Churn 1.26 % 1.23 % Postpaid handset gross additions for the three months ended March 31, 2018,2019 were 96,000, slightly higher than in137,000, an increase of 8,000 when compared to the same period last year. In addition, postpaid handset churn improved year over year, from 1.08% to 0.97%. As a result,Gross additions of both handsets and connected devices were higher, with the net loss on postpaidincrease in handsets for the three months ended March 31, 2018, of 16,000 was significantly reduced from the net lossdriven by more aggressive promotions offered in the first quarter of 2019 compared to the prior year period.Total postpaid net losseschurn increased as heavily discounted tablets sold in connection with various past promotions continue to reach the end of their service contracts, as well as aggressive, industry-wide handset promotional activity.Postpaid Revenue Three Months Ended
March 31, 2019 2018 Average Revenue Per User (ARPU) $ 45.44 $ 44.34 Average Revenue Per Account (ARPA) $ 118.84 $ 118.22 Postpaid ARPU and Postpaid ARPA increased for the three months ended March 31, 2018,2019, when compared to the same period last year, due to net losses forseveral factors including: having proportionately more handset connections, which on a per-unit basis contribute more revenue than connected devices, which reflected both lower tablet gross additionsdevice connections; a shift in mix to higher-priced service plans; and an increase in tablet churn. The decline in tablet gross additions reflects U.S. Cellular‘s decision to curtail promotions of heavily discounted tablets. device protection plan revenues.Financial Overview Three Months Ended
March 31, 2019 2018 2019 vs. 2018 (Dollars in millions) Retail service $ 659 $ 649 2 % Inbound roaming 34 27 22 % Other 48 48 1 % Service revenues 741 724 2 % Equipment sales 225 218 3 % Total operating revenues 966 942 3 % System operations (excluding Depreciation, amortization and accretion reported below) 176 179 (1 )% Cost of equipment sold 233 219 7 % Selling, general and administrative 326 326 – Depreciation, amortization and accretion 169 159 6 % (Gain) loss on asset disposals, net 2 1 55 % (Gain) loss on sale of business and other exit costs, net (2 ) — N/M (Gain) loss on license sales and exchanges, net (2 ) (7 ) 69 % Total operating expenses 902 877 3 % Operating income $ 64 $ 65 (1 )% Net income $ 58 $ 55 6 % Adjusted OIBDA (Non-GAAP)1$ 231 $ 218 6 % Adjusted EBITDA (Non-GAAP)1$ 281 $ 259 8 % Capital expenditures $ 102 $ 70 46 % N/M - Percentage change not meaningful
1Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure. Operating RevenuesThree Months Ended March 31, 2019 and 2018(Dollars in millions)
On January 1, 2018, U.S. Cellular adopted the provisions of ASU 2014-09, using a modified retrospective method. Under this method, the new accounting standard is applied only to the most recent period presented, recognizing the cumulative effect of the accounting change as an adjustment to retained earnings at January 1, 2018. See Note 2 — Revenue Recognition in the Notes to Consolidated Financial Statements for additional details. Postpaid ARPU and Postpaid ARPA decreased for the three months ended March 31, 2018, when compared to the same period last year, reflecting industry-wide price competition resulting in overall price reductions on plan offerings as well as the impact of adopting the provisions of ASU 2014-09, as discussed above. Application of the new accounting standard had the impact of reducing ARPU and ARPA for the three months ended March 31, 2018, by $0.53 and $1.11, respectively. Such factors were partially offset by increases in regulatory cost recovery and Device Protection plan revenues.Under equipment installment plans, customers pay for their wireless devices in installments over a period of time. In order to show the trend in estimated cash collections from postpaid customer billings for both service and equipment, 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 for the three months ended March 31, 2018, due mainly to increased penetration of equipment installment plans. Postpaid ABPU and ABPA increased for the three months ended March 31, 2018, as the increase in equipment installment plan billings more than offset the decline in Postpaid ARPU and ARPA discussed above. ▪ Service revenues consist of:Retail Service –- Charges for access, airtime, roaming, 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 –- Amounts received from the Federal USF, and tower rental revenues. Imputed interest on equipment installment plan contracts is included in 2017; however, it is not included in 2018 due to the impact of adopting the provisions of ASU 2014-09Equipment revenues, consist of:Equipment revenues consist of:▪ Sales of wireless devices and related accessories to new and existing customers, agents, and third-party distributorsKey components of changes in the statement of operations line items were as follows:Total operating revenuesServiceRetail service revenues decreasedincreased for the three months ended March 31, 2018, when compared to the same period last year,2019, primarily as a result of (i) the declineincrease in Postpaid ARPU as previously discussed in the Operational Overview section; and (ii)section.Inbound roaming revenues increased for the impact of adopting the provisions of ASU 2014-09. Federal USF revenue remained flat year over year at $23 million. 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 increased for the three months ended March 31, 2018,2019, due to the impact of adopting the provisions of ASU 2014-09, an increase in the average revenue per device sold, a mix shift from feature phones and connected devices to higher end smartphone devices, and an increase in accessories revenues. Such factors were partially offset by a decrease in the number of devices soldsold.System operations expensesSystem operations expenses decreased for the three months ended March 31, 2019, due to (i) lower customer usage expenses driven primarily by decreased circuit costs and a reduction(ii) lower maintenance, utility and cell site rent expenses. Such factors were offset by an increase in guarantee liability amortization for equipment installment contractsroaming expense as a result of changes in plan offerings.See Note 2 — Revenue Recognition in the Notes to Consolidated Financial Statements for additional details on the financial statement impacthigher data roaming usage, partially offset by lower rates.Cost of ASU 2014-09.System operations expensesSystem operations expensesequipment soldCost of equipment sold increased for the three months ended March 31, 2018,2019, due to a higher maintenance, utility and cell site expenses largely reflecting increased cell site rent and tower maintenance and repair costs. Such factors wereaverage cost per device sold, partially offset by a decrease in roaming expenses primarily driven by lower data roaming rates, partially offset by increased data roaming usage.Cost of equipment soldCost of equipment sold decreased for the three months ended March 31, 2018, mainly due to a decrease in the number of devices sold as well as the impact of adopting the provisions of ASU 2014-09. Such factors were partially offset by increases due to a mix shift from feature phones and connected devices to higher cost smartphones, an increase in the average cost per device sold, and an increase in accessories cost.Loss on equipment sold, defined as Equipment sales revenues less Cost of equipment sold, was $1 million and $38 million for the three months ended March 31, 2018 and 2017, respectively. Selling, general and administrative expensesSelling expenses decreased by $4 million for the three months ended March 31, 2018, due to lower advertising expenses and lower commissions expenses.
sold.General and administrative expenses decreased by $9 million for the three months ended March 31, 2018, mainly due to lower expenses for bad debts driven primarily by improved receivables collectability, lower employee related and consulting expenses, as well as reductions in numerous other general and administrative expense categories.Depreciation, amortization, and accretion increased for the three months ended March 31, 2018, due primarily to an increase in amortization expense related to billing system upgrades.(Gain) loss on license sales and exchanges, netNet gains in 2018 and 2017 were2019, due to gains recognized on license saleadditional network assets being placed into service and exchange transactions with various third parties. Components of Other Income (Expense) Three Months Ended
March 31, 2019 2018 2019 vs. 2018 (Dollars in millions) Operating income $ 64 $ 65 (1 )% Equity in earnings of unconsolidated entities 44 38 16 % Interest and dividend income 6 4 59 % Interest expense (29 ) (29 ) – Other, net — (1 ) 92 % Total investment and other income 21 12 65 % Income before income taxes 85 77 10 % Income tax expense 27 22 20 % Net income 58 55 6 % Less: Net income attributable to noncontrolling interests, net of tax 4 10 (64 )% Net income attributable to U.S. Cellular shareholders $ 54 $ 45 22 % Equity in earnings of unconsolidated entitiesEquity 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 by the equity method. U.S. Cellular’s investment in the Los Angeles SMSA Limited Partnership (LA Partnership) contributed $19$21 million and $16$19 million to Equity in earnings of unconsolidated entities for the three months ended March 31, 20182019 and 2017,2018, respectively. See Note 87 — Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.Interest and dividend incomeInterest and dividend income increased as a result of an increase in U.S. Cellular's money market investments balance, classified within Cash and cash equivalents, in 2019.Income tax expenseThe effective tax rate on Income before income taxes for the three months ended March 31, 2019 and 2018, was 31.4% and 2017, was 28.8% and 54.2%, respectively. The lowerhigher rate in 20182019 as compared to 20172018 is due primarily to a discrete benefit recorded in the reductionfirst quarter of the U.S. federal corporate tax rate from 35%2018 to 21% asadjust a result ofprovisional estimate made in conjunction with the Tax Act enacted in December 2017, as well as immaterial tax adjustments having a distortive impact on the tax rate in 2017. See Note 5 — Income Taxes in the Notes to Consolidated Financial Statements for additional information related to income taxes.Net income attributable to noncontrolling interests, net of taxNet income attributable to noncontrolling interests, net of tax increased mainly due to out-of-period adjustments recordeddecreased during the three months ended March 31, 2018. U.S. Cellular determined such adjustments were not material2019, due primarily to anyan out-of-period adjustment recorded in the first quarter of the periods impacted.2018. See Note 9 — Variable Interest Entities in the Notes to Consolidated Financial Statements for additional information.Sources of LiquidityU.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 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, U.S. Cellular has incurred negative free cash flow at times in the past and this could occur in the future. However, U.S. Cellular believes that existing cash and investment balances, funds available under its revolving credit facility,and receivables securitization facilityagreements, 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 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, 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. U.S. Cellular is a qualified bidder for spectrum auctions during 2019 (see Regulatory Matters - Millimeter Wave Spectrum Auctions), and expects capital expenditures in 2019 to be higher than in 2018, due primarily to investments to enhance network speed and capacity and to deploy 5G technology. 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,agreement, or to obtain other forms of financing in order to fund potential expenditures. U.S. Cellular’s liquidity would be adversely affected if, among other things, U.S. Cellular is unable to obtain shortshort- or long-term financing on acceptable terms, U.S. Cellular makes significant spectrum license purchases, the LA Partnership discontinues or significantly reduces distributions 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 currently is sub-investment 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 spectrum licenses, and/or reduce or cease share repurchases and/or the payment of dividends. Any of the foregoing developments would have an adverse impact on U.S. Cellular’s business, financial condition or results of 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 EquivalentsCash 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.
At March 31, 2018, U.S. Cellular’s Cash and cash equivalents totaled $509 million compared to $352 million at December 31, 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 March 31, 2019, U.S. Cellular's cash and cash equivalents totaled $648 million compared to $580 million at December 31, 2018.The majority of U.S. Cellular’s Cash and cash equivalents is 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 believes that the credit risk associated with these investments is low.Financingfacilityagreement available for general corporate purposes including spectrum purchases and capital expenditures. This credit facilityagreement matures in June 2021.U.S. Cellular’s unused capacity under its revolving credit facility was $298 million asMay 2023. As of March 31, 2018.2019, there were no outstanding borrowings under the revolving credit agreement, except for letters of credit, and the unused borrowing capacity was $298 million.In March 2019, U.S. Cellular amended its senior term loan credit agreement in order to reduce the interest rate. There were no significant changes to the maturity date or other key terms 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 and the senior term loan credit agreement as of that date. U.S. Cellular is in the process of seeking to replace this credit facility with a new facility that would mature in 2023.U.S. Cellular, through its subsidiaries, also has a receivables securitization facilityagreement to permit securitized borrowings using its equipment installment plan receivables for general corporate purposes. The unused capacity under this facilityagreement was $200 million as of March 31, 2018,2019, subject to sufficient collateral to satisfy the asset borrowing base provisions of the facility.agreement. As of March 31, 2018,2019, the USCC Master Note Trust (Trust) held $8$78 million of assets available to be pledged as collateral for the receivables securitization facility.agreement. U.S. Cellular believes that it was in compliance with all of the financial covenants and requirements set forth in its receivables securitization facilityagreement as of that date.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 20182019 and the next four years are $219$200 million, which represent 13%12% of the total gross long-term debt obligation at March 31, 2018.Capital ExpendituresCapital expenditures (i.e., additions to property, plant and equipment and system development expenditures), which include the effects of accruals and capitalized interest, for the three months ended March 31, 20182019 and 2017,2018, were as follows:
Capital Expenditures(Dollars in millions)
U.S. Cellular’s capital expenditures for the three months ended March 31, 2019 and 2018, were $102 million and $70 million, respectively.Capital expenditures for the full year 2019 are expected to be between $625 million and $725 million. These expenditures are expected to be used principally for the following purposes:▪ Enhance and maintain U.S. Cellular’s capital expenditures for the three months ended March 31, 2018 and 2017, were $70 million and $61 million, respectively.Capital expenditures for the full year 2018 are expected to be between $500 million and $550 million. These expenditures are expected to be used for the following purposes: EnhanceCellular's network coverage, byincluding 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;▪ Deploy 5G technology; and▪ Invest in information technology to support existing and replace end of life platforms.new services and products.U.S. Cellular plansintends to finance its capital expenditures program for 20182019 using primarily Cash flows from operating activities, existing cash balances and, if required, its receivables securitization and/or revolving credit facilities.Acquisitions, Divestitures and ExchangesU.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. 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 actively seeks attractive opportunities to acquire 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.Variable Interest EntitiesU.S. Cellular consolidates certain “variable interest entities” as defined under GAAP. See Note 9 — 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.Common Share Repurchase ProgramU.S. Cellular has repurchased and expects to continue to repurchase its Common Shares, subject to its repurchase program. However, there were no share repurchases made under this program in the three months ended March 31, 20182019, or in the year ended December 31, 2017.
2018.2018,2019, the total cumulative amount of U.S. Cellular Common Shares authorized to be purchased is 5,900,849.5,901,000. For additional information related to the current repurchase authorization, see Unregistered Sales of Equity Securities and Use of Proceeds. Contractual and Other ObligationsThere were no material changes outside the ordinary course of business between December 31, 20172018 and March 31, 2018,2019, to the Contractual and Other Obligations disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in U.S. Cellular’s Form 10-K for the year ended December 31, 2017.Subsequent to March 31, 2019, U.S. Cellular committed to purchase spectrum licenses in the amount of $120 million, subject to regulatory approval. This purchase obligation is expected to be paid in 2019.Off-Balance Sheet ArrangementsU.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.U.S. Cellular operates a capital- and marketing-intensive business. U.S. Cellular makes substantial investments to acquire wireless 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, and short-term 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 three months ended March 31, 20182019 and 2017.2019 CommentaryU.S. Cellular’s Cash, cash equivalents and restricted cash increased $69 million in the first quarter of 2019. Net cash provided by operating activities was $287 million in 2019 due to net income of $58 million plus non-cash items of $174 million, distributions received from unconsolidated entities of $18 million, and changes in working capital items which increased net cash by $37 million. The working capital changes were primarily influenced by timing of vendor payments and collections of customer and agent receivables, partially offset by annual employee bonus payments.Cash flows used for investing activities were $212 million. Cash paid for additions to property, plant and equipment in 2019 totaled $107 million. Advance payments for license acquisitions were $135 million. These were partially offset by Cash received from divestitures and exchanges of $31 million.Cash flows used for financing activities were $6 million, reflecting ordinary activity such as the scheduled repayments of debt.2018 CommentaryU.S. Cellular’s Cash, cash equivalents and restricted cash increased $158 million in the first quarter of 2018. Net cash provided by operating activities was $188 million in 2018 due primarily to net income of $55 million plus non-cash items of $158 million and distributions received from unconsolidated entities of $17 million. This was partially offset by changes in working capital items which decreased net cash by $42 million. The working capital decrease waschanges were primarily influenced by timing of annual employee bonus, vendor and tax payments, partially offset by collections of customer and agent receivables. The adoption of ASU 2014-09 caused fluctuations in working capital items in the Consolidated Balance Sheet; however, it did not have an impact on total Net cash provided by operating activities.Cash flows used for investing activities were $23 million. Cash paid in 2018 for additions to property, plant and equipment in 2018 totaled $76 million. This was partially offset by cash received forfrom investments of $50 million, resulting from the redemption of short-term Treasury bills.Cash flows used for financing activities were $7 million, reflecting ordinary activity such as the scheduled repayments of debt.2017 CommentaryU.S. Cellular’s Cash, cash equivalents and restricted cash decreased $14 million in 2017. Net cash provided by operating activities was $61 million in 2017, due primarily to net income of $28 million plus non-cash items of $139 million and distributions received from unconsolidated entities of $11 million. This was partially offset by changes in working capital items which decreased cash by $117 million. The decrease in working capital items was due in part to a $44 million increase in equipment installment plan receivables. The decrease was also a result of a $78 million decrease in accounts payable.The net cash provided by operating activities was offset by cash flows used for investing activities of $75 million. Cash paid for additions to property, plant and equipment in the first quarter of 2017 totaled $88 million. Cash paid for acquisitions and licenses was $3 million which was offset by Cash received from divestitures and exchanges of $16 million.
Cash
Seeexchange agreements that U.S. Cellular entered into in 2018 closed in the Consolidated Cash Flow Analysis above for a discussionfirst quarter of cash and cash equivalents.
Short-term investments
Short-term investments decreased $502019.
Other assets and deferred charges
Other assets and deferred charges increased $147 million due primarily to the creation of contract assets and contract cost assets as a result of the adoption of ASU 2014-09.Accounting Standards Codification (ASC) 842. See Note 28 — Revenue RecognitionLeases in the Notes to Consolidated Financial Statements for additional information.
Customer deposits
Customer deposits and deferred revenues decreased $53 million due in large part to the impact of reclassifying certain deferred revenues to charges
Accrued compensation
Accrued compensation
Deferred income tax liability, net
Deferred income tax liability, net, increased $65$93 million due primarily to the adoption of ASU 2014-09 increasingASC 842. See Note 8 — Leases in the net basis of assets on a U.S. GAAP basis without a corresponding increase in tax basis, as well as the impact of full expensing of qualified property additions following the enactment of the Tax Act.
Supplemental Information Relating to Non-GAAP Financial MeasuresU.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. 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 ABPUPostpaid ABPA▪ EBITDA ▪ Adjusted EBITDA ▪ Adjusted OIBDA ▪ Free cash flow Following are explanations of each of these measures.EBITDA, Adjusted EBITDA and Adjusted OIBDAEBITDA, Adjusted EBITDA and Adjusted OIBDA are defined as net income adjusted for the items set forth in the reconciliation below. EBITDA, Adjusted EBITDA and Adjusted OIBDA are not measures of financial performance under GAAP and should not be considered as alternatives to Net income or Cash flows from operating activities, as indicators of cash flows or as measures of liquidity. 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 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, Net income and Operating income.
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1 | As of January 1, 2018, U.S. Cellular adopted ASU 2014-09 using a modified retrospective approach. Under this method, the new accounting standard is applied only to the most recent period presented. See Note 2 — Revenue Recognition in the Notes to Consolidated Financial Statements for additional information. | ||||||
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| 2019 | 2018 | ||||||
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| Net income (GAAP) | $ | 58 | $ | 55 | |||
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| Income tax expense | 27 | 22 | |||||
| Interest expense | 29 | 29 | |||||
| Depreciation, amortization and accretion | 169 | 159 | |||||
| EBITDA (Non-GAAP) | 283 | 265 | |||||
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| (Gain) loss on asset disposals, net | 2 | 1 | |||||
| (Gain) loss on sale of business and other exit costs, net | (2 | ) | — | ||||
| (Gain) loss on license sales and exchanges, net | (2 | ) | (7 | ) | |||
| Adjusted EBITDA (Non-GAAP) | 281 | 259 | |||||
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| Equity in earnings of unconsolidated entities | 44 | 38 | |||||
| Interest and dividend income | 6 | 4 | |||||
| Other, net | — | (1 | ) | ||||
| Adjusted OIBDA (Non-GAAP) | 231 | 218 | |||||
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| Depreciation, amortization and accretion | 169 | 159 | |||||
| (Gain) loss on asset disposals, net | 2 | 1 | |||||
| (Gain) loss on sale of business and other exit costs, net | (2 | ) | — | ||||
| (Gain) loss on license sales and exchanges, net | (2 | ) | (7 | ) | |||
| Operating income (GAAP) | $ | 64 | $ | 65 | |||
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Postpaid ABPU and Postpaid ABPA
U.S. Cellular presents Postpaid ABPU and Postpaid ABPA to reflect estimated cash collections from postpaid customer billings for both service and equipment resulting from the increased adoption of equipment installment plans. Postpaid ABPU and Postpaid ABPA, as previously defined, 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.
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1 | As of January 1, 2018, U.S. Cellular adopted ASU 2014-09 using a modified retrospective approach. Under this method, the new accounting standard is applied only to the most recent period presented. See Note 2 — Revenue Recognition in the Notes to Consolidated Financial Statements for additional information. | ||||||
| Three Months Ended March 31, | |||||||
| 2019 | 2018 | ||||||
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| Cash flows from operating activities (GAAP) | $ | 287 | $ | 188 | |||
| Less: Cash paid for additions to property, plant and equipment | 107 | 76 | |||||
| Free cash flow (Non-GAAP) | $ | 180 | $ | 112 | |||
Application of Critical Accounting Policies and EstimatesU.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 and Note 2 — Revenue Recognition 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, 2017. 2018.
Regulatory MattersFCC Mobility Fund Phase II OrderIn 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. The Phase II Connect America Mobility Fund (MF2) was not operational as of July 2014 and, therefore, as provided by 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. For areas that receive support under MF2, legacy support to MF2 Auction winners will terminate and be replaced with MF2 support effective the first day of the month following release of the public notice closing the auction. Legacy support in areas where the legacy support recipient is not an MF2 winner will be subject to phase down over two years unless there is no winner in a particular census block, in which case it will be continued for one legacy support recipient only. The MF2 Order further states that the phase down of legacy support for areas that were not eligible for 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 collection of 4G LTE coverage data. Responses submitting the collected data were due on January 4, 2018. On February 27, 2018, the FCC issued public notices providing detailed challenge procedures and a schedule for the challenge process. Pursuant to these notices, the challenge window began on March 29, 2018 and will close on August 27, 2018. No earlier than thirty days after the FCC processes the challenges, it will open a thirty-day challenge response window. Following the challenge response window, the FCC will adjudicate any disputes. This entire process must be completed before an auction can be commenced. U.S. Cellular cannot predict at this time when the MF2 auction will occur, when the phase down period for its existing legacy support from the Federal USF will commence, or whether the MF2 auction will provide opportunities to U.S. Cellular to offset any loss in existing support. U.S. Cellular currently expects that its legacy support will continue at the 2017 level through 2018.Millimeter Wave Spectrum AuctionsAt its open meeting on April 17,August 2, 2018, the FCC adopted a public notice seeking comment onestablishing procedures for two auctions of spectrum licenses in the 28 GHz and 24 GHz bands. As proposed, the 28GHzThe 28 GHz auction (Auction 101) would commencecommenced on November 14, 2018 and would offerclosed on January 24, 2019. Auction 101 offered two 425 MHz licenses in the 28 GHz band over portions of the United States that do not have incumbent licensees. Following the completion of Auction 101, the FCC would commence theThe 24 GHz auction (Auction 102), which would offer commenced on March 14, 2019 and is offering up to seven 100 MHz licenses in the 24 GHz band in Partial Economic Areas covering most of the United States. The initial phase of Auction 102 closed on April 17, 2019, and the FCC has announced that the assignment phase for this auction will commence on May 3, 2019. U.S. Cellular filed applications to participate in both auctions on September 18, 2018, and was announced as a qualified bidder for Auction 101 on October 31, 2018 and as a qualified bidder for Auction 102 on February 27, 2019.18Also, at the open meeting on August 2, 2018, the FCC adopted a Further Notice of Proposed Rulemaking in preparation for an additional Millimeter Wave auction offering licenses in the 37, 39 and 47 GHz bands (Auction 103). On April 12, 2019, the FCC announced that it intends to start Auction 103 on December 10, 2019.
2018. Safe Harbor Cautionary StatementThis 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, 2017.2018. 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, 2017,2018, 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 for additional spectrum or for funding in certain Universal Service programs 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 and revenue are concentrated in the U.S. wireless telecommunications industry. Consequently, its operating results may fluctuate based on factors related primarily to conditions in this industry.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.▪ 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.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 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.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 relating to adjustments of amounts reflected 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.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. ▪ 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 spectrum licenses acquired, and/or reduce or cease share repurchases.▪ 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.▪ 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.▪ 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.▪ 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.▪ 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.▪ 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.▪ 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 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.▪ 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.▪ 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 licensesand/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.▪ 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.▪ 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.▪ 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.▪ 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.▪ 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 or have other consequences.▪ The market price of U.S. Cellular’s Common Shares is subject to fluctuations due to a variety of factors.▪ 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.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.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, 2017,2018, 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, 2017,2018, 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, 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, 2017.2018.Quantitative and Qualitative Disclosures about Market RiskMarket RiskRefer to the disclosure under Market Risk in U.S. Cellular’s Form 10-K for the year ended December 31, 2017,2018, 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 since December 31, 2017. See Note 3 — 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 March 31, 2018.2019.
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| Three Months Ended | |||||
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| March 31, | ||||
| 2018 |
| 2017 | |||||
(Dollars and shares in millions, except per share amounts) |
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| |||
Operating revenues |
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| |||
| Service | $ |
| $ | ||||
| Equipment sales |
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| Total operating revenues |
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| |||
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Operating expenses |
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| System operations (excluding Depreciation, amortization and accretion reported below) |
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| Cost of equipment sold |
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| ||||
| Selling, general and administrative (including charges from affiliates of $19 million and $21 million, respectively) |
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| ||||
| Depreciation, amortization and accretion |
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| ||||
| (Gain) loss on asset disposals, net |
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| ||||
| (Gain) loss on license sales and exchanges, net |
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| Total operating expenses |
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Operating income |
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Investment and other income (expense) |
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| Equity in earnings of unconsolidated entities |
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| Interest and dividend income |
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| Interest expense |
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| Other, net |
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| Total investment and other income |
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Income before income taxes |
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| Income tax expense |
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Net income |
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Less: Net income attributable to noncontrolling interests, net of tax |
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Net income attributable to U.S. Cellular shareholders | $ |
| $ | |||||
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Basic weighted average shares outstanding |
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Basic earnings per share attributable to U.S. Cellular shareholders | $ |
| $ | |||||
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Diluted weighted average shares outstanding |
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Diluted earnings per share attributable to U.S. Cellular shareholders | $ |
| $ | |||||
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The accompanying notes are an integral part of these consolidated financial statements. | ||||||||
| Three Months Ended March 31, | |||||||
| 2019 | 2018 | ||||||
| (Dollars and shares in millions, except per share amounts) | |||||||
| Operating revenues | |||||||
| Service | $ | 741 | $ | 724 | |||
| Equipment sales | 225 | 218 | |||||
| Total operating revenues | 966 | 942 | |||||
| Operating expenses | |||||||
| System operations (excluding Depreciation, amortization and accretion reported below) | 176 | 179 | |||||
| Cost of equipment sold | 233 | 219 | |||||
| Selling, general and administrative (including charges from affiliates of $20 million and $19 million, respectively) | 326 | 326 | |||||
| Depreciation, amortization and accretion | 169 | 159 | |||||
| (Gain) loss on asset disposals, net | 2 | 1 | |||||
| (Gain) loss on sale of business and other exit costs, net | (2 | ) | — | ||||
| (Gain) loss on license sales and exchanges, net | (2 | ) | (7 | ) | |||
| Total operating expenses | 902 | 877 | |||||
| Operating income | 64 | 65 | |||||
| Investment and other income (expense) | |||||||
| Equity in earnings of unconsolidated entities | 44 | 38 | |||||
| Interest and dividend income | 6 | 4 | |||||
| Interest expense | (29 | ) | (29 | ) | |||
| Other, net | — | (1 | ) | ||||
| Total investment and other income | 21 | 12 | |||||
| Income before income taxes | 85 | 77 | |||||
| Income tax expense | 27 | 22 | |||||
| Net income | 58 | 55 | |||||
| Less: Net income attributable to noncontrolling interests, net of tax | 4 | 10 | |||||
| Net income attributable to U.S. Cellular shareholders | $ | 54 | $ | 45 | |||
| Basic weighted average shares outstanding | 86 | 85 | |||||
| Basic earnings per share attributable to U.S. Cellular shareholders | $ | 0.63 | $ | 0.52 | |||
| Diluted weighted average shares outstanding | 88 | 86 | |||||
| Diluted earnings per share attributable to U.S. Cellular shareholders | $ | 0.62 | $ | 0.52 | |||
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| Three Months Ended | |||||
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| March 31, | ||||
| 2018 |
| 2017 | ||||||
(Dollars in millions) |
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| ||||
Cash flows from operating activities |
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| ||||
| Net income | $ |
| $ | |||||
| Add (deduct) adjustments to reconcile net income to net cash flows |
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| from operating activities |
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| ||||
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| Depreciation, amortization and accretion |
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| Bad debts expense |
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| Stock-based compensation expense |
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| Deferred income taxes, net |
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| |||
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| Equity in earnings of unconsolidated entities |
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| |||
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| Distributions from unconsolidated entities |
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| |||
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| (Gain) loss on asset disposals, net |
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| |||
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| (Gain) loss on license sales and exchanges, net |
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| |||
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| Noncash interest |
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| |||
| Changes in assets and liabilities from operations |
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| Accounts receivable |
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| Equipment installment plans receivable |
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| |||
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| Inventory |
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| Accounts payable |
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| |||
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| Customer deposits and deferred revenues |
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| |||
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| Accrued taxes |
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| Accrued interest |
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| Other assets and liabilities |
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| Net cash provided by operating activities |
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Cash flows from investing activities |
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| Cash paid for additions to property, plant and equipment |
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| Cash paid for licenses |
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| Cash received for investments |
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| Cash received from divestitures and exchanges |
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| Net cash used in investing activities |
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Cash flows from financing activities |
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| Repayment of long-term debt |
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| Common shares reissued for benefit plans, net of tax payments |
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| Other financing activities |
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| Net cash used in financing activities |
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Net increase (decrease) in cash, cash equivalents and restricted cash |
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Cash, cash equivalents and restricted cash |
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| ||||||
| Beginning of period |
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| |||||
| End of period | $ |
| $ | |||||
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The accompanying notes are an integral part of these consolidated financial statements. | |||||||||
| Three Months Ended March 31, | |||||||
| 2019 | 2018 | ||||||
| (Dollars in millions) | |||||||
| Cash flows from operating activities | |||||||
| Net income | $ | 58 | $ | 55 | |||
| Add (deduct) adjustments to reconcile net income to net cash flows from operating activities | |||||||
| Depreciation, amortization and accretion | 169 | 159 | |||||
| Bad debts expense | 24 | 19 | |||||
| Stock-based compensation expense | 9 | 8 | |||||
| Deferred income taxes, net | 17 | 15 | |||||
| Equity in earnings of unconsolidated entities | (44 | ) | (38 | ) | |||
| Distributions from unconsolidated entities | 18 | 17 | |||||
| (Gain) loss on asset disposals, net | 2 | 1 | |||||
| (Gain) loss on sale of business and other exit costs, net | (2 | ) | — | ||||
| (Gain) loss on license sales and exchanges, net | (2 | ) | (7 | ) | |||
| Noncash interest | 1 | 1 | |||||
| Changes in assets and liabilities from operations | |||||||
| Accounts receivable | 31 | 69 | |||||
| Equipment installment plans receivable | (10 | ) | (17 | ) | |||
| Inventory | (15 | ) | (2 | ) | |||
| Accounts payable | 56 | (30 | ) | ||||
| Customer deposits and deferred revenues | 7 | (26 | ) | ||||
| Accrued taxes | 11 | 5 | |||||
| Accrued interest | 9 | 9 | |||||
| Other assets and liabilities | (52 | ) | (50 | ) | |||
| Net cash provided by operating activities | 287 | 188 | |||||
| Cash flows from investing activities | |||||||
| Cash paid for additions to property, plant and equipment | (107 | ) | (76 | ) | |||
| Cash paid for licenses | (1 | ) | (1 | ) | |||
| Cash received from investments | 2 | 50 | |||||
| Cash paid for investments | (1 | ) | — | ||||
| Cash received from divestitures and exchanges | 31 | 4 | |||||
| Advance payments for license acquisitions | (135 | ) | — | ||||
| Other investing activities | (1 | ) | — | ||||
| Net cash used in investing activities | (212 | ) | (23 | ) | |||
| Cash flows from financing activities | |||||||
| Repayment of long-term debt | (5 | ) | (5 | ) | |||
| Common shares reissued for benefit plans, net of tax payments | — | 2 | |||||
| Distributions to noncontrolling interests | (1 | ) | — | ||||
| Other financing activities | — | (4 | ) | ||||
| Net cash used in financing activities | (6 | ) | (7 | ) | |||
| Net increase in cash, cash equivalents and restricted cash | 69 | 158 | |||||
| Cash, cash equivalents and restricted cash | |||||||
| Beginning of period | 583 | 352 | |||||
| End of period | $ | 652 | $ | 510 | |||
March 31, |
| December 31, | ||||||
| 2018 |
| 2017 | |||||
(Dollars in millions) |
|
|
|
|
| |||
Current assets |
|
|
|
|
| |||
| Cash and cash equivalents | $ |
| $ | ||||
| Short-term investments |
|
|
| ||||
| Accounts receivable |
|
|
| ||||
|
| Customers and agents, less allowances of $56 and $55, respectively |
|
|
| |||
|
| Roaming |
|
|
| |||
|
| Affiliated |
|
|
| |||
|
| Other, less allowances of $1 and $1, respectively |
|
|
| |||
| Inventory, net |
|
|
| ||||
| Prepaid expenses |
|
|
| ||||
| Other current assets |
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| ||||
|
|
| Total current assets |
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| ||
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| ||
Assets held for sale |
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| |||||
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| ||
Licenses |
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| |||||
|
|
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|
| ||
Investments in unconsolidated entities |
|
|
| |||||
|
|
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| ||
Property, plant and equipment |
|
|
| |||||
| In service and under construction |
|
|
| ||||
| Less: Accumulated depreciation and amortization |
|
|
| ||||
|
|
| Property, plant and equipment, net |
|
|
| ||
|
|
|
|
|
|
| ||
Other assets and deferred charges |
|
|
| |||||
|
|
|
|
|
|
| ||
Total assets1 | $ |
| $ | |||||
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements. | ||||||||
| March 31, 2019 | December 31, 2018 | ||||||
| (Dollars in millions) | |||||||
| Current assets | |||||||
| Cash and cash equivalents | $ | 648 | $ | 580 | |||
| Short-term investments | 17 | 17 | |||||
| Accounts receivable | |||||||
| Customers and agents, less allowances of $66 and $66, respectively | 882 | 908 | |||||
| Roaming | 20 | 20 | |||||
| Affiliated | 1 | 2 | |||||
| Other, less allowances of $2 and $2, respectively | 38 | 46 | |||||
| Inventory, net | 157 | 142 | |||||
| Prepaid expenses | 47 | 63 | |||||
| Other current assets | 29 | 34 | |||||
| Total current assets | 1,839 | 1,812 | |||||
| Assets held for sale | — | 54 | |||||
| Licenses | 2,213 | 2,186 | |||||
| Investments in unconsolidated entities | 468 | 441 | |||||
Property, plant and equipment | |||||||
| In service and under construction | 7,867 | 7,778 | |||||
| Less: Accumulated depreciation and amortization | 5,730 | 5,576 | |||||
| Property, plant and equipment, net | 2,137 | 2,202 | |||||
| Operating lease right-of-use assets | 888 | — | |||||
| Other assets and deferred charges | 684 | 579 | |||||
Total assets1 | $ | 8,229 | $ | 7,274 | |||
March 31, |
| December 31, | ||||||
| 2018 |
| 2017 | |||||
(Dollars and shares in millions, except per share amounts) |
|
|
|
|
| |||
Current liabilities |
|
|
|
|
| |||
| Current portion of long-term debt | $ |
| $ | ||||
| Accounts payable |
|
|
| ||||
|
| Affiliated |
|
|
| |||
|
| Trade |
|
|
| |||
| Customer deposits and deferred revenues |
|
|
| ||||
| Accrued taxes |
|
|
| ||||
| Accrued compensation |
|
|
| ||||
| Other current liabilities |
|
|
| ||||
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| Total current liabilities |
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Deferred liabilities and credits |
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| Deferred income tax liability, net |
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| Other deferred liabilities and credits |
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Long-term debt, net |
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Commitments and contingencies |
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Noncontrolling interests with redemption features |
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Equity |
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| U.S. Cellular shareholders’ equity |
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| Series A Common and Common Shares |
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| Authorized 190 shares (50 Series A Common and 140 Common Shares) |
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| Issued 88 shares (33 Series A Common and 55 Common Shares) |
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| Outstanding 85 shares (33 Series A Common and 52 Common Shares) |
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| Par Value ($1.00 per share) ($33 Series A Common and $55 Common Shares) |
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| Additional paid-in capital |
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| Treasury shares, at cost, 3 Common Shares |
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| Retained earnings |
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| Total U.S. Cellular shareholders' equity |
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| Noncontrolling interests |
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| Total equity |
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Total liabilities and equity1 | $ |
| $ | |||||
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The accompanying notes are an integral part of these consolidated financial statements. | ||||||||
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1 | The consolidated total assets as of March 31, 2018 and December 31, 2017, include assets held by consolidated variable interest entities (VIEs) of $793 million and $785 million, respectively, which are not available to be used to settle the obligations of U.S. Cellular. The consolidated total liabilities as of March 31, 2018 and December 31, 2017, include certain liabilities of consolidated VIEs of $21 million and $24 million, respectively, for which the creditors of the VIEs have no recourse to the general credit of U.S. Cellular. See Note 9 — Variable Interest Entities for additional information. | |||||||
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| March 31, 2019 | December 31, 2018 | ||||||
| (Dollars and shares in millions, except per share amounts) | |||||||
| Current liabilities | |||||||
| Current portion of long-term debt | $ | 19 | $ | 19 | |||
| Accounts payable | |||||||
| Affiliated | 9 | 9 | |||||
| Trade | 355 | 304 | |||||
| Customer deposits and deferred revenues | 164 | 157 | |||||
| Accrued taxes | 34 | 30 | |||||
| Accrued compensation | 42 | 78 | |||||
| Short-term operating lease liabilities | 99 | — | |||||
| Other current liabilities | 80 | 94 | |||||
| Total current liabilities | 802 | 691 | |||||
| Liabilities held for sale | — | 1 | |||||
| Deferred liabilities and credits | |||||||
| Deferred income tax liability, net | 527 | 510 | |||||
| Long-term operating lease liabilities | 858 | — | |||||
| Other deferred liabilities and credits | 296 | 389 | |||||
| Long-term debt, net | 1,601 | 1,605 | |||||
| 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 | 1,599 | 1,590 | |||||
| Treasury shares, at cost, 2 Common Shares | (63 | ) | (65 | ) | |||
| Retained earnings | 2,497 | 2,444 | |||||
| Total U.S. Cellular shareholders' equity | 4,121 | 4,057 | |||||
| Noncontrolling interests | 13 | 10 | |||||
| Total equity | 4,134 | 4,067 | |||||
Total liabilities and equity1 | $ | 8,229 | $ | 7,274 | |||
1 | The consolidated total assets as of March 31, 2019 and December 31, 2018, include assets held by consolidated variable interest entities (VIEs) of $911 million and $868 million, respectively, which are not available to be used to settle the obligations of U.S. Cellular. The consolidated total liabilities as of March 31, 2019 and December 31, 2018, include certain liabilities of consolidated VIEs of $21 million and $23 million, respectively, for which the creditors of the VIEs have no recourse to the general credit of U.S. Cellular. See Note 9 — Variable Interest Entities for additional information. |
| U.S. Cellular Shareholders |
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|
| Series A Common and Common shares |
| Additional paid-in capital |
| Treasury shares |
| Retained earnings |
| Total U.S. Cellular shareholders' equity |
| Noncontrolling interests |
| Total equity | |||||||
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(Dollars in millions) |
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Balance, December 31, 2017 | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ | ||||||||
Cumulative effect of accounting change |
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Net income attributable to U.S. Cellular shareholders |
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Incentive and compensation plans |
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Stock-based compensation awards |
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Balance, March 31, 2018 | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ | ||||||||
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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) | |||||||||||||||||||||||||||
| December 31, 2018 | $ | 88 | $ | 1,590 | $ | (65 | ) | $ | 2,444 | $ | 4,057 | $ | 10 | $ | 4,067 | ||||||||||||
| Net income attributable to U.S. Cellular shareholders | — | — | — | 54 | 54 | — | 54 | ||||||||||||||||||||
| Net income attributable to noncontrolling interests classified as equity | — | — | — | — | — | 4 | 4 | ||||||||||||||||||||
| Incentive and compensation plans | — | — | 2 | (1 | ) | 1 | — | 1 | |||||||||||||||||||
| Stock-based compensation awards | — | 9 | — | — | 9 | — | 9 | ||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | (1 | ) | (1 | ) | ||||||||||||||||||
| March 31, 2019 | $ | 88 | $ | 1,599 | $ | (63 | ) | $ | 2,497 | $ | 4,121 | $ | 13 | $ | 4,134 | ||||||||||||
| U.S. Cellular Shareholders |
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|
| Series A Common and Common shares |
| Additional paid-in capital |
| Treasury shares |
| Retained earnings |
| Total U.S. Cellular shareholders' equity |
| Noncontrolling interests |
| Total equity | |||||||
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(Dollars in millions) |
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Balance, December 31, 2016 | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ | ||||||||
Net income attributable to U.S. Cellular shareholders |
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Net income attributable to noncontrolling interests classified as equity |
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Incentive and compensation plans |
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Stock-based compensation awards |
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Balance, March 31, 2017 | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ | ||||||||
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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) | |||||||||||||||||||||||||||
| December 31, 2017 | $ | 88 | $ | 1,552 | $ | (120 | ) | $ | 2,157 | $ | 3,677 | $ | 10 | $ | 3,687 | ||||||||||||
| Cumulative effect of accounting change | — | — | — | 175 | 175 | 1 | 176 | ||||||||||||||||||||
| Net income attributable to U.S. Cellular shareholders | — | — | — | 45 | 45 | — | 45 | ||||||||||||||||||||
| Incentive and compensation plans | — | — | 4 | (2 | ) | 2 | — | 2 | |||||||||||||||||||
| Stock-based compensation awards | — | 8 | — | — | 8 | — | 8 | ||||||||||||||||||||
| March 31, 2018 | $ | 88 | $ | 1,560 | $ | (116 | ) | $ | 2,375 | $ | 3,907 | $ | 11 | $ | 3,918 | ||||||||||||
| The accompanying notes are an integral part of these consolidated financial statements. | |||||||||||||||||||||||||||
2018. March 31, December 31, 2018 2017 (Dollars in millions) Cash and cash equivalents $ $ Restricted cash included in: Other current assets Cash, cash equivalents and restricted cash in the statement of cash flows $ $ In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments Notes to Consolidated Financial StatementsNote 1 Basis of PresentationUnited 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 require consolidation under GAAP. All material intercompany 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, 2017.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 March 31, 20182019 and December 31, 2017,2018 and its results of operations, cash flows and changes in equity for the three months ended March 31, 20182019 and 2017.2018. The Consolidated Statement of Comprehensive Income was not included because comprehensive income for the three months ended March 31, 20182019 and 2017,2018, 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, 2017,2018, except as described below and as disclosed in Note 2 — Revenue Recognition and Note 8 — Investments in Unconsolidated Entities.U.S. Cellular presents restricted cash with cash and cash equivalents in the Consolidated Statement of Cash Flows. The following table provides a reconciliation of Cash and cash equivalents and restricted cash reported in the Consolidated Balance Sheet to the total of the amounts in the Consolidated Statement of Cash Flows as of March 31, 20182019 and December 31, 2017. March 31, 2019 December 31, 2018 (Dollars in millions) Cash and cash equivalents $ 648 $ 580 Restricted cash included in Other current assets 4 3 Cash, cash equivalents and restricted cash in the statement of cash flows $ 652 $ 583 Recently Issued Accounting Pronouncements Not Yet AdoptedIn 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. Early adoption is permitted; however, U.S. Cellular plans to adopt ASU 2016-02 on a modified retrospective basis when required on January 1, 2019. In January 2018, the FASB issued Accounting Standards Update 2018-01, Leases (ASU 2018-01), which permits an entity to elect an optional transition practical expedient to not evaluate land easements that exist or expired before the entities adoption of ASU 2016-02. U.S. Cellular plans to adopt ASU 2018-01 in conjunction with its adoption of ASU 2016-02. U.S. Cellular is evaluating the full effect that adoption of ASU 2016-02 and ASU 2018-01 will have on its financial condition, results of operations and disclosures. Upon adoption, U.S. Cellular expects a substantial increase to assets and liabilities on its balance sheet and is in the process of implementing a new lease management and accounting system to assist in the application of the new standard.–- Credit Losses: Measurement of Credit Losses on Financial Instruments(ASU (ASU 2016-13). ASU 2016-13 requires entities to use a new forward-looking, expected loss model to estimate credit losses. It also requires additional disclosure relating to the credit quality of trade and other receivables, including information relating to management’s estimate of credit allowances. U.S. Cellular is required to adopt ASU 2016-13 on January 1, 2020, using the modified retrospective approach. Early adoption is permitted as of January 1, 2019.permitted; however, U.S. Cellular does not intend to adopt early. U.S. Cellular is evaluating the effects that adoption of ASU 2016-13 will have on its financial position, results of operations and disclosures.Amounts Collected from Customers and Remitted to Governmental AuthoritiesU.S. Cellular records amounts collected from 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 tax are recorded in Service revenues and amounts remitted to governmental authorities are recorded in Selling, general and administrative expenses in the Consolidated Statement of Operations. The amounts recorded gross in revenues that are billed to customers and remitted to governmental authorities totaled $17 million and $14 million for the three months ended March 31, 2018 and 2017, respectively.
Change in Accounting Policy
As a practical expedient, U.S. Cellular groups similar contracts or similar performance obligations together into portfolios of contracts or performance obligations if doing so does not result in a significant difference from applying the new accounting standard to the individual contracts. U.S. Cellular applies this grouping method for the following types of transactions: device activation fees, contract acquisition costs, and certain customer promotions. Contract portfolios will be recognized over the respective expected customer lives or terms of the contracts.
The line items impacted by the adoption of ASU 2014-09 and ASU 2017-05 in the Consolidated Statement of Operations and the Consolidated Balance Sheet are presented below.
Consolidated Statement of Operations
Results under prior accounting standards |
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| Adjustment |
| As reported | ||||
Three Months Ended March 31, 2018 |
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(Dollars and shares in millions, except per share amounts) |
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Operating revenues |
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Service | $ |
| $ |
| $ | |||
Equipment sales |
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Total operating revenues |
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Cost of equipment sold |
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(Gain) loss on license sales and exchanges, net |
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Total operating expenses |
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Operating income (loss) |
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Income (loss) before income taxes |
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Income tax expense (benefit) |
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Net income (loss) |
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Net income (loss) attributable to U.S. Cellular shareholders |
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Basic earnings (loss) per share attributable to |
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U.S. Cellular shareholders | $ |
| $ |
| $ | |||
Diluted earnings (loss) per share attributable to |
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U.S. Cellular shareholders | $ |
| $ |
| $ | |||
The decrease in Service revenues and the increase in Equipment sales revenues are driven primarily by differences in the timing and classification of revenue recognized for certain arrangements with multiple performance obligations and ceasing to record deferred imputed interest and the resulting interest income on equipment installment contracts. Under prior accounting standards, revenues were allocated to deliverables using the relative selling price method, where consideration was allocated to each element on the basis of its relative selling price. Revenue recognized for the delivered items was limited to the amount due from the customer that was not contingent upon the delivery of additional products or services. Under ASU 2014-09, the revenue allocation of the transaction price is based on the relative standalone selling prices of the individual performance obligations in the customer’s contract, and the resulting revenue attributable to each is recognized as control over the performance obligation is transferred to the customer. This has resulted in increased Equipment sales revenues as more revenue is allocated to discounted equipment than under prior accounting standards. Under prior accounting standards, U.S. Cellular deferred imputed interest related to equipment installment plan receivable contracts that exceeded twelve months, and recognized the corresponding interest income over the contract period in Service revenues. Under the provisions of ASU 2014-09, U.S. Cellular has determined that equipment installment plan contracts do not contain a significant financing component, and accordingly U.S. Cellular ceased recording deferred imputed interest and the resulting interest income on equipment installment contracts upon the adoption of ASU 2014-09.
Cost of equipment sold decreased due to a change in timing of recognition of cost of goods sold in the agent channel. Under prior accounting standards, Equipment sales to agents and the related Cost of equipment sold was recognized when equipment was sold through from the agent to end user customers. In accordance with the provisions of ASU 2014-09, such amounts are recognized when U.S. Cellular delivers the equipment to the agent.
Under ASU 2017-05, (Gain) loss on license sales and exchanges, net is calculated by subtracting the carrying amount of the distinct asset being disposed from the consideration measured and allocated to that distinct asset. The consideration, or transaction price, is the fair value of the licenses received. Under prior accounting standards, the transaction price was typically the fair value of the licenses surrendered. This change in guidance has resulted in a decrease in (Gain) loss on license sales and exchanges, net.
Consolidated Balance Sheet
Results under prior accounting standards |
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| Adjustment |
| As reported | ||||
As of March 31, 2018 |
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(Dollars in millions) |
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Accounts receivable |
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Customers and agents, less allowances | $ |
| $ |
| $ | |||
Roaming |
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Prepaid expenses |
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Other current assets |
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Total current assets |
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Licenses |
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Investments in unconsolidated entities |
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Other assets and deferred charges |
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Total assets |
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Customer deposits and deferred revenues |
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Accrued taxes |
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Other current liabilities |
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Total current liabilities |
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Deferred income tax liability, net |
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Other deferred liabilities and credits |
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Retained earnings |
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Total U.S. Cellular shareholders' equity |
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Noncontrolling interests |
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Total equity |
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Total liabilities and equity |
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As a result of adoption of ASU 2014-09, U.S. Cellular recorded short-term and long-term contract assets and contract liabilities in its Consolidated Balance Sheet as of March 31, 2018. Under ASU 2014-09, the timing of recognition of revenue for each performance obligation may differ from the timing of the customer billing, creating a contract asset or contract liability. See Contract Balances below for additional information. Contract assets are included in Other current assets if short-term in nature or Other assets and deferred charges if long-term in nature. Short-term contract liabilities are classified as Customer deposits and deferred revenues and long-term contract liabilities are included in Other deferred liabilities and credits. Accounts receivable increased as a result of U.S. Cellular ceasing to record deferred imputed interest. Certain prepaid expenses have been reclassified as contract cost assets, which are a component of Other assets and deferred charges. Investments in unconsolidated entities increased due to the cumulative effect of applying the provisions of ASU 2014-09 to certain of U.S. Cellular’s equity method investments as of January 1, 2018. Deferred income tax liabilities, net, increased due to the provisions of ASU 2014-09 increasing the net basis of assets on a U.S. GAAP basis, without a corresponding increase in tax basis. Contract cost assets have also been created as a result of ASU 2014-09 due to capitalization of costs to obtain a new contract. See Contract Cost Assets below for additional information.
The following is a description of principal activities from which U.S. Cellular generates its revenues.
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Significant Judgments
U.S. Cellular sells bundled service and equipment offerings. In these instances, U.S. Cellular recognizes its revenue based on the relative standalone selling prices for each distinct service or equipment performance obligation, or bundles thereof. Revenues from sales of equipment are recognized when control has transferred to the customer. Service revenues are recognized as the related service is provided. Services are deemed to be highly interrelated when the method and timing of transfer and performance risk are the same. Highly interrelated services that are determined to not be distinct have been grouped into a single performance obligation. Each month of services promised is a performance obligation. The series of monthly service performance obligations promised over the course of the contract are combined into a single performance obligation for purposes of the allocation.
U.S. Cellular has made judgments regarding transaction price, including but not limited to issues relating to variable consideration, time value of money and returns. When determined to be significant in the context of the contract, these items are considered in the valuation of transaction price at contract inception or modification, as appropriate.
| Three Months Ended March 31, | |||||||
| 2019 | 2018 | ||||||
| (Dollars in millions) | |||||||
| Revenues from contracts with customers: | |||||||
| Retail service | $ | 659 | $ | 649 | |||
| Inbound roaming | 34 | 27 | |||||
| Other service | 32 | 32 | |||||
| Service revenues from contracts with customers | 725 | 708 | |||||
| Equipment sales | 225 | 218 | |||||
Total revenues from contracts with customers1 | $ | 950 | $ | 926 | |||
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1 |
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For contracts that involve multiple element service and equipment offerings, the transaction price is allocated to each performance obligation based on its relative standalone selling price. When payment is collected in advance of delivery of goods or services, a contract liability is recorded. A contract asset is recorded when revenue is recognized in advance of U.S. Cellular’s right to receive consideration. Once there is an unconditional right to receive the consideration, U.S. Cellular bills the customer under the terms of the respective contract and the amounts are recorded as receivables.
U.S. Cellular recognizes Equipment sales revenue when the equipment is delivered to the customer and a corresponding contract asset or liability is recorded for the difference between the amount of revenue recognized and the amount billed to the customer in cases where discounts are offered. The contract asset or liability is reduced over the contract term as service is provided and billed to the customer.
| March 31, 2019 | December 31, 2018 | ||||||
| (Dollars in millions) | |||||||
| Accounts receivable | |||||||
| Customer and agents | $ | 882 | $ | 908 | |||
| Roaming | 20 | 20 | |||||
| Other | 32 | 32 | |||||
Total1 | $ | 934 | $ | 960 | |||
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1 |
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Accounts | |||
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| Contract Assets | |||
| (Dollars in millions) | |||
| Balance at December 31, 2018 | $ | 9 | |
| Contract additions | 4 | ||
| Reclassified to receivables | (5 | ) | |
| Balance at March 31, 2019 | $ | 8 | |
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| Contract Liabilities | |||
| (Dollars in millions) | |||
| Balance at December 31, 2018 | $ | 163 | |
| Contract additions | 45 | ||
| Terminated contracts | (2 | ) | |
| Revenue recognized | (37 | ) | |
| Balance at March 31, 2019 | $ | 169 | |
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Thereafter |
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| Total | $ | ||
| Service Revenue | |||
| (Dollars in millions) | |||
| Remainder of 2019 | $ | 198 | |
| 2020 | 61 | ||
| Thereafter | 16 | ||
| Total | $ | 275 | |
Contract Cost Assets
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| Level within the Fair Value Hierarchy | Book Value | Fair Value | Book Value | Fair Value | |||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Cash and cash equivalents | 1 | $ | 648 | $ | 648 | $ | 580 | $ | 580 | ||||||||
| Short-term investments | 1 | 17 | 17 | 17 | 17 | ||||||||||||
| Long-term debt | |||||||||||||||||
| Retail | 2 | 917 | 951 | 917 | 850 | ||||||||||||
| Institutional | 2 | 534 | 585 | 534 | 531 | ||||||||||||
| Other | 2 | 177 | 177 | 180 | 180 | ||||||||||||
March 31, 2018 December 31, 2017 (Dollars in millions) Equipment installment plan receivables, gross $ $ Deferred interest Equipment installment plan receivables, net of deferred interest Allowance for credit losses Equipment installment plan receivables, net $ $ Net balance presented in the Consolidated Balance Sheet as: Accounts receivable — Customers and agents (Current portion) $ $ Other assets and deferred charges (Non-current portion) Equipment installment plan receivables, net $ $ 2018. March 31, 2018 December 31, 2017 Lower Risk Higher Risk Total Lower Risk Higher Risk Total (Dollars in millions) Unbilled $ $ $ $ $ $ Billed — current Billed — past due Equipment installment plan receivables, gross $ $ $ $ $ $ March 31, 2018 March 31, 2017 (Dollars in millions) Allowance for credit losses, beginning of period $ $ Bad debts expense Write-offs, net of recoveries Allowance for credit losses, end of period $ $ Three Months Ended March 31, 2018 2017 (Dollars and shares in millions, except per share amounts) Net income attributable to U.S. Cellular shareholders $ $ Weighted average number of shares used in basic earnings per share Effects of dilutive securities Weighted average number of shares used in diluted earnings per share Basic earnings per share attributable to U.S. Cellular shareholders $ $ Diluted earnings per share attributable to U.S. Cellular shareholders $ $Note 4 Equipment Installment PlansU.S. Cellular sells devices to customers under equipment installment plans over a specified time period. For certain equipment installment plans, after a specified period of time or amount of payments, the customer may have the right to upgrade to a new device and have the remaining unpaid equipment installment contract balance waived, subject to certain conditions, including trading in the original device in good working condition and signing a new equipment installment contract. U.S. Cellular values this trade-in right as a guarantee liability. The guarantee liability is initially measured at fair value and is determined based on assumptions including the probability and timing of the customer upgrading to a new device and the fair value of the device being traded-in at the time of trade-in. When a customer exercises the trade-in option, both the outstanding receivable and guarantee liability balances related to the respective device are reduced to zero, and the value of the used device that is received in the transaction is recognized as inventory. If the customer does not exercise the trade-in option at the time of eligibility, U.S. Cellular begins amortizing the liability and records this amortization as additional equipment revenue. As of March 31, 20182019 and December 31, 2017,2018, the guarantee liability related to these plans was $13$11 million and $15 million, respectively, and is reflected in Customer deposits and deferred revenues in the Consolidated Balance Sheet.The following table summarizes equipment installment plan receivables as of March 31, 20182019 and December 31, 2017. March 31, 2019 December 31, 2018 (Dollars in millions) Equipment installment plan receivables, gross $ 975 $ 974 Allowance for credit losses (77 ) (77 ) Equipment installment plan receivables, net $ 898 $ 897 Net balance presented in the Consolidated Balance Sheet as: Accounts receivable — Customers and agents (Current portion) $ 571 $ 560 Other assets and deferred charges (Non-current portion) 327 337 Equipment installment plan receivables, net $ 898 $ 897 U.S. Cellular uses various inputs, including internal data, information from the credit bureaus and other sources, to evaluate the credit profiles of its customers. From this evaluation, a credit class is assigned to the customer that determines the number of eligible lines, the amount of credit available, and the down payment requirement, if any. Customers assigned to credit classes requiring no down payment represent a lower risk category, whereas those assigned to credit classes requiring a down payment represent a higher risk category. The balance and aging of the equipment installment plan receivables on a gross basis by credit category were as follows: March 31, 2019 December 31, 2018 Lower Risk Higher Risk Total Lower Risk Higher Risk Total (Dollars in millions) Unbilled $ 901 $ 13 $ 914 $ 904 $ 17 $ 921 Billed — current 41 1 42 35 1 36 Billed — past due 17 2 19 15 2 17 Equipment installment plan receivables, gross $ 959 $ 16 $ 975 $ 954 $ 20 $ 974 Activity for the three months ended March 31, 20182019 and 2017,2018, in the allowance for credit losses balance for the equipment installment plan receivables was as follows: March 31, 2019 March 31, 2018 (Dollars in millions) Allowance for credit losses, beginning of period $ 77 $ 65 Bad debts expense 18 14 Write-offs, net of recoveries (18 ) (13 ) Allowance for credit losses, end of period $ 77 $ 66 In December 2017, the Tax Act was signed into law. Following the guidance of the FASB’s Accounting Standards Update 2018-05, Income Taxes:Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, tax expense for the year ended December 31, 2017, included a provisional estimate for the impact of the Tax Act on U.S. Cellular’s 2017 depreciation deduction. Tax expense for the three months ended March 31, 2018, includes an income tax benefit of $3 million related to adjusting this provisional estimate. U.S. Cellular has not completed a full analysis of contracts and agreements related to fixed assets placed in service during 2017. U.S. Cellular expects any final adjustments to the provisional amounts to be recorded by the third quarter of 2018, which could be material to U.S. Cellular’s financial statements.Note 65 Earnings Per ShareBasic earnings per share attributable to U.S. Cellular shareholders is computed by dividing Net income attributable to U.S. Cellular shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share attributable to U.S. Cellular shareholders is computed by dividing Net income attributable to U.S. Cellular shareholders by the weighted average number of common shares outstanding during the period adjusted to include the effects of potentially dilutive securities. Potentially dilutive securities primarily include incremental shares issuable upon the exercise of outstanding stock options and the vesting of performance and restricted stock units.The amounts used in computing earnings per common share and the effects of potentially dilutive securities on the weighted average number of common shares were as follows: Three Months Ended
March 31, 2019 2018 (Dollars and shares in millions, except per share amounts) Net income attributable to U.S. Cellular shareholders $ 54 $ 45 Weighted average number of shares used in basic earnings per share 86 85 Effects of dilutive securities 2 1 Weighted average number of shares used in diluted earnings per share 88 86 Basic earnings per share attributable to U.S. Cellular shareholders $ 0.63 $ 0.52 Diluted earnings per share attributable to U.S. Cellular shareholders $ 0.62 $ 0.52 Certain Common Shares issuable upon the exercise of stock options or vesting of performance and restricted stock units were not included in average diluted shares outstanding for the calculation of Diluted earnings per share attributable to U.S. Cellular shareholders because their effects were antidilutive. The number of such Common Shares excluded was less than 1 million and 2 million for both the three months ended March 31, 2019 and 2018, and 2017. respectively.
| Licenses | |||
| (Dollars in millions) | |||
| Balance at December 31, 2018 | $ | 2,186 | |
| Acquisitions | 1 | ||
| Exchanges - Licenses received | 26 | ||
| Balance at March 31, 2019 | $ | 2,213 | |
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March 31, December 31, 2018 2017 (Dollars in millions) Equity method investments $ $ Measurement alternative method investments Total investments in unconsolidated entities $ $ Three Months Ended March 31, 2018 2017 (Dollars in millions) Revenues $ $ Operating expenses Operating income Other expense, net Net income $ $Note 87 Investments in Unconsolidated EntitiesInvestments in unconsolidated entities consist of amounts invested in wireless entities in which U.S. Cellular holds a noncontrolling interest. On January 1, 2018, U.S. Cellular adopted Accounting Standards Update 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01) using the modified retrospective approach. The adoption of ASU 2016-01 did not have a significant impact on U.S. Cellular’s financial position or results of operations. U.S. Cellular’s Investments in unconsolidated entities are accounted for using either the equity method or measurement alternative method as shown in the table below. The measurement alternative method was elected for investments without readily determinable fair values formerly accounted for under the cost method. The measurement alternative fair value represents cost minus any impairments plus or minus any observable price changes. U.S. Cellular did not have an impairment or observable price change related to these investments for the three months ended March 31, 2018. March 31, 2019 December 31, 2018 (Dollars in millions) Equity method investments $ 460 $ 434 Measurement alternative method investments 8 7 Total investments in unconsolidated entities $ 468 $ 441 The following table, which is based in part on information provided by third parties, summarizes the combined results of operations of U.S. Cellular’s equity method investments. Three Months Ended
March 31, 2019 2018 (Dollars in millions) Revenues $ 1,689 $ 1,657 Operating expenses 1,215 1,208 Operating income 474 449 Other income (expense), net (5 ) (1 ) Net income $ 469 $ 448 38Note 8 LeasesChange in Accounting PolicyIn February 2016, the FASB issued Accounting Standards Update 2016-02, Leases and has since amended the standard with Accounting Standards Updates 2018-01, Leases: Land Easement Practical Expedient for Transition to Topic 842, Accounting Standards Update 2018-10, Codification Improvements to Topic 842, Leases, Accounting Standards Update 2018-11, Leases: Targeted Improvements, and Accounting Standards Update 2018-20, Leases: Narrow-Scope Improvements for Lessors, collectively referred to as ASC 842. This standard replaces the previous lease accounting standard under ASC 840 - Leases and requires lessees to record a right-of-use (ROU) asset and lease liability for the majority of leases. U.S. Cellular adopted the provisions of ASC 842 on January 1, 2019, using a modified retrospective method. Under this method, U.S. Cellular elected to apply 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 842 had no impact on retained earnings as of January 1, 2019.U.S. Cellular elected transitional practical expedients for existing leases which eliminated the requirements to reassess existing lease classification, initial direct costs, and whether contracts contain leases. U.S. Cellular also elected the practical expedient related to land easements that allows it to carry forward the accounting treatment for pre-existing land easement agreements.The cumulative effect of the adoption of ASC 842 on U.S. Cellular’s Consolidated Balance Sheet is presented below. December 31, 2018 ASC 842 Adjustment January 1, 2019 (Dollars in millions) Prepaid expenses $ 63 $ (13 ) $ 50 Operating lease right-of-use assets — 899 899 Other assets and deferred charges 579 (12 ) 567 Short-term operating lease liabilities — 101 101 Other current liabilities 94 (8 ) 86 Long-term operating lease liabilities — 878 878 Other deferred liabilities and credits 389 (97 ) 292 As a result of the adoption of ASC 842, U.S. Cellular recorded ROU assets and lease liabilities for its operating leases in its Consolidated Balance Sheet as of January 1, 2019. The lease liabilities are calculated as the discounted value of future lease payments. The difference between the lease liabilities and the corresponding ROU assets is a result of various lease prepayments and straight-line expense recognition deferral balances as of December 31, 2018, which were offset against the ROU assets as of January 1, 2019. Finance leases are included in Property, plant and equipment and Long-term debt, net consistent with presentation under prior accounting standards.Lessee AgreementsA lease is generally present in a contract if the lessee controls the use of identified property, plant or equipment for a period of time in exchange for consideration. Nearly all of U.S. Cellular’s leases are classified as operating leases, although it does have a small number of finance leases. U.S. Cellular’s most significant leases are for land and tower spaces, network facilities, retail spaces, and offices.U.S. Cellular has agreements with both lease and nonlease components, which are accounted for separately. As part of the present value calculation for the lease liabilities, U.S. Cellular uses an incremental borrowing rate as the rates implicit in the leases are not readily determinable. The incremental borrowing rates used for lease accounting are based on U.S. Cellular's unsecured rates, adjusted to approximate what U.S. Cellular would have to borrow on a collateralized basis over a similar period of time as the recognized lease term. U.S. Cellular applies the incremental borrowing rates to lease components using a portfolio approach based upon the length of the lease term. The cost of nonlease components in U.S. Cellular’s lease portfolio (e.g., utilities and common area maintenance) are not typically predetermined at lease commencement and are expensed as incurred at their relative standalone price.Variable lease expense occurs when, subsequent to the lease commencement, lease payments are made that were not originally included in the lease liability calculation. U.S. Cellular’s variable lease payments are primarily a result of leases with escalations that are tied to an index. The incremental changes due to the index changes are recorded as variable lease expense and are not included in the ROU assets or lease liabilities.Lease term recognition determines the periods to allocate expense and also has a significant impact on the lease liability and ROU asset calculations. Many of U.S. Cellular’s leases include renewal and early termination options. At lease commencement, the lease terms include options to extend the lease when U.S. Cellular is reasonably certain that it will exercise the options. The lease terms do not include early termination options unless U.S. Cellular is reasonably certain to exercise the options. Certain asset classes have similar lease characteristics; therefore, U.S. Cellular has applied the portfolio approach for lease term recognition for its tower space, retail, and certain ground lease asset classes.The following table shows the components of lease cost included in the Consolidated Statement of Operations: Three Months Ended
March 31, 2019(Dollars in millions) Operating lease cost $ 40 Variable lease cost 2 Total lease cost $ 42 The following table shows supplemental cash flow information related to lease activities: Three Months Ended
March 31, 2019(Dollars in millions) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 37 ROU assets obtained in exchange for lease obligations: Operating leases $ 20 The following table shows the classification of U.S. Cellular’s operating and finance leases in its Consolidated Balance Sheet: March 31, 2019 (Dollars in millions) Operating Leases Operating lease right-of-use assets $ 888 Short-term operating lease liabilities $ 99 Long-term operating lease liabilities 858 Total operating lease liabilities $ 957 Finance Leases Property, plant and equipment $ 7 Less: Accumulated depreciation and amortization 3 Property, plant and equipment, net $ 4 Current portion of long-term debt $ 1 Long-term debt, net 3 Total finance lease liabilities $ 4 The table below shows a weighted-average analysis for lease term and discount rate for all leases:March 31, 2019 Weighted Average Remaining Lease Term Operating leases 13 years Finance leases 23 years Weighted Average Discount Rate Operating leases 4.5 % Finance leases 7.0 % The maturities of lease liabilities are as follows: Operating Leases Finance Leases (Dollars in millions) Remainder of 2019 $ 108 $ 1 2020 146 1 2021 130 — 2022 113 — 2023 97 — Thereafter 734 12 Total lease payments1$ 1,328 $ 14 Less: Imputed interest 371 10 Present value of lease liabilities $ 957 $ 4
1 | Lease payments exclude $6 million of legally binding lease payments for leases signed but not yet commenced. |
| Three Months Ended March 31, 2019 | |||
| (Dollars in millions) | |||
| Operating lease income | $ | 16 | |
| Operating Leases | |||
| (Dollars in millions) | |||
| Remainder of 2019 | $ | 39 | |
| 2020 | 49 | ||
| 2021 | 37 | ||
| 2022 | 24 | ||
| 2023 | 12 | ||
| Thereafter | 3 | ||
| Total future lease maturities | $ | 164 | |
| Operating Leases Future Minimum Rental Payments | Operating Leases Future Minimum Rental Receipts | ||||||
| (Dollars in millions) | |||||||
| 2019 | $ | 154 | $ | 58 | |||
| 2020 | 143 | 47 | |||||
| 2021 | 128 | 34 | |||||
| 2022 | 112 | 22 | |||||
| 2023 | 97 | 10 | |||||
| Thereafter | 769 | 3 | |||||
| Total | $ | 1,403 | $ | 174 | |||
2018.
| ▪ | Advantage Spectrum, L.P. (Advantage Spectrum) and Sunshine Spectrum, Inc., the general partner of Advantage Spectrum; and |
| ▪ | King Street Wireless, L.P. (King Street Wireless) and King Street Wireless, Inc., the general partner of King Street Wireless. |
In the first quarter of 2018, U.S. Cellular received an initial liquidating distribution of substantially all of the remaining assets of Aquinas Wireless. The final liquidating distribution is expected during the second quarter of 2018, and Aquinas Wireless will then be subsequently dissolved.
The following table presents the classification and balances of the consolidated VIEs’ assets and liabilities in U.S. Cellular’s Consolidated Balance Sheet.
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| Property, plant and equipment, net |
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Liabilities |
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| Current liabilities | $ |
| $ | |||
| Deferred liabilities and credits |
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| Total liabilities | $ |
| $ | ||
| March 31, 2019 | December 31, 2018 | ||||||
| (Dollars in millions) | |||||||
| Assets | |||||||
| Cash and cash equivalents | $ | 8 | $ | 9 | |||
| Short-term investments | 17 | 17 | |||||
| Accounts receivable | 619 | 611 | |||||
| Inventory, net | 4 | 5 | |||||
| Other current assets | 5 | 6 | |||||
| Assets held for sale | — | 4 | |||||
| Licenses | 652 | 652 | |||||
| Property, plant and equipment, net | 92 | 94 | |||||
| Operating lease right-of-use assets | 39 | — | |||||
| Other assets and deferred charges | 339 | 349 | |||||
| Total assets | $ | 1,775 | $ | 1,747 | |||
| Liabilities | |||||||
| Current liabilities | $ | 37 | $ | 34 | |||
| Liabilities held for sale | — | 1 | |||||
| Long-term operating lease liabilities | 36 | — | |||||
| Deferred liabilities and credits | 12 | 16 | |||||
| Total liabilities | $ | 85 | $ | 51 | |||
During the three months ended March 31, 2018 and 2017,
2019.Legal ProceedingsThe United States Department of Justice (DOJ) has notified U.S. Cellular and its parent, TDS, that it is conducting an inquiryinquiries of U.S. Cellular and TDS under the federal False Claims Act. The DOJ is investigating U.S. Cellular’s participation in spectrum auctionauctions 58, 66, 73 and 97 conducted by the FCC in 2008.FCC. U.S. Cellular is a limited partner in aseveral limited partnershippartnerships which qualified for the 25% bid credit in theeach auction. TDS and U.S. Cellular are cooperating with the DOJ’s review. TDS and U.S. Cellular believe that U.S. Cellular’s arrangements with the limited partnershippartnerships and the limited partnerships’ participation in the FCC auctions complied with applicable law and FCC rules. At this time, U.S. Cellular cannot predict the outcome of this review.Refer to the disclosure under Legal Proceedings in U.S. Cellular’s Form 10-K for the year ended December 31, 2017,2018, for additional information. There have been no material changes to such information since December 31, 2017.2018.Unregistered Sales of Equity Securities and Use of ProceedsIn November 2009, U.S. Cellular announced by Form 8-K that the Board of Directors of U.S. Cellular authorized the repurchase of up to 1,300,000 Common Shares on an annual basis beginning in 2009 and continuing each year thereafter, on a cumulative basis. In December 2016, the U.S. Cellular Board amended this authorization to provide that, beginning on January 1, 2017, the authorized repurchase amount with respect to a particular year will be any amount from zero to 1,300,000 Common Shares, as determined by the Pricing Committee of the Board of Directors, and that if the Pricing Committee did not specify an amount for any year, such amount would be zero for such year. The Pricing Committee didhas not specifyspecified any amount as of January 1, 2018.increase in the authorization since that time. The Pricing Committee also was authorized to decrease the cumulative amount of the authorization at any time, but has not taken any action to do so at this time. As a result, there was no change to the cumulative amount of the share repurchase authorization as of January 1, 2018. The authorization provides that share repurchases will be made pursuant to open market purchases, block purchases, private purchases, or otherwise, depending on market prices and other conditions. This authorization does not have an expiration date. U.S. Cellular did not determine to terminate the foregoing Common Share repurchase program, as amended, or cease making further purchases thereunder, during the first quarter of 2018.The maximum number of shares that may yet be purchased under this program was 5,900,8495,901,000 as of March 31, 2018.2019. There were no purchases made by or on behalf of U.S. Cellular, and no open market purchases made by any “affiliated purchaser” (as defined by the SEC) of U.S. Cellular, of U.S. Cellular Common Shares during the quarter covered by this Form 10-Q.
| |
ExhibitNumber | Description of Documents |
Exhibit 4.1 | |
| Exhibit 10.1 | |
| Exhibit 10.2 | |
| |
Exhibit | |
| Exhibit 31.1 | |
| Exhibit 31.2 | |
| Exhibit 32.1 | |
| Exhibit 32.2 | |
| Exhibit 101.INS | XBRL Instance Document |
| Exhibit 101.SCH | XBRL Taxonomy Extension Schema Document |
| Exhibit 101.PRE | XBRL Taxonomy Presentation Linkbase Document |
| Exhibit 101.CAL | XBRL Taxonomy Calculation Linkbase Document |
| Exhibit 101.LAB | XBRL Taxonomy Label Linkbase Document |
| Exhibit 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
Form 10-Q Cross Reference Index | ||||
Item Number | Page No. | |||
Part I. | Financial Information | |||
Part II. | Other Information | |||
Date: /s/ Kenneth R. Meyers Date: /s/ Steven T. Campbell Date: /s/ Douglas W. ChambersSIGNATURESPursuant 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) May 4, 20182, 2019Kenneth R. MeyersPresident and Chief Executive Officer(principal executive officer)May 4, 20182, 2019Steven T. CampbellExecutive Vice President-Finance,Chief Financial Officer and Treasurer(principal financial officer)May 4, 20182, 2019/s/ Douglas D. ShumaDouglas D. ShumaChief Accounting Officer(principal accounting officer)Date:May 4, 2018Douglas W. ChambersChief Accounting Officer(principal accounting officer)Date: May 2, 2019 /s/ Jeffrey S. Hoersch Jeffrey S. HoerschVice President and Controller
