0000821130-19-000067.txt : 20191031 0000821130-19-000067.hdr.sgml : 20191031 20191031163302 ACCESSION NUMBER: 0000821130-19-000067 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 89 CONFORMED PERIOD OF REPORT: 20190930 FILED AS OF DATE: 20191031 DATE AS OF CHANGE: 20191031 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED STATES CELLULAR CORP CENTRAL INDEX KEY: 0000821130 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 621147325 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09712 FILM NUMBER: 191184044 BUSINESS ADDRESS: STREET 1: 8410 W BRYN MAWR AVE STREET 2: STE 700 CITY: CHICAGO STATE: IL ZIP: 60631 BUSINESS PHONE: 7733998900 MAIL ADDRESS: STREET 1: 8410 W BRYN MAWR AVE STREET 2: STE 700 CITY: CHICAGO STATE: IL ZIP: 60631 10-Q 1 usm930201910q.htm 10-Q Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                    to

Commission file number 001-09712
uscelllogoa04.jpg
UNITED STATES CELLULAR CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware
 
62-1147325
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
8410 West Bryn Mawr, Chicago, Illinois 60631
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (773) 399-8900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Shares, $1 par value
 
USM
 
New York Stock Exchange
6.95% Senior Notes due 2060
 
UZA
 
New York Stock Exchange
7.25% Senior Notes due 2063
 
UZB
 
New York Stock Exchange
7.25% Senior Notes due 2064
 
UZC
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
No
 
 
 
 
 
 
 
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
No
 
 
 
 
 
 
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging growth company
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No

The number of shares outstanding of each of the issuer's classes of common stock, as of September 30, 2019, is 53,140,600 Common Shares, $1 par value, and 33,005,900 Series A Common Shares, $1 par value.
 



United States Cellular Corporation
 
Quarterly Report on Form 10-Q
For the Period Ended September 30, 2019
 
 
Index
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




cacbe9711b2_image2a04.jpg
United States Cellular Corporation
Management’s Discussion and Analysis of
Financial Condition and Results of Operations 
Executive Overview
The following discussion and analysis compares United States Cellular Corporation’s (U.S. Cellular) financial results for the three and nine months ended September 30, 2019, to the three and nine months ended September 30, 2018. It should be read in conjunction with U.S. Cellular’s interim consolidated financial statements and notes included herein, and with the description of U.S. Cellular’s business, its audited consolidated financial statements and Management's Discussion and Analysis (MD&A) of Financial Condition and Results of Operations included in U.S. Cellular’s Annual Report on Form 10-K (Form 10-K) for the year ended December 31, 2018. Certain numbers included herein are rounded to millions for ease of presentation; however, certain calculated amounts and percentages are determined using the unrounded numbers. 
This report contains statements that are not based on historical facts, including the words “believes,” “anticipates,” “estimates,” “expects,” “plans,” “intends,” “projects” and similar expressions. These statements constitute and represent “forward looking statements” as this term is defined in the Private Securities Litigation Reform Act of 1995. Such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward looking statements. See Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement for additional information.
U.S. Cellular uses certain “non-GAAP financial measures” and each such measure is identified in the MD&A. A discussion of the reason U.S. Cellular determines these metrics to be useful and a reconciliation of these measures to their most directly comparable measures determined in accordance with accounting principles generally accepted in the United States of America (GAAP) are included in the Supplemental Information Relating to Non-GAAP Financial Measures section within the MD&A of this Form 10-Q Report.

1


General
U.S. Cellular owns, operates, and invests in wireless markets throughout the United States. U.S. Cellular is an 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
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Serves customers with 5.0 million connections including 4.4 million postpaid, 0.5 million prepaid and 0.1 million reseller and other connections
Operates in 21 states
Employs approximately 5,500 associates
4,123 owned towers
6,554 cell sites in service
 

2


U.S. Cellular Mission and Strategy
U.S. Cellular’s mission is to provide exceptional wireless communication services which enhance consumers’ lives, increase the competitiveness of local businesses, and improve the efficiency of government operations in the mid-sized and rural markets served.
In 2019, U.S. Cellular continues to execute on its strategies to grow and protect its customer base, grow revenues, drive improvements in the overall cost structure, and invest in its network and 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 is now available to 67% of U.S Cellular's subscribers, and deployments in additional operating markets are expected in 2020 and 2021. 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.
U.S. Cellular also has begun to deploy 5G technology in its network and expects to launch commercial 5G services in selected markets in 2020. 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, initially focused on mobility services and using its low band spectrum. At the same time, as discussed below, U.S. Cellular has begun acquiring high band spectrum to enable the delivery of additional 5G services in the future. 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 network 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, and to be able to expand its 5G service offerings, U.S. Cellular actively seeks attractive opportunities to acquire wireless spectrum licenses, including pursuant to FCC auctions. In June 2019, the FCC announced by way of public notice that U.S. Cellular was the provisional winning bidder for 408 wireless spectrum licenses in its 28 GHz auction (Auction 101) and 282 wireless spectrum licenses in its 24 GHz auction (Auction 102) for an aggregate purchase price of $256 million. The wireless spectrum licenses from Auction 101 were granted by the FCC on October 2, 2019, and the wireless spectrum licenses from Auction 102 are expected to be granted by the FCC during the fourth quarter of 2019. Additionally, in September 2019, U.S. Cellular filed an application to participate in Auction 103; bidding in that auction will commence on December 10, 2019. Auction 103 will offer 34 100 MHz blocks in the Upper 37 GHz, 39 GHz, and 47 GHz bands in all Partial Economic Areas.

3


Terms Used by U.S. Cellular
The following is a list of definitions of certain industry terms that are used throughout this document:
4G LTEfourth 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.
5Gfifth 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 (Losses) – represents the total number of new connections added during the period, net of connections that were terminated during that period.
OIBDA – refers to operating income before depreciation, amortization and accretion and is used in the non-GAAP metric Adjusted OIBDA throughout this document. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information.
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.
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.

4


Operational Overview
chart-a9029081b3325602a4b.jpg
 
 
 
 
 
 
 
 
 
 
 
 
 
As of September 30,
 
2019
 
2018
Retail Connections – End of Period
 
 
 
Postpaid
 
4,395,000
 
4,466,000
 
Prepaid
 
510,000
 
528,000
 
Total
 
4,905,000
 
4,994,000
 
 
 
 
 
 
 
 
 
 
 
 

 
Q3 2019
 
Q3 2018
 
Q3 2019 vs.
Q3 2018
 
YTD 2019
 
YTD 2018
YTD 2019 vs. YTD 2018
Postpaid Activity and Churn
 
Gross Additions
 
 
 
 
 
 
 
 
 
 
Handsets
124,000

 
133,000

 
(7
)%
 
328,000

 
340,000

(4
)%
Connected Devices
39,000

 
39,000

 

 
108,000

 
107,000

1
 %
Total Gross Additions
163,000

 
172,000

 
(5
)%
 
436,000

 
447,000

(2
)%
Net Additions (Losses)
 
 
 
 
 
 
 
 
 
 
Handsets
(2,000
)
 
15,000

 
N/M

 
(26,000
)
 
3,000

N/M

Connected Devices
(17,000
)
 
(16,000
)
 
(6
)%
 
(51,000
)
 
(55,000
)
7
 %
Total Net (Losses)
(19,000
)
 
(1,000
)
 
N/M

 
(77,000
)
 
(52,000
)
(48
)%
Churn
 
 
 
 
 
 
 
 
 
 
Handsets
1.09
%
 
1.02
%
 
 
 
1.02
%
 
0.97
%
 
Connected Devices
3.44
%
 
3.04
%
 
 
 
3.17
%
 
2.89
%
 
Total Churn
1.38
%
 
1.29
%
 
 
 
1.29
%
 
1.24
%
 
N/M - Percentage change not meaningful
Total postpaid gross additions decreased for the three and nine months ended September 30, 2019, when compared to the same period last year, due to aggressive industry-wide competition.
Total postpaid churn increased for the three and nine months ended September 30, 2019, due primarily to aggressive industry-wide competition and an increase in defections of connected wearables, which were launched late in the second quarter of 2018.
Postpaid Revenue
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019 vs. 2018
 
2019
 
2018
 
2019 vs. 2018
Average Revenue Per User (ARPU)
$
46.16

 
$
45.31

 
2
%
 
$
45.82

 
$
44.79

 
2
%
Average Revenue Per Account (ARPA)
$
119.87

 
$
119.42

 
%
 
$
119.39

 
$
118.71

 
1
%
Postpaid ARPU and Postpaid ARPA increased for the three and nine months ended September 30, 2019, when compared to the same period last year, due to several factors including: a shift in mix to higher-priced service plans; having proportionately more smartphone connections, which on a per-unit basis contribute more revenue than feature phones and connected devices; and an increase in device protection plan revenues.

5


Financial Overview
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019 vs. 2018
 
2019
 
2018
 
2019 vs. 2018
(Dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
Retail service
$
663

 
$
659

 
1
 %
 
$
1,984

 
$
1,960

 
1
 %
Inbound roaming
54

 
50

 
9
 %
 
132

 
116

 
14
 %
Other
57

 
50

 
13
 %
 
156

 
148

 
5
 %
Service revenues
774

 
759

 
2
 %
 
2,272

 
2,224

 
2
 %
Equipment sales
257

 
242

 
6
 %
 
698

 
692

 
1
 %
Total operating revenues
1,031

 
1,001

 
3
 %
 
2,970

 
2,916

 
2
 %
 
 
 
 
 
 
 
 
 
 
 
 
System operations (excluding Depreciation, amortization and accretion reported below)
199

 
200

 
(1
)%
 
568

 
566

 

Cost of equipment sold
266

 
258

 
3
 %
 
724

 
716

 
1
 %
Selling, general and administrative
358

 
346

 
3
 %
 
1,027

 
1,014

 
1
 %
Depreciation, amortization and accretion
181

 
160

 
13
 %
 
524

 
478

 
10
 %
(Gain) loss on asset disposals, net
5

 
3

 
66
 %
 
13

 
5

 
N/M

(Gain) loss on sale of business and other exit costs, net

 

 
N/M

 
(1
)
 

 
N/M

(Gain) loss on license sales and exchanges, net
2

 

 
N/M

 

 
(18
)
 
98
 %
Total operating expenses
1,011

 
967

 
5
 %
 
2,855

 
2,761

 
3
 %
 
 
 
 
 
 
 
 
 
 
 
 
Operating income
$
20

 
$
34

 
(40
)%
 
$
115

 
$
155

 
(26
)%
 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
24

 
$
37

 
(33
)%
 
$
115

 
$
143

 
(20
)%
Adjusted OIBDA (Non-GAAP)1
$
208

 
$
197

 
6
 %
 
$
651

 
$
620

 
5
 %
Adjusted EBITDA (Non-GAAP)1
$
256

 
$
243

 
5
 %
 
$
793

 
$
750

 
6
 %
Capital expenditures2
$
170

 
$
118

 
43
 %
 
$
467

 
$
274

 
71
 %
N/M - Percentage change not meaningful
1
Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.
2 
Refer to Liquidity and Capital Resources within this MD&A for additional information on Capital expenditures.

6


 
Operating Revenues
Three Months Ended September 30, 2019 and 2018
(Dollars in millions)
chart-640374a54da557ef92e.jpg
 
Operating Revenues
Nine Months Ended September 30, 2019 and 2018
(Dollars in millions)
chart-87410f93d1b65288a4a.jpg
Service revenues consist of:
Retail Service - Charges for voice, data and value added services and recovery of regulatory costs
Inbound Roaming - Charges to other wireless carriers whose customers use U.S. Cellular’s wireless systems when roaming
Other Service - Amounts received from the Federal USF, tower rental revenues, and miscellaneous other service revenues
Equipment revenues consist of:
Sales of wireless devices and related accessories to new and existing customers, agents, and third-party distributors

Key components of changes in the statement of operations line items were as follows:
Total operating revenues
Retail service revenues increased for the three and nine months ended September 30, 2019, primarily as a result of the increase in Postpaid ARPU, which was previously discussed in the Operational Overview section.
Inbound roaming revenues increased for the three and nine months ended September 30, 2019, primarily driven by higher data usage, partially offset by lower rates.
Other service revenues increased for the three and nine months ended September 30, 2019, due primarily to an out-of-period adjustment to tower lease revenues recorded in the third quarter of 2019. See Note 8Leases in the Notes to Consolidated Financial Statements for additional information.
Equipment sales revenues increased for the three and nine months ended September 30, 2019, due to an increase in the average revenue per device sold and a shift in mix to smartphones, partially offset by a decrease in the number of devices sold.
Cost of equipment sold
Cost of equipment sold increased for the three and nine months ended September 30, 2019, due primarily to higher average cost per device sold and a shift in mix to smartphones, partially offset by a decrease in the number of devices sold.

7


Selling, general and administrative expenses
Selling, general and administrative expenses increased for the three and nine months ended September 30, 2019, due primarily to an increase in costs driven by information system initiatives, as well as an increase in bad debts expenses.
Depreciation, amortization and accretion
Depreciation, amortization, and accretion increased for the three and nine months ended September 30, 2019, due to (i) additional network assets being placed into service and (ii) accelerated depreciation of certain assets due to changes in network technology, which will continue throughout the remainder of 2019 and beyond.
Components of Other Income (Expense)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019 vs. 2018
 
2019
 
2018
 
2019 vs. 2018
(Dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
Operating income
$
20

 
$
34

 
(40
)%
 
$
115

 
$
155

 
(26
)%
 
 
 
 
 
 
 
 
 
 
 
 
Equity in earnings of unconsolidated entities
44

 
42

 
5
 %
 
128

 
120

 
7
 %
Interest and dividend income
4

 
4

 
4
 %
 
14

 
10

 
40
 %
Interest expense
(29
)
 
(29
)
 
1
 %
 
(87
)
 
(87
)
 

Total investment and other income
19

 
17

 
12
 %
 
55

 
43

 
27
 %
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
39

 
51

 
(23
)%
 
170

 
198

 
(14
)%
Income tax expense
15

 
14

 
2
 %
 
55

 
55

 
1
 %
 
 
 
 
 
 
 
 
 
 
 
 
Net income
24

 
37

 
(33
)%
 
115

 
143

 
(20
)%
Less: Net income attributable to noncontrolling interests, net of tax
1

 
1

 
29
 %
 
6

 
14

 
(61
)%
Net income attributable to U.S. Cellular shareholders
$
23

 
$
36

 
(34
)%
 
$
109

 
$
129

 
(15
)%
N/M - Percentage change not meaningful
Equity in earnings of unconsolidated entities
Equity in earnings of unconsolidated entities represents U.S. Cellular’s share of net income from entities in which it has a noncontrolling interest and that are accounted for by the equity method. U.S. Cellular’s investment in the Los Angeles SMSA Limited Partnership (LA Partnership) contributed $20 million for both the three months ended September 30, 2019 and 2018, and $60 million and $58 million for the nine months ended September 30, 2019 and 2018, respectively. See Note 7Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.
Interest and dividend income
Interest and dividend income increased for the nine months ended September 30, 2019 as a result of an increase in U.S. Cellular's money market investments balance, classified within Cash and cash equivalents.
Income tax expense
The effective tax rate on Income before income taxes for the three months ended September 30, 2019 and 2018, was 37.4% and 28.2%, respectively. The effective tax rate on Income before income taxes for the nine months ended September 30, 2019 and 2018, was 32.5% and 27.7%, respectively. The effective tax rate for the three and nine months ended September 30, 2019 was higher than in the corresponding 2018 periods due primarily to an increase in projected unrecognized tax benefits for 2019 that had a disproportionate impact on the effective tax rate due to the relatively low pretax income in the 2019 quarter and year-to-date periods.
Net income attributable to noncontrolling interests, net of tax
Net income attributable to noncontrolling interests, net of tax decreased during the nine months ended September 30, 2019, due primarily to an out-of-period adjustment recorded in the first quarter of 2018. See Note 10Variable Interest Entities in the Notes to Consolidated Financial Statements for additional information.

8


Liquidity and Capital Resources
Sources of Liquidity
U.S. Cellular operates a capital-intensive business. Historically, U.S. Cellular has used internally-generated funds and also has obtained substantial funds from external sources for general corporate purposes. In the past, U.S. Cellular’s existing cash and investment balances, funds available under its revolving credit and receivables securitization agreements, funds from other financing sources, including a term loan and other long-term debt, and cash flows from operating and certain investing and financing activities, including sales of assets or businesses, provided sufficient liquidity and financial flexibility for U.S. Cellular to meet its normal day-to-day operating needs and debt service requirements, to finance the build-out and enhancement of markets and to fund acquisitions, primarily of wireless spectrum licenses. There is no assurance that this will be the case in the future. See Market Risk for additional information regarding maturities of long-term debt.
Although U.S. Cellular currently has a significant cash balance, 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 and receivables securitization agreements, and expected cash flows from operating and investing activities will provide sufficient liquidity for U.S. Cellular to meet its normal day-to-day operating needs and debt service requirements for the coming year. 
U.S. Cellular may require substantial additional capital for, among other uses, funding day-to-day operating needs including working capital, acquisitions of providers of wireless telecommunications services, wireless spectrum license or system acquisitions, capital expenditures, debt service requirements, the repurchase of shares, the payment of dividends, or making additional investments. It may be necessary from time to time to increase the size of the existing revolving credit agreements, to put in place new credit agreements, or to obtain other forms of financing in order to fund potential expenditures. U.S. Cellular made payments related to wireless spectrum license auctions (see Regulatory Matters - Millimeter Wave Spectrum Auctions) and debt repayments during 2019, and U.S. Cellular 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 on its network. U.S. Cellular’s liquidity would be adversely affected if, among other things, U.S. Cellular is unable to obtain financing on acceptable terms, U.S. Cellular makes significant wireless 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. 
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 U.S. Cellular's credit ratings, defaults of the terms of debt or credit agreements, uncertainty of access to capital, deterioration in the capital markets, reduced regulatory capital at banks which in turn limits their ability to borrow and lend, other changes in the performance of U.S. Cellular or in market conditions or other factors could limit or restrict the availability of financing on terms and prices acceptable to U.S. Cellular, which could require U.S. Cellular to reduce its acquisition, capital expenditure and business development programs, reduce the acquisition of wireless spectrum licenses, and/or reduce or cease share repurchases. 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.
Cash and Cash Equivalents
Cash and cash equivalents include cash and money market investments. The primary objective of U.S. Cellular’s Cash and cash equivalents is for use in its operations and acquisition, capital expenditure and business development programs.
 
Cash and Cash Equivalents
(Dollars in millions)
chart-91c2af8fd96c5e73adb.jpg
 


At September 30, 2019, U.S. Cellular's cash and cash equivalents totaled $570 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 the financial institutions with which U.S. Cellular has deposits and believes that the credit risk associated with these funds and institutions is low.
 

9


Financing
U.S. Cellular has an unsecured revolving credit agreement available for general corporate purposes including wireless spectrum license purchases and capital expenditures. This credit agreement matures in May 2023. As of September 30, 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 changes to the maturity date and no significant changes to other key terms of the agreement. In October 2019, U.S. Cellular made a $100 million principal prepayment on its senior term loan.
U.S. Cellular believes that it was in compliance with all of the financial covenants and requirements set forth in its revolving credit agreement and the senior term loan credit agreement as of September 30, 2019.
U.S. Cellular, through its subsidiaries, also has a receivables securitization agreement to permit securitized borrowings for general corporate purposes using its equipment installment plan receivables. The unused capacity under this agreement was $200 million as of September 30, 2019, subject to sufficient collateral to satisfy the asset borrowing base provisions of the agreement. In September 2019, U.S. Cellular amended this agreement extending the expiration date of the agreement to December 15, 2021. There were no significant changes to 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 receivables securitization agreement as of September 30, 2019.
U.S. Cellular has in place an effective shelf registration statement on Form S-3 to issue senior or subordinated debt securities.
As of September 30, 2019, long-term debt payments due for the remainder of 2019 and the next four years are $191 million, which represent 12% of the total gross long-term debt obligation.
Capital Expenditures
Capital expenditures (i.e., additions to property, plant and equipment and system development expenditures), which include the effects of accruals and capitalized interest, for the nine months ended September 30, 2019 and 2018, were as follows:
 
Capital Expenditures
(Dollars in millions)
chart-85e3e798e61d5c6caa5.jpg
 



U.S. Cellular’s capital expenditures for the nine months ended September 30, 2019 and 2018, were $467 million and $274 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 network coverage, including continuing to deploy VoLTE technology in certain markets and providing additional speed and capacity to accommodate increased data usage by current customers;
Begin deploying 5G technology on its network; and
Invest in information technology to support existing and new services and products.



 
U.S. Cellular intends to finance its capital expenditures for 2019 using primarily Cash flows from operating activities, existing cash balances and, if required, its receivables securitization and/or revolving credit agreements.
Acquisitions, Divestitures and Exchanges
U.S. Cellular may be engaged from time to time in negotiations (subject to all applicable regulations) relating to the acquisition, divestiture or exchange of companies, properties or wireless spectrum licenses. 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 its long-term return on capital. As part of this strategy, U.S. Cellular actively seeks attractive opportunities to acquire wireless spectrum licenses, 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.

10


In June 2019, the FCC announced by way of public notice that U.S. Cellular was the provisional winning bidder for 408 wireless spectrum licenses in its 28 GHz auction (Auction 101) and 282 wireless spectrum licenses in its 24 GHz auction (Auction 102) for an aggregate purchase price of $256 million. U.S. Cellular paid substantially all of the $256 million in the first half of 2019. The wireless spectrum licenses from Auction 101 were granted by the FCC on October 2, 2019, and the wireless spectrum licenses from Auction 102 are expected to be granted by the FCC during the fourth quarter of 2019.
Variable Interest Entities
U.S. Cellular consolidates certain “variable interest entities” as defined under GAAP. See Note 10Variable 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 Program
U.S. Cellular has repurchased and expects to continue to repurchase its Common Shares, subject to its repurchase program. During the three and nine months ended September 30, 2019, U.S. Cellular repurchased 590,300 Common Shares for $21 million at an average cost per share of $35.45. As of September 30, 2019, the total cumulative amount of U.S. Cellular Common Shares authorized to be purchased is 5,310,549. For additional information related to the current repurchase authorization, see Unregistered Sales of Equity Securities and Use of Proceeds.
Contractual and Other Obligations
There were no material changes outside the ordinary course of business between December 31, 2018 and September 30, 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, 2018.
On September 27, 2019, U.S. Cellular executed a new Master Service Agreement, Master Statement of Work for Managed Services and certain other documents with Amdocs Tethys Limited, effective October 1, 2019, to continue using the Billing and Operational Support System (B/OSS) and certain support functions offered by Amdocs Tethys Limited. The committed, non-cancellable amount to be paid to Amdocs Tethys Limited with respect to the new agreements is $241 million over five years.
Off-Balance Sheet Arrangements
U.S. Cellular had no transactions, agreements or other contractual arrangements with unconsolidated entities involving “off-balance sheet arrangements,” as defined by SEC rules, that had or are reasonably likely to have a material current or future effect on its financial condition, results of operations, liquidity, capital expenditures or capital resources.

11


Consolidated Cash Flow Analysis
U.S. Cellular operates a capital- and marketing-intensive business. U.S. Cellular makes substantial investments to acquire wireless spectrum licenses and properties and to construct and upgrade wireless telecommunications networks and facilities as a basis for creating long-term value for shareholders. In recent years, rapid changes in technology and new opportunities have required substantial investments in potentially revenue‑enhancing and cost-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 wireless 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 nine months ended September 30, 2019 and 2018.
2019 Commentary
U.S. Cellular’s Cash, cash equivalents and restricted cash decreased $8 million. Net cash provided by operating activities was $687 million due to net income of $115 million plus non-cash items of $486 million and distributions received from unconsolidated entities of $99 million, including $33 million in distributions from the LA Partnership. This was offset by changes in working capital items which decreased net cash by $13 million. The more significant working capital changes were increases in accounts receivables and equipment installment plan receivables, offset by an increase to accrued taxes.
Cash flows used for investing activities were $647 million. Cash paid for additions to property, plant and equipment totaled $439 million. Cash payments for wireless spectrum license acquisitions were $257 million. These were partially offset by Cash received from divestitures and exchanges of $32 million and cash received from the redemption of short-term Treasury bills of $29 million.
Cash flows used for financing activities were $48 million, reflecting the repurchase of $21 million of Common Shares and ordinary activity such as the scheduled repayments of debt.
2018 Commentary
U.S. Cellular’s Cash, cash equivalents and restricted cash increased $380 million. Net cash provided by operating activities was $600 million due to net income of $143 million plus non-cash items of $436 million and distributions received from unconsolidated entities of $90 million, including $33 million in distributions from the LA Partnership. This was offset by changes in working capital items which decreased net cash by $69 million. The working capital changes were primarily influenced by an increase in equipment installment plan receivables.
Cash flows used for investing activities were $203 million. Cash paid for additions to property, plant and equipment totaled $277 million. This was partially offset by cash received from the redemption of short-term Treasury bills of $50 million and Cash received from divestitures and exchanges of $23 million.
Cash flows used for financing activities were $17 million, reflecting ordinary activity such as the scheduled repayments of debt.

12


Consolidated Balance Sheet Analysis
The following discussion addresses certain captions in the consolidated balance sheet and changes therein. This discussion is intended to highlight the significant changes and is not intended to fully reconcile the changes. Changes in financial condition during 2019 were as follows:
Assets held for sale
Assets held for sale decreased $45 million. Certain sale and exchange agreements that U.S. Cellular entered into in 2018 closed in the first quarter of 2019. This was partially offset by certain sale agreements that U.S. Cellular entered into in the third quarter of 2019, which are expected to close in the fourth quarter of 2019.
Licenses
Licenses increased $275 million due primarily to wireless spectrum license rights acquired through FCC auctions. See Note 6Intangible Assets in the Notes to Consolidated Financial Statements for additional information.
Operating lease right-of-use assets
Operating lease right-of-use assets increased $897 million due to the adoption of Accounting Standards Codification (ASC) 842. See Note 8Leases in the Notes to Consolidated Financial Statements for additional information.
Accrued taxes
Accrued taxes increased $58 million due primarily to the excess of current income tax expense over federal estimated payments made during the nine months ended September 30, 2019.
Short-term operating lease liabilities
Short-term operating lease liabilities increased $104 million due to the adoption of ASC 842. See Note 8Leases in the Notes to Consolidated Financial Statements for additional information.
Long-term operating lease liabilities
Long-term operating lease liabilities increased $864 million due to the adoption of ASC 842. See Note 8Leases in the Notes to Consolidated Financial Statements for additional information.
Other deferred liabilities and credits
Other deferred liabilities and credits decreased $77 million due primarily to the adoption of ASC 842. See Note 8Leases in the Notes to Consolidated Financial Statements for additional information.

13


Supplemental Information Relating to Non-GAAP Financial Measures
U.S. Cellular sometimes uses information derived from consolidated financial information but not presented in its financial statements prepared in accordance with U.S. GAAP to evaluate the performance of its business. Specifically, U.S. Cellular has referred to the following measures in this Form 10-Q Report:
EBITDA
Adjusted EBITDA
Adjusted OIBDA
Free cash flow

Certain of these measures are considered “non-GAAP financial measures” under U.S. Securities and Exchange Commission Rules. Following are explanations of each of these measures.
EBITDA, Adjusted EBITDA and Adjusted OIBDA
EBITDA, Adjusted EBITDA and Adjusted OIBDA are defined as net income adjusted for the items set forth in the reconciliation below. EBITDA, Adjusted EBITDA and Adjusted OIBDA are not measures of financial performance under GAAP and should not be considered as alternatives to Net income or Cash flows from operating activities, as indicators of cash flows or as measures of liquidity. 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 measures, Net income and Operating income.

14


 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
(Dollars in millions)
 
 
 
 
 
 
 
Net income (GAAP)
$
24

 
$
37

 
$
115

 
$
143

Add back:

 

 

 

Income tax expense
15

 
14

 
55

 
55

Interest expense
29

 
29

 
87

 
87

Depreciation, amortization and accretion
181

 
160

 
524

 
478

EBITDA (Non-GAAP)
249

 
240

 
781

 
763

Add back or deduct:

 

 

 

(Gain) loss on asset disposals, net
5

 
3

 
13

 
5

(Gain) loss on sale of business and other exit costs, net

 

 
(1
)
 

(Gain) loss on license sales and exchanges, net
2

 

 

 
(18
)
Adjusted EBITDA (Non-GAAP)
256

 
243

 
793

 
750

Deduct:

 

 

 

Equity in earnings of unconsolidated entities
44

 
42

 
128

 
120

Interest and dividend income
4

 
4

 
14

 
10

Adjusted OIBDA (Non-GAAP)
208

 
197

 
651

 
620

Deduct:

 

 

 

Depreciation, amortization and accretion
181

 
160

 
524

 
478

(Gain) loss on asset disposals, net
5

 
3

 
13

 
5

(Gain) loss on sale of business and other exit costs, net

 

 
(1
)
 

(Gain) loss on license sales and exchanges, net
2

 

 

 
(18
)
Operating income (GAAP)
$
20

 
$
34

 
$
115

 
$
155

Free Cash Flow
The following table presents Free cash flow, which is defined as Cash flows from operating activities less Cash paid for additions to property, plant and equipment. Free cash flow is a non-GAAP financial measure which U.S. Cellular believes may be useful to investors and other users of its financial information in evaluating liquidity, specifically, the amount of net cash generated by business operations after deducting Cash paid for additions to property, plant and equipment. 
 
Nine Months Ended
September 30,
 
2019
 
2018
(Dollars in millions)
 
 
 
Cash flows from operating activities (GAAP)
$
687

 
$
600

Less: Cash paid for additions to property, plant and equipment
439

 
277

Free cash flow (Non-GAAP)
$
248

 
$
323


15


Application of Critical Accounting Policies and Estimates
U.S. Cellular prepares its consolidated financial statements in accordance with GAAP. U.S. Cellular’s significant accounting policies are discussed in detail in Note 1 — Summary of Significant Accounting Policies and Recent Accounting Pronouncements 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, 2018
Recent Accounting Pronouncements
See Note 1Basis of Presentation and Note 8Leases in the Notes to Consolidated Financial Statements for information on recent accounting pronouncements.
Regulatory Matters
Millimeter Wave Spectrum Auctions
During 2018, the FCC established procedures for two auctions of wireless spectrum licenses in the 28 GHz and 24 GHz bands. The 28 GHz auction (Auction 101) commenced on November 14, 2018 and closed 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. The 24 GHz auction (Auction 102) commenced on March 14, 2019 and closed on May 28, 2019. Auction 102 offered up to seven 100 MHz licenses in the 24 GHz band in Partial Economic Areas covering most of the United States. On June 3, 2019, the FCC announced by way of public notice that U.S. Cellular was the provisional winning bidder for 408 wireless spectrum licenses in Auction 101 and 282 wireless spectrum licenses in Auction 102 for an aggregate purchase price of $256 million. The wireless spectrum licenses from Auction 101 were granted by the FCC on October 2, 2019, and the wireless spectrum licenses from Auction 102 are expected to be granted by the FCC during the fourth quarter of 2019.
On July 11, 2019, the FCC released a Public Notice establishing procedures for an additional Millimeter Wave auction offering wireless spectrum licenses in the 37, 39 and 47 GHz bands (Auction 103). On August 21, 2019, the FCC released a Public Notice announcing that all 39 GHz incumbents have agreed to relinquish their licenses in return for incentive payments. Consequently, Auction 103 will offer 34 100 MHz blocks in the Upper 37 GHz, 39 GHz, and 47 GHz bands in all Partial Economic Areas. On September 9, 2019, U.S. Cellular filed an application to participate in Auction 103; bidding in this auction will commence on December 10, 2019.

16


Private Securities Litigation Reform Act of 1995
Safe Harbor Cautionary Statement
 
This Form 10-Q, including exhibits, contains statements that are not based on historical facts and represent forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, that address activities, events or developments that U.S. Cellular intends, expects, projects, believes, estimates, plans or anticipates will or may occur in the future are forward-looking statements. The words “believes,” “anticipates,” “estimates,” “expects,” “plans,” “intends,” “projects” and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, but are not limited to, those set forth below, as more fully described under “Risk Factors” in U.S. Cellular’s Form 10-K for the year ended December 31, 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, 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 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 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 talent throughout all levels of the organization, to develop their potential through education and assignments, and to retain them by keeping them engaged, challenged and properly rewarded could have an adverse effect on 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.

17


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.
Changes in facts or circumstances, including new or additional information, could require U.S. Cellular to record adjustments to 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.

18


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 events could cause revenues, earnings, capital expenditures and/or any other financial or statistical information to vary from U.S. Cellular’s forward-looking estimates by a material amount.
Risk Factors
In addition to the information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in U.S. Cellular’s Annual Report on Form 10-K for the year ended December 31, 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, 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, 2018.
Quantitative and Qualitative Disclosures about Market Risk
Market Risk
Refer to the disclosure under Market Risk in U.S. Cellular’s Form 10-K for the year ended December 31, 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 between December 31, 2018 and September 30, 2019
See Note 3Fair 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 September 30, 2019.

19


Financial Statements
United States Cellular Corporation
Consolidated Statement of Operations
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
(Dollars and shares in millions, except per share amounts)
 
 
 
 
 
 
 
Operating revenues
 
 
 
 
 
 
 
Service
$
774

 
$
759

 
$
2,272

 
$
2,224

Equipment sales
257

 
242

 
698

 
692

Total operating revenues
1,031

 
1,001

 
2,970

 
2,916

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
System operations (excluding Depreciation, amortization and accretion reported below)
199

 
200

 
568

 
566

Cost of equipment sold
266

 
258

 
724

 
716

Selling, general and administrative (including charges from affiliates of $22 million and $20 million, respectively, for the three months, and $61 million, and $60 million, respectively, for the nine months)
358

 
346

 
1,027

 
1,014

Depreciation, amortization and accretion
181

 
160

 
524

 
478

(Gain) loss on asset disposals, net
5

 
3

 
13

 
5

(Gain) loss on sale of business and other exit costs, net

 

 
(1
)
 

(Gain) loss on license sales and exchanges, net
2

 

 

 
(18
)
Total operating expenses
1,011

 
967

 
2,855

 
2,761

 
 
 
 
 
 
 
 
Operating income
20

 
34

 
115

 
155

 
 
 
 
 
 
 
 
Investment and other income (expense)
 
 
 
 
 
 
 
Equity in earnings of unconsolidated entities
44

 
42

 
128

 
120

Interest and dividend income
4

 
4

 
14

 
10

Interest expense
(29
)
 
(29
)
 
(87
)
 
(87
)
Total investment and other income
19

 
17

 
55

 
43

 
 
 
 
 
 
 
 
Income before income taxes
39

 
51

 
170

 
198

Income tax expense
15

 
14

 
55

 
55

Net income
24

 
37

 
115

 
143

Less: Net income attributable to noncontrolling interests, net of tax
1

 
1

 
6

 
14

Net income attributable to U.S. Cellular shareholders
$
23

 
$
36

 
$
109

 
$
129

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
86

 
86

 
87

 
85

Basic earnings per share attributable to U.S. Cellular shareholders
$
0.27

 
$
0.42

 
$
1.26

 
$
1.51




 


 


 


Diluted weighted average shares outstanding
88

 
87

 
88

 
86

Diluted earnings per share attributable to U.S. Cellular shareholders
$
0.27

 
$
0.41

 
$
1.24

 
$
1.49

The accompanying notes are an integral part of these consolidated financial statements.

20


United States Cellular Corporation
Consolidated Statement of Cash Flows
(Unaudited)
 
Nine Months Ended
September 30,
 
2019
 
2018
(Dollars in millions)
 
 
 
Cash flows from operating activities
 
 
 
Net income
$
115

 
$
143

Add (deduct) adjustments to reconcile net income to net cash flows from operating activities
 
 
 
Depreciation, amortization and accretion
524

 
478

Bad debts expense
77

 
67

Stock-based compensation expense
32

 
26

Deferred income taxes, net
(34
)
 
(4
)
Equity in earnings of unconsolidated entities
(128
)
 
(120
)
Distributions from unconsolidated entities
99

 
90

(Gain) loss on asset disposals, net
13

 
5

(Gain) loss on sale of business and other exit costs, net
(1
)
 

(Gain) loss on license sales and exchanges, net

 
(18
)
Other operating activities
3

 
2

Changes in assets and liabilities from operations
 
 
 
Accounts receivable
(35
)
 
(1
)
Equipment installment plans receivable
(42
)
 
(88
)
Inventory
3

 
15

Accounts payable
(4
)
 
21

Customer deposits and deferred revenues
(1
)
 
(5
)
Accrued taxes
81

 
1

Accrued interest
9

 
9

Other assets and liabilities
(24
)
 
(21
)
Net cash provided by operating activities
687

 
600

 
 
 
 
Cash flows from investing activities
 
 
 
Cash paid for additions to property, plant and equipment
(439
)
 
(277
)
Cash paid for licenses
(257
)
 
(2
)
Cash received from investments
29

 
50

Cash paid for investments
(11
)
 

Cash received from divestitures and exchanges
32

 
23

Other investing activities
(1
)
 
3

Net cash used in investing activities
(647
)
 
(203
)
 
 
 
 
Cash flows from financing activities
 
 
 
Repayment of long-term debt
(14
)
 
(14
)
Common Shares reissued for benefit plans, net of tax payments
(8
)
 
7

Repurchase of Common Shares
(21
)
 

Distributions to noncontrolling interests
(3
)
 
(5
)
Other financing activities
(2
)
 
(5
)
Net cash used in financing activities
(48
)
 
(17
)
 
 
 
 
Net increase (decrease) in cash, cash equivalents and restricted cash
(8
)
 
380

 
 
 
 
Cash, cash equivalents and restricted cash
 
 
 
Beginning of period
583

 
352

End of period
$
575

 
$
732


The accompanying notes are an integral part of these consolidated financial statements.

21


United States Cellular Corporation
Consolidated Balance Sheet — Assets
(Unaudited)
 
September 30, 2019
 
December 31, 2018
(Dollars in millions)
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
570

 
$
580

Short-term investments

 
17

Accounts receivable
 
 
 
Customers and agents, less allowances of $69 and $66, respectively
899

 
908

Roaming
34

 
20

Affiliated

 
2

Other, less allowances of $1 and $2, respectively
60

 
46

Inventory, net
139

 
142

Prepaid expenses
49

 
63

Other current assets
19

 
34

Total current assets
1,770

 
1,812

 
 
 
 
Assets held for sale
9

 
54

 
 
 
 
Licenses
2,461

 
2,186

 
 
 
 
Investments in unconsolidated entities
471

 
441

 
 
 
 
Property, plant and equipment
 
 
 
In service and under construction
8,088

 
7,778

Less: Accumulated depreciation and amortization
5,944

 
5,576

Property, plant and equipment, net
2,144

 
2,202

 
 
 
 
Operating lease right-of-use assets
897

 

 
 
 
 
Other assets and deferred charges
539

 
579

 
 
 
 
Total assets1
$
8,291

 
$
7,274

The accompanying notes are an integral part of these consolidated financial statements.

22


United States Cellular Corporation
Consolidated Balance Sheet — Liabilities and Equity
(Unaudited)
 
September 30, 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
8

 
9

Trade
329

 
304

Customer deposits and deferred revenues
155

 
157

Accrued taxes
88

 
30

Accrued compensation
68

 
78

Short-term operating lease liabilities
104

 

Other current liabilities
78

 
94

Total current liabilities
849

 
691

 
 
 
 
Liabilities held for sale
1

 
1

 
 
 
 
Deferred liabilities and credits
 
 
 
Deferred income tax liability, net
477

 
510

Long-term operating lease liabilities
864

 

Other deferred liabilities and credits
312

 
389

 
 
 
 
Long-term debt, net
1,592

 
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
1,622

 
1,590

Treasury shares, at cost, 2 Common Shares
(70
)
 
(65
)
Retained earnings
2,532

 
2,444

Total U.S. Cellular shareholders' equity
4,172

 
4,057

 
 
 
 
Noncontrolling interests
13

 
10

 
 
 
 
Total equity
4,185

 
4,067

 
 
 
 
Total liabilities and equity1
$
8,291

 
$
7,274


The accompanying notes are an integral part of these consolidated financial statements.
 

1
The consolidated total assets as of September 30, 2019 and December 31, 2018, include assets held by consolidated variable interest entities (VIEs) of $927 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 September 30, 2019 and December 31, 2018, include certain liabilities of consolidated VIEs of $20 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 10Variable Interest Entities for additional information.

23


United States Cellular Corporation
Consolidated Statement of Changes in Equity
(Unaudited)
 
U.S. Cellular Shareholders