0000821130-20-000066.txt : 20200806 0000821130-20-000066.hdr.sgml : 20200806 20200806163317 ACCESSION NUMBER: 0000821130-20-000066 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 73 CONFORMED PERIOD OF REPORT: 20200630 FILED AS OF DATE: 20200806 DATE AS OF CHANGE: 20200806 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: 201082257 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 usm630202010q.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 June 30, 2020
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
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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 June 30, 2020, is 52,930,800 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 June 30, 2020
 
 
Index
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




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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 six months ended June 30, 2020, to the three and six months ended June 30, 2019. It should be read in conjunction with U.S. Cellular’s interim consolidated financial statements and notes included herein, and with the description of U.S. Cellular’s business, its audited consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) included in U.S. Cellular’s Annual Report on Form 10-K (Form 10-K) for the year ended December 31, 2019. Certain numbers included herein are rounded to millions for ease of presentation; however, certain calculated amounts and percentages are determined using the unrounded numbers. 
This report contains statements that are not based on historical facts, including the words “believes,” “anticipates,” “estimates,” “expects,” “plans,” “intends,” “projects” and similar expressions. These statements constitute and represent “forward looking statements” as this term is defined in the Private Securities Litigation Reform Act of 1995. Such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward looking statements. See Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement for additional information.
U.S. Cellular uses certain “non-GAAP financial measures” and each such measure is identified in the MD&A. A discussion of the reason U.S. Cellular determines these metrics to be useful and a reconciliation of these measures to their most directly comparable measures determined in accordance with accounting principles generally accepted in the United States of America (GAAP) are included in the Supplemental Information Relating to Non-GAAP Financial Measures section within the MD&A of this Form 10-Q Report.

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 community focus.
COVID-19 considerations
The impact of the global spread of coronavirus (COVID-19) on U.S. Cellular's future operations is uncertain. There are many factors, including the severity and duration of the outbreak, as well as other direct and indirect impacts, that are expected to negatively impact U.S. Cellular.
COVID-19 impacts on U.S. Cellular's business for the six months ended June 30, 2020 include a reduction in service revenues and equipment sales, and a reduction in handset subscriber gross additions and defections. The impacts of COVID-19 on this and future periods are expected to negatively affect U.S. Cellular’s results of operations, cash flows and financial position. The extent and duration of these impacts are uncertain due to many factors and could be material. Certain impacts on and actions by U.S. Cellular related to COVID-19 include, but are not limited to, the following:
Taking action to keep associates safe, including implementing a work-from-home strategy for employees whose jobs can be performed remotely. In addition, to keep associates, customers, and communities safe, U.S. Cellular temporarily closes retail stores for enhanced cleanings, continues to operate with reduced store hours, and provides associates with personal protective equipment to be worn during customer interactions. U.S. Cellular has also implemented a daily health check process for associates and requires social distancing and mask wearing in all company facilities, including stores. Throughout this period of change, U.S. Cellular has continued serving its customers and ensuring its wireless network remains fully operational.
Participated in the FCC Keep Americans Connected Pledge, through June 30, 2020, to not turn-off service or charge late fees due to a customer’s inability to pay their bill due to circumstances related to COVID-19. This resulted in a reduction in non-pay defections, as well as reduced service revenues, for the six months ended June 30, 2020. Non-pay defections are expected to increase in future periods as the FCC Keep Americans Connected Pledge ended on June 30, 2020 and certain accounts that were part of the Pledge are expected to terminate due to non-payment.
Waiving overage charges and certain other charges. This resulted in reduced service revenues during the three and six months ended June 30, 2020.
Supporting the communities in which U.S. Cellular operates. Through U.S. Cellular’s partnership with the Boys & Girls Clubs, U.S. Cellular has contributed to the Boys & Girls Clubs’ COVID-19 Relief Fund to support children, families and communities. These funds are dispersed directly to more than 50 clubs in U.S. Cellular’s service regions to support the most immediate needs of youth in areas of importance such as providing food for children who rely on their Boys & Girls Clubs for their dinner, care for children of essential workers and first responders, and digital learning resources. In additional to monetary donations, in-person volunteerism has been replaced by virtual volunteerism, with associates participating in events such as reading for the visually impaired and mentoring for students.
Recognizing income tax benefits associated with the enactment of the CARES Act. This legislation resulted in a reduction to income tax expense for the three and six months ended June 30, 2020. The CARES Act is also projected to result in a reduction of income tax expense recognized throughout the 2020 tax year as part of the estimated annual effective tax rate, and a cash refund in 2021 of taxes paid in prior years.
Monitoring its supply chain to assess impacts to availability and costs of device inventory and network equipment and services, including monitoring the dependency on third parties to continue network related projects. Various states' stay-at-home orders could cause delays in municipal permitting and other contractor work. At this time, U.S. Cellular expects to be able to meet customer demand for devices and services and to be able to continue its 4G LTE network modernization and 5G deployment with no significant disruptions.
Tracking increased customer usage and the impact of the removal of data caps. At this time, U.S. Cellular believes its network capacity is sufficient to accommodate expected increased usage.
Monitoring roaming behaviors. Both inbound and outbound roaming traffic have been dampened by COVID-19 as wireless customers are reducing travel. The extent to which roaming traffic will be impacted by the pandemic in the future will depend upon governmental mandates and customer behavior in response to the outbreak.
See the following areas within this MD&A for additional discussion of the impacts of COVID-19:
Operational Overview
Financial Overview — Income tax expense
Liquidity and Capital Resources
Risk Factors

2


 
OPERATIONS
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Serves customers with 4.9 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 5,400 associates
4,208 owned towers
6,673 cell sites in service
 

3


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.
U.S. Cellular plans to continue 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 offers economical and competitively priced service plans and devices to its customers and is focused on increasing revenues from sales of related products such as accessories and device protection plans and from new services such as home internet. In addition, U.S. Cellular is focused on expanding its solutions available to business and government customers.
U.S. Cellular continues to devote efforts to enhance its network capabilities. VoLTE technology is now available to nearly 90% of U.S Cellular's subscribers, and deployments in additional operating markets are expected later in 2020. VoLTE technology allows customers to utilize a 4G LTE network for both voice and data services and offers enhanced services such as high definition voice and simultaneous voice and data sessions.
U.S. Cellular has launched commercial 5G services in Iowa and Wisconsin and will continue to launch in additional areas throughout 2020 and beyond. 5G technology is expected to help address customers' growing demand for data services as well as create opportunities for new services requiring high speed, reliability and low latency. In addition to the deployment of 5G technology, U.S. Cellular is also modernizing its 4G LTE network to further enhance 4G LTE speeds.
U.S. Cellular assesses its existing wireless interests on an ongoing basis with a goal of improving the competitiveness of its operations and maximizing its long-term return on capital. As part of this strategy, U.S. Cellular actively seeks attractive opportunities to acquire wireless spectrum, including pursuant to FCC auctions such as Auctions 103 and 105.


4


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.
Auctions 103 and 105 – Auction 103 is an FCC auction of 37, 39, and 47 GHz wireless spectrum licenses that started in December 2019 and concluded in March 2020. Auction 105 is an FCC auction of 3.5 GHz wireless spectrum licenses and bidding commenced in July 2020.
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.
Coronavirus Aid, Relief, and Economic Security (CARES) Act – economic relief package signed into law on March 27, 2020 to address the public health and economic impacts of COVID-19, including a variety of tax provisions.
EBITDA – refers to earnings before interest, taxes, depreciation, amortization and accretion and is used in the non-GAAP metric Adjusted EBITDA throughout this document. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information.
FCC Keep Americans Connected Pledge – voluntary FCC initiative in response to the COVID-19 pandemic to ensure that Americans do not lose their broadband or telephone connectivity as a result of the exceptional circumstance.
Free Cash Flow – non-GAAP metric defined as Cash flows from operating activities less Cash paid for additions to property, plant and equipment. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information.
Gross Additions – represents the total number of new connections added during the period, without regard to connections that were terminated during that period.
Net Additions (Losses) – represents the total number of new connections added during the period, net of connections that were terminated during that period.
OIBDA – refers to operating income before depreciation, amortization and accretion and is used in the non-GAAP metric Adjusted OIBDA throughout this document. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information.
Postpaid Average Revenue per Account (Postpaid ARPA) – metric which is calculated by dividing total postpaid service revenues by the average number of postpaid accounts and by the number of months in the period.
Postpaid Average Revenue per User (Postpaid ARPU) – metric which is calculated by dividing total postpaid service revenues by the average number of postpaid connections and by the number of months in the period.
Retail Connections – the sum of postpaid connections and prepaid connections.
Universal Service Fund (USF) – a system of telecommunications collected fees and support payments managed by the FCC intended to promote universal access to telecommunications services in the United States.
VoLTE – Voice over Long-Term Evolution is a technology specification that defines the standards and procedures for delivering voice communications and related services over 4G LTE networks.

5


Operational Overview
chart-797c1ab4a3f25a9e82b.jpg
 
 
 
 
 
 
 
 
 
 
 
 
 
As of June 30,
 
2020
 
2019
Retail Connections – End of Period
 
 
 
Postpaid
 
4,372,000
 
4,414,000
 
Prepaid
 
496,000
 
500,000
 
Total
 
4,868,000
 
4,914,000
 
 
 
 
 
 
 
 
 
 
 
 


 
Q2 2020
 
Q2 2019
 
Q2 2020 vs. Q2 2019
 
YTD 2020
 
YTD 2019
YTD 2020 vs. YTD 2019
Postpaid Activity and Churn
 
Gross Additions
 
 
 
 
 
 
 
 
 
 
Handsets
85,000

 
102,000

 
(17
)%
 
175,000

 
203,000

(14
)%
Connected Devices
44,000

 
35,000

 
26
 %
 
86,000

 
70,000

23
 %
Total Gross Additions
129,000

 
137,000

 
(6
)%
 
261,000

 
273,000

(4
)%
Net Additions (Losses)
 
 
 
 
 
 
 
 
 
 
Handsets
3,000

 
(11,000
)
 
N/M

 
(17,000
)
 
(25,000
)
32
 %
Connected Devices
9,000

 
(15,000
)
 
N/M

 
3,000

 
(33,000
)
N/M

Total Net Additions (Losses)
12,000

 
(26,000
)
 
N/M

 
(14,000
)
 
(58,000
)
76
 %
Churn
 
 
 
 
 
 
 
 
 
 
Handsets
0.71
%
 
0.97
%
 
 
 
0.83
%
 
0.98
%
 
Connected Devices
2.24
%
 
3.01
%
 
 
 
2.67
%
 
3.05
%
 
Total Churn
0.89
%
 
1.23
%
 
 
 
1.05
%
 
1.24
%
 
N/M - Percentage change not meaningful
Total postpaid handset net additions increased for the three months ended June 30, 2020, when compared to the same period last year. Handset defections decreased as a result of lower consumer switching activity related to COVID-19, as well as a reduction in non-pay defections related to the FCC Keep Americans Connected Pledge. Partially offsetting the decrease in defections were lower gross additions resulting from lower consumer switching activity.
Total postpaid handset net additions increased for the six months ended June 30, 2020, when compared to the same period last year. Handset defections decreased as a result of lower consumer switching activity related to COVID-19, as well as a reduction in non-pay defections related to the FCC Keep Americans Connected Pledge. Partially offsetting the decrease in defections were lower gross additions resulting from aggressive industry-wide competition in the first quarter of 2020 and lower consumer switching activity in the second quarter of 2020.
Total postpaid connected device net additions increased for the three and six months ended June 30, 2020, when compared to the same period last year. The increase is due to (i) a decrease in tablet defections and (ii) an increase in demand for internet related products given a need for remote connectivity related to COVID-19.
Non-pay defections are expected to increase in future periods as the FCC Keep Americans Connected Pledge ended on June 30, 2020 and certain accounts that were part of the Pledge are expected to terminate due to non-payment.

6


Postpaid Revenue
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020 vs. 2019
 
2020
 
2019
 
2020 vs. 2019
Average Revenue Per User (ARPU)
$
46.24

 
$
45.90

 
1
%
 
$
46.72

 
$
45.66

 
2
%
Average Revenue Per Account (ARPA)
$
120.70

 
$
119.46

 
1
%
 
$
121.80

 
$
119.15

 
2
%
Postpaid ARPU and Postpaid ARPA increased for the three and six months ended June 30, 2020, when compared to the same period last year, due primarily to (i) having proportionately fewer tablet connections, which on a per-unit basis contribute less revenue than smartphone devices, (ii) an increase in regulatory recovery revenues, and (iii) an increase in device protection plan revenues. These increases were partially offset by the impact of waiving overage charges, a measure U.S. Cellular has taken to assist customers during the COVID-19 pandemic.

7


Financial Overview
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020 vs. 2019
 
2020
 
2019
 
2020 vs. 2019
(Dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
Retail service
$
658

 
$
662

 
(1
)%
 
$
1,329

 
$
1,322

 
1
 %
Inbound roaming
41

 
44

 
(8
)%
 
77

 
78

 

Other
54

 
51

 
7
 %
 
109

 
98

 
10
 %
Service revenues
753

 
757

 
(1
)%
 
1,515

 
1,498

 
1
 %
Equipment sales
220

 
216

 
2
 %
 
422

 
441

 
(4
)%
Total operating revenues
973

 
973

 

 
1,937

 
1,939

 

 
 
 
 
 
 
 
 
 
 
 
 
System operations (excluding Depreciation, amortization and accretion reported below)
197

 
193

 
2
 %
 
377

 
369

 
2
 %
Cost of equipment sold
218

 
224

 
(3
)%
 
435

 
458

 
(5
)%
Selling, general and administrative
323

 
344

 
(6
)%
 
659

 
669

 
(2
)%
Depreciation, amortization and accretion
178

 
177

 
1
 %
 
354

 
345

 
3
 %
(Gain) loss on asset disposals, net
4

 
5

 
(19
)%
 
8

 
7

 
7
 %
(Gain) loss on sale of business and other exit costs, net

 

 
N/M

 

 
(2
)
 
N/M

(Gain) loss on license sales and exchanges, net

 

 
N/M

 

 
(2
)
 
N/M

Total operating expenses
920

 
943

 
(2
)%
 
1,833

 
1,844

 
(1
)%
 
 
 
 
 
 
 
 
 
 
 
 
Operating income
$
53

 
$
30

 
74
 %
 
$
104

 
$
95

 
9
 %
 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
69

 
$
32

 
N/M

 
$
141

 
$
90

 
56
 %
Adjusted OIBDA (Non-GAAP)1
$
235

 
$
212

 
11
 %
 
$
466

 
$
443

 
5
 %
Adjusted EBITDA (Non-GAAP)1
$
280

 
$
257

 
9
 %
 
$
560

 
$
537

 
4
 %
Capital expenditures2
$
168

 
$
195

 
(14
)%
 
$
405

 
$
297

 
36
 %
N/M - Percentage change not meaningful
1
Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.
2 
Refer to Liquidity and Capital Resources within this MD&A for additional information on Capital expenditures.

8


 
Operating Revenues
Three Months Ended June 30, 2020 and 2019
(Dollars in millions)
chart-d714c8bcb4125780a63.jpg
 
Operating Revenues
Six Months Ended June 30, 2020 and 2019
(Dollars in millions)
chart-8728388539713a572fe.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 decreased for the three months ended June 30, 2020, primarily as a result of a decline in the average number of subscribers compared to the second quarter of 2019, partially offset by the increase in Postpaid ARPU as previously discussed in the Operational Overview section. Retail service revenues increased for the six months ended June 30, 2020, primarily as a result of the increase in Postpaid ARPU, partially offset by a decline in subscribers.
Inbound roaming revenues decreased for the three and six months ended June 30, 2020, primarily driven by lower data revenues, with lower rates partially offset by higher usage.
Other service revenues increased for the three and six months ended June 30, 2020, largely due to an increase in tower rental revenues.
Equipment sales revenues increased for the three months ended June 30, 2020, due primarily to an increase in device sales volumes. This was partially offset by lower average revenue per device and a decrease in accessory sales. Equipment sales revenues decreased for the six months ended June 30, 2020, due primarily to lower average revenue per device and a decrease in accessory sales, partially offset by an increase in device sales volumes.

9


System operations expenses
System operations expenses increased for the three and six months ended June 30, 2020, due to increases in cell site rent expense, non-capitalizable costs to add network capacity, and costs to decommission network assets. Such factors were partially offset by a decrease in roaming expense as a result of lower data rates, partially offset by higher data roaming usage.
Cost of equipment sold
Cost of equipment sold decreased for the three and six months ended June 30, 2020, due primarily to (i) lower average cost per device, (ii) a shift in mix from new device sales to used device sales, (iii) a decrease in accessory sales and (iv) a decrease in charges recorded to reduce inventory to its net realizable value. These decreases were partially offset by an increase in volume of devices sold.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased for the three and six months ended June 30, 2020, driven primarily by decreases in bad debts expense, advertising expense and employee related expense.
Depreciation, amortization and accretion
Depreciation, amortization, and accretion increased for the six months ended June 30, 2020, due to accelerated depreciation of certain assets due to changes in network technology, which will continue throughout 2020 and beyond.
Components of Other Income (Expense)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020 vs. 2019
 
2020
 
2019
 
2020 vs. 2019
(Dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
Operating income
$
53

 
$
30

 
74
 %
 
$
104

 
$
95

 
9
 %
 
 
 
 
 
 
 
 
 
 
 
 
Equity in earnings of unconsolidated entities
44

 
40

 
8
 %
 
89

 
84

 
6
 %
Interest and dividend income
1

 
5

 
(79
)%
 
5

 
11

 
(54
)%
Interest expense
(25
)
 
(29
)
 
15
 %
 
(49
)
 
(58
)
 
17
 %
Other, net

 

 
N/M

 

 
(1
)
 
N/M

Total investment and other income
20

 
16

 
31
 %
 
45

 
36

 
27
 %
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
73

 
46

 
60
 %
 
149

 
131

 
14
 %
Income tax expense
4

 
14

 
(71
)%
 
8

 
41

 
(81
)%
 
 
 
 
 
 
 
 
 
 
 
 
Net income
69

 
32

 
N/M

 
141

 
90

 
56
 %
Less: Net income attributable to noncontrolling interests, net of tax
1

 
1

 
42
 %
 
2

 
4

 
(51
)%
Net income attributable to U.S. Cellular shareholders
$
68

 
$
31

 
N/M

 
$
139

 
$
86

 
62
 %
N/M - Percentage change not meaningful
Equity in earnings of unconsolidated entities
Equity in earnings of unconsolidated entities represents U.S. Cellular’s share of net income from entities in which it has a noncontrolling interest and that are accounted for using the equity method. U.S. Cellular’s investment in the Los Angeles SMSA Limited Partnership (LA Partnership) contributed pretax income of $20 million and $19 million for the three months ended June 30, 2020 and 2019, respectively, and $42 million and $40 million for the six months ended June 30, 2020 and 2019, respectively. See Note 8Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.
Interest and dividend income
Interest and dividend income decreased for the three and six months ended June 30, 2020, driven by lower average investment balances and lower interest rates.
Interest expense
Interest expense decreased for the three and six months ended June 30, 2020, primarily as a result of a higher amount of capitalized interest. Also contributing to the decrease was a $100 million principal prepayment made in October 2019 on a senior term loan. 

10


Income tax expense
The effective tax rate on Income before income taxes for the three months ended June 30, 2020 and 2019, was 5.5% and 30.1%, respectively. The effective tax rate on Income before income taxes for the six months ended June 30, 2020 and 2019, was 5.2% and 31.0%, respectively. The lower effective tax rate in 2020 as compared to 2019 is due primarily to the income tax benefits of the CARES Act enacted on March 27, 2020.
The CARES Act provides retroactive eligibility of bonus depreciation on qualified improvement property put into service after December 31, 2017 and a 5-year carryback of net operating losses generated in years 2018-2020. As the statutory federal tax rate applicable to certain years within the carryback period is 35%, carryback to those years provides a tax benefit in excess of the current federal statutory rate of 21%, resulting in a reduction of income tax expense. U.S. Cellular projects that the income tax effects of the CARES Act will result in a reduction of income tax expense recognized throughout the 2020 tax year as part of the estimated annual effective tax rate, and a cash refund in 2021 of taxes paid in prior years.

11


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.
U.S. Cellular has incurred negative free cash flow at times in the past and this could occur in the future, and forecasting future cash flow is more challenging with the various risks and uncertainties related to COVID-19. However, U.S. Cellular believes that existing cash and investment balances, funds available under its revolving credit, term loan and receivables securitization agreements, and expected cash flows from operating and investing activities will provide sufficient liquidity for U.S. Cellular to meet its normal day-to-day operating needs and debt service requirements for the coming year. U.S. Cellular will continue to monitor the rapidly changing business and market conditions and plans to take appropriate actions, as necessary, to meet its liquidity needs.
U.S. Cellular may require substantial additional capital for, among other uses, funding day-to-day operating needs including working capital, acquisitions of providers of wireless telecommunications services, wireless spectrum license or system acquisitions, capital expenditures, debt service requirements, the repurchase of shares, or making additional investments. It may be necessary from time to time to increase the size of the existing revolving credit agreement, to put in place new credit agreements, or to obtain other forms of financing in order to fund potential expenditures. U.S. Cellular made payments related to wireless spectrum auctions in 2020 (see Regulatory Matters - Spectrum Auctions). U.S. Cellular also expects annual capital expenditures in 2020 to be higher than in 2019, due primarily to investments to enhance network speed and capacity and to continue deploying VoLTE and 5G technology in its 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, distributions from unconsolidated entities are discontinued or significantly reduced 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.

12


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 including the purchase of wireless spectrum licenses.
 

Cash and Cash Equivalents
(Dollars in millions)
chart-3959780b1d2356f6a95.jpg
 




At June 30, 2020, U.S. Cellular's cash and cash equivalents totaled $418 million compared to $285 million at December 31, 2019.
The majority of U.S. Cellular’s Cash and cash equivalents are held in bank deposit accounts and in money market funds that purchase only debt issued by the U.S. Treasury or U.S. government agencies.
 
Financing
In March 2020, U.S. Cellular entered into a new $300 million unsecured revolving credit agreement with certain lenders and other parties. Amounts under the new revolving credit agreement may be borrowed, repaid and reborrowed from time to time until maturity in March 2025. As a result of the new agreement, U.S. Cellular's previous revolving credit agreement due to expire in May 2023 was terminated. As of June 30, 2020, 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 2020, U.S. Cellular amended its senior term loan credit agreement in order to conform the agreement with its revolving credit agreement. There were no significant changes to other key terms of the senior term loan credit agreement. In June 2020, U.S. Cellular amended and restated its senior term loan agreement and increased its borrowing capacity to $300 million. There were no significant changes to other key terms of the U.S. Cellular senior term loan credit agreement.
U.S. Cellular, through its subsidiaries, also has a receivables securitization agreement to permit securitized borrowings using its equipment installment plan receivables. In April 2020, U.S. Cellular borrowed $125 million under its receivables securitization agreement. The unused capacity under this agreement was $75 million as of June 30, 2020, subject to sufficient collateral to satisfy the asset borrowing base provisions of the agreement.
U.S. Cellular believes that it was in compliance with all of the financial covenants and requirements set forth in its revolving credit agreement, senior term loan credit agreement and receivables securitization agreement as of June 30, 2020.
U.S. Cellular has an effective shelf registration statement on Form S-3 to issue senior or subordinated debt securities.

13


Capital Expenditures
Capital expenditures (i.e., additions to property, plant and equipment and system development expenditures; excludes wireless spectrum license additions), which include the effects of accruals and capitalized interest, for the six months ended June 30, 2020 and 2019, were as follows:
 

Capital Expenditures
(Dollars in millions)
chart-0872aa6cc3105c3f9b4.jpg
 



U.S. Cellular’s capital expenditures for the six months ended June 30, 2020 and 2019, were $405 million and $297 million, respectively.
Capital expenditures for the full year 2020 are expected to be between $850 million and $950 million. These expenditures are expected to be used principally for the following purposes:
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;
Continue deploying 5G technology in 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 2020 using primarily Cash flows from operating activities, existing cash balances and, if required, additional debt financing from its receivables securitization agreement, senior term loan credit agreement, revolving credit agreement and/or other forms of financing.
Acquisitions, Divestitures and Exchanges
U.S. Cellular may be engaged from time to time in negotiations (subject to all applicable regulations) relating to the acquisition, divestiture or exchange of companies, properties or wireless spectrum licenses (including pursuant to FCC auctions). In general, U.S. Cellular may not disclose such transactions until there is a definitive agreement.
In March 2020, the FCC announced by way of public notice that U.S. Cellular was the provisional winning bidder for 237 wireless spectrum licenses in the 37, 39 and 47 GHz bands (Auction 103) for $146 million. U.S. Cellular paid $24 million of this amount in the three months ended March 31, 2020 and substantially all of the remainder in April 2020. In June 2020, the wireless spectrum licenses from Auction 103 were granted by the FCC.
Variable Interest Entities
U.S. Cellular consolidates certain “variable interest entities” as defined under GAAP. See Note 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
During the six months ended June 30, 2020, U.S. Cellular repurchased 803,836 Common Shares for $23 million at an average cost per share of $29.00. As of June 30, 2020, the total cumulative amount of U.S. Cellular Common Shares authorized to be repurchased is 4,507,000. For additional information related to the current repurchase authorization, see Unregistered Sales of Equity Securities and Use of Proceeds.
Contractual and Other Obligations
There were no material changes outside the ordinary course of business between December 31, 2019 and June 30, 2020, to the Contractual and Other Obligations disclosed in MD&A included in U.S. Cellular’s Form 10-K for the year ended December 31, 2019. In April 2020, U.S. Cellular borrowed $125 million under its receivables securitization agreement.

14


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.

15


Consolidated Cash Flow Analysis
U.S. Cellular operates a capital-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. 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 six months ended June 30, 2020 and 2019.
2020 Commentary
U.S. Cellular’s Cash, cash equivalents and restricted cash increased $145 million. Net cash provided by operating activities was $692 million due to net income of $141 million adjusted for non-cash items of $441 million, distributions received from unconsolidated entities of $90 million including $43 million in distributions from the LA Partnership, and changes in working capital items which increased net cash by $20 million. The working capital changes were primarily influenced by timing of vendor payments and collections of customer and agent receivables, partially offset by tax impacts from the CARES Act and annual employee bonus payments.
Cash flows used for investing activities were $631 million. Cash paid for additions to property, plant and equipment totaled $471 million. Cash payments for wireless spectrum license acquisitions were $144 million.
Cash flows provided by financing activities were $84 million, reflecting the $125 million borrowed under the receivables securitization agreement, partially offset by the repurchase of $23 million of Common Shares.
2019 Commentary
U.S. Cellular’s Cash, cash equivalents and restricted cash decreased $51 million. Net cash provided by operating activities was $476 million due to net income of $90 million plus non-cash items of $366 million and distributions received from unconsolidated entities of $76 million, including $33 million in distributions from the LA Partnership. This was offset by changes in working capital items which decreased net cash by $56 million. The primary working capital changes were a reduction in accrued compensation reflecting annual employee bonus payments and a decline in the amounts due to agents driven by lower sales volume.
Cash flows used for investing activities were $506 million. Cash paid for additions to property, plant and equipment totaled $282 million. Cash payments for wireless spectrum license acquisitions were $255 million. These were partially offset by Cash received from divestitures and exchanges of $32 million.
Cash flows used for financing activities were $21 million, reflecting ordinary activity such as the scheduled repayments of debt.

16


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 2020 were as follows:
Income taxes receivable
Income taxes receivable increased $76 million primarily reflecting future tax refunds attributable to the expected carryback of 2020 net operating losses, as allowed under the CARES Act which was enacted in March 2020.
Deferred income tax liability, net
Deferred income tax liability, net increased $106 million due primarily to full deductibility for tax purposes of qualified property placed in service during the current year.

17


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 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 and Operating income are deemed appropriate. Management believes Adjusted EBITDA and Adjusted OIBDA are useful measures of U.S. Cellular’s operating results before significant recurring non-cash charges, gains and losses, and other items as presented below as they provide additional relevant and useful information to investors and other users of U.S. Cellular’s financial data in evaluating the effectiveness of its operations and underlying business trends in a manner that is consistent with management’s evaluation of business performance. Adjusted EBITDA shows adjusted earnings before interest, taxes, depreciation, amortization and accretion, and gains and losses, while Adjusted OIBDA reduces this measure further to exclude Equity in earnings of unconsolidated entities and Interest and dividend income in order to more effectively show the performance of operating activities excluding investment activities. The following table reconciles EBITDA, Adjusted EBITDA and Adjusted OIBDA to the corresponding GAAP measures, Net income and Operating income.

18


 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
(Dollars in millions)
 
 
 
 
 
 
 
Net income (GAAP)
$
69

 
$
32

 
$
141

 
$
90

Add back:

 

 

 

Income tax expense
4

 
14

 
8

 
41

Interest expense
25

 
29

 
49

 
58

Depreciation, amortization and accretion
178

 
177

 
354

 
345

EBITDA (Non-GAAP)
276

 
252

 
552

 
534

Add back or deduct:

 

 

 

(Gain) loss on asset disposals, net
4

 
5

 
8

 
7

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

 

 

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

 

 

 
(2
)
Adjusted EBITDA (Non-GAAP)
280

 
257

 
560

 
537

Deduct:

 

 

 

Equity in earnings of unconsolidated entities
44

 
40

 
89

 
84

Interest and dividend income
1

 
5

 
5

 
11

Other, net

 

 

 
(1
)
Adjusted OIBDA (Non-GAAP)
235

 
212

 
466

 
443

Deduct:

 

 

 

Depreciation, amortization and accretion
178

 
177

 
354

 
345

(Gain) loss on asset disposals, net
4

 
5

 
8

 
7

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

 

 

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

 

 

 
(2
)
Operating income (GAAP)
$
53

 
$
30

 
$
104

 
$
95

Free Cash Flow
The following table presents Free cash flow, 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. 
 
Six Months Ended
June 30,
 
2020
 
2019
(Dollars in millions)
 
 
 
Cash flows from operating activities (GAAP)
$
692

 
$
476

Less: Cash paid for additions to property, plant and equipment
471

 
282

Free cash flow (Non-GAAP)
$
221

 
$
194


19


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, Note 2 — Revenue Recognition and Note 10 — Leases in the Notes to Consolidated Financial Statements and U.S. Cellular’s Application of Critical Accounting Policies and Estimates is discussed in detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are included in U.S. Cellular’s Form 10-K for the year ended December 31, 2019
Recent Accounting Pronouncements
See Note 1Basis of Presentation in the Notes to Consolidated Financial Statements for information on recent accounting pronouncements.
Regulatory Matters
5G Fund
Issuance of a Notice of Proposed Rulemaking (NPRM) was approved at the FCC's Open Meeting on April 23, 2020, seeking comment on a proposal to create a new fund for 5G deployment in rural areas. The proposal includes a 5G fund for rural areas, which would be implemented through a two-phase competitive process, using multi-round auctions to award support to the provider willing to serve each area at required performance levels for the lowest amount of support. The proposed funding is $9 billion to be disbursed over ten years. The proposal seeks comments on the timing for the auction, the approach for determining eligible areas, minimum speed requirements, and a transition plan from legacy support to 5G fund support. The NPRM proposes that the 5G fund be in lieu of the previously proposed fund (the Phase II Connect America Mobility Fund) for the development of 4G LTE.
U.S. Cellular cannot predict at this time when the 5G fund auction will occur, if ever, when the phase down period for its existing legacy support from the Federal USF will commence, or whether the 5G fund auction will provide opportunities to U.S. Cellular to offset any loss in existing support.
FCC Rulemaking - Restoring Internet Freedom
In December 2017, the FCC approved rules reversing or revising decisions made in the FCC’s 2015 Open Internet and Title II Order (Restoring Internet Freedom). The 2017 action reversed the FCC’s 2015 decision to reclassify Broadband Internet Access Services as telecommunications services subject to regulation under Title II of the Telecommunications Act. The 2017 action also reversed the FCC’s 2015 restrictions on blocking, throttling and paid prioritization, and modified transparency rules relating to such practices. Several parties filed suit in federal court challenging the 2017 actions. On October 1, 2019, the Court of Appeals for the D.C. Circuit issued an order reaffirming the FCC in most respects, but limiting the FCC's ability to preempt state and local net neutrality laws. On February 19, 2020, the FCC issued a Public Notice seeking comment on three issues under further consideration by the FCC based on a recent D.C. Circuit decision.
A number of states, including certain states in which U.S. Cellular operates, have adopted or considered laws intended to reinstate aspects of the foregoing net neutrality regulations that were reversed or revised by the FCC in 2017. To the extent such laws are enacted, it is expected that legal proceedings will be pursued challenging such laws, subject now to the DC Circuit ruling limiting the FCC's preemptive authority in this matter. U.S. Cellular cannot predict the outcome of these proceedings or the impact on its business.
Spectrum Auctions
On July 11, 2019, the FCC released a Public Notice establishing procedures for an auction offering wireless spectrum licenses in the 37, 39 and 47 GHz bands (Auction 103). On March 12, 2020, the FCC announced by public notice that U.S. Cellular was the provisional winning bidder for 237 wireless spectrum licenses for a purchase price of $146 million. In June 2020, the wireless spectrum licenses from Auction 103 were granted by the FCC.
On March 2, 2020, the FCC released a Public Notice establishing procedures for an auction offering wireless spectrum licenses in the 3.5 GHz band (Auction 105). On May 5, 2020, U.S. Cellular filed an application to participate in Auction 105 and on July 1, 2020, the FCC announced that U.S. Cellular was a qualified bidder for the auction. Bidding commenced on July 23, 2020.
Rural Digital Opportunity Fund
On January 30, 2020, the FCC adopted the Rural Digital Opportunity Fund Report and Order, which establishes the framework for the Rural Digital Opportunity Fund (Auction 904). Auction 904 is a two phase reverse auction to provide funding for high speed fixed broadband service in underserved rural areas. Phase I is scheduled to begin on October 29, 2020. On July 15, 2020, U.S. Cellular filed an application to participate in Auction 904.

20


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, 2019 and in this Form 10-Q. Each of the following risks could have a material adverse effect on U.S. Cellular’s business, financial condition or results of operations. However, such factors are not necessarily all of the important factors that could cause actual results, performance or achievements to differ materially from those expressed in, or implied by, the forward-looking statements contained in this document. Other unknown or unpredictable factors also could have material adverse effects on future results, performance or achievements. U.S. Cellular undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. You should carefully consider the Risk Factors in U.S. Cellular’s Form 10-K for the year ended December 31, 2019, the following factors and other information contained in, or incorporated by reference into, this Form 10-Q to understand the material risks relating to U.S. Cellular’s business, financial condition or results of operations.
The impact of the COVID-19 pandemic on U.S. Cellular's business is uncertain, but depending on its duration and severity it could have a material adverse effect on U.S. Cellular's business, financial condition or results of operations.
Intense competition in the markets in which U.S. Cellular operates could adversely affect U.S. Cellular’s revenues or increase its costs to compete.
A failure by U.S. Cellular to successfully execute its business strategy (including planned acquisitions, spectrum acquisitions, divestitures and exchanges) or allocate resources or capital effectively could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
Uncertainty in U.S. Cellular’s future cash flow and liquidity or the inability to access capital, deterioration in the capital markets, other changes in U.S. Cellular’s performance or market conditions, changes in U.S. Cellular’s credit ratings or other factors could limit or restrict the availability of financing on terms and prices acceptable to U.S. Cellular, which could require U.S. Cellular to reduce its construction, development or acquisition programs, reduce the amount of wireless spectrum licenses acquired, and/or reduce or cease share repurchases.
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.

21


Changes in various business factors, including changes in demand, consumer preferences and perceptions, price competition, churn from customer switching activity and other factors, could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
Advances or changes in technology could render certain technologies used by U.S. Cellular obsolete, could put U.S. Cellular at a 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.
Changes in U.S. Cellular’s enterprise value, changes in the market supply or demand for wireless spectrum licenses, adverse developments in the business or the industry in which U.S. Cellular is involved and/or other factors could require U.S. Cellular to recognize impairments in the carrying value of its wireless spectrum licenses and/or physical assets.
Costs, integration problems or other factors associated with acquisitions, divestitures or exchanges of properties or wireless spectrum licenses and/or expansion of U.S. Cellular’s business could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
A failure by U.S. Cellular to complete significant network construction and systems implementation activities as part of its plans to improve the quality, coverage, capabilities and capacity of its network, support and other systems and infrastructure could have an adverse effect on its operations.
Difficulties involving third parties with which U.S. Cellular does business, including changes in U.S. Cellular's relationships with or financial or operational difficulties of key suppliers or independent agents and third party national retailers who market U.S. Cellular’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.
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.

22


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, 2019, which could materially affect U.S. Cellular’s business, financial condition or future results. The risks described in this Form 10-Q and the Form 10-K for the year ended December 31, 2019, may not be the only risks that could affect U.S. Cellular. Additional unidentified or unrecognized risks and uncertainties could materially adversely affect U.S. Cellular’s business, financial condition and/or operating results. Subject to the foregoing and other than the risk factor set forth below, U.S. Cellular has not identified for disclosure any material changes to the risk factors as previously disclosed in U.S. Cellular’s Annual Report on Form 10-K for the year ended December 31, 2019.
The impact of the COVID-19 pandemic on U.S. Cellular's business is uncertain, but depending on its duration and severity it could have a material adverse effect on U.S. Cellular's business, financial condition or results of operations.
The impact of the recent global spread of COVID-19 on U.S. Cellular's future operations is uncertain. Public health emergencies, such as COVID-19, pose the risk that U.S. Cellular or its associates, agents, partners and suppliers may be unable to conduct business activities for an extended period of time and/or provide the level of service expected. U.S. Cellular's ability to attract customers, maintain an adequate supply chain and execute on its business strategies and initiatives could be negatively impacted by this outbreak. Additionally, COVID-19 has caused and could continue to cause increased unemployment, economic downturn and credit market deterioration, all of which could negatively impact U.S. Cellular. The extent of the impact of COVID-19 on U.S. Cellular's business, financial condition and results of operations will depend on future circumstances, including the severity of the disease, the duration of the outbreak, actions taken by governmental authorities and other possible direct and indirect consequences, all of which are uncertain and cannot be predicted.
Quantitative and Qualitative Disclosures about Market Risk
Market Risk
Refer to the disclosure under Market Risk in U.S. Cellular’s Form 10-K for the year ended December 31, 2019, for additional information, including information regarding required principal payments and the weighted average interest rates related to U.S. Cellular’s Long-term debt. There have been no material changes to such information between December 31, 2019 and June 30, 2020. In April 2020, U.S. Cellular borrowed $125 million under its receivables securitization agreement.
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 June 30, 2020.

23


Financial Statements
United States Cellular Corporation
Consolidated Statement of Operations
(Unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
(Dollars and shares in millions, except per share amounts)
 
 
 
 
 
 
 
Operating revenues
 
 
 
 
 
 
 
Service
$
753

 
$
757

 
$
1,515

 
$
1,498

Equipment sales
220

 
216

 
422

 
441

Total operating revenues
973

 
973

 
1,937

 
1,939

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
System operations (excluding Depreciation, amortization and accretion reported below)
197

 
193

 
377

 
369

Cost of equipment sold
218

 
224

 
435

 
458

Selling, general and administrative
323

 
344

 
659

 
669

Depreciation, amortization and accretion
178

 
177

 
354

 
345

(Gain) loss on asset disposals, net
4

 
5

 
8

 
7

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

 

 

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

 

 

 
(2
)
Total operating expenses
920

 
943

 
1,833

 
1,844

 
 
 
 
 
 
 
 
Operating income
53

 
30

 
104

 
95

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

 
40

 
89

 
84

Interest and dividend income
1

 
5

 
5

 
11

Interest expense
(25
)
 
(29
)
 
(49
)
 
(58
)
Other, net

 

 

 
(1
)
Total investment and other income
20

 
16

 
45

 
36

 
 
 
 
 
 
 
 
Income before income taxes
73

 
46

 
149

 
131

Income tax expense
4

 
14

 
8

 
41

Net income
69

 
32

 
141

 
90

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

 
1

 
2

 
4

Net income attributable to U.S. Cellular shareholders
$
68

 
$
31

 
$
139

 
$
86

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
86

 
87

 
86

 
87

Basic earnings per share attributable to U.S. Cellular shareholders
$
0.79

 
$
0.36

 
$
1.62

 
$
0.99




 


 


 


Diluted weighted average shares outstanding
87

 
88

 
87

 
88

Diluted earnings per share attributable to U.S. Cellular shareholders
$
0.78

 
$
0.35

 
$
1.59

 
$
0.97

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

24


United States Cellular Corporation
Consolidated Statement of Cash Flows
(Unaudited)
 
Six Months Ended
June 30,
 
2020
 
2019
(Dollars in millions)
 
 
 
Cash flows from operating activities
 
 
 
Net income
$
141

 
$
90

Add (deduct) adjustments to reconcile net income to net cash flows from operating activities
 
 
 
Depreciation, amortization and accretion
354

 
345

Bad debts expense
45

 
48

Stock-based compensation expense
17

 
25

Deferred income taxes, net
106

 
27

Equity in earnings of unconsolidated entities
(89
)
 
(84
)
Distributions from unconsolidated entities
90

 
76

(Gain) loss on asset disposals, net
8

 
7

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

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

 
(2
)
Other operating activities

 
2

Changes in assets and liabilities from operations
 
 
 
Accounts receivable
23

 
3

Equipment installment plans receivable
22

 
(11
)
Inventory
17

 
(4
)
Accounts payable
55

 
(7
)
Customer deposits and deferred revenues
(10
)
 
8

Accrued taxes
(67
)
 
3

Other assets and liabilities
(20
)
 
(48
)
Net cash provided by operating activities
692

 
476

 
 
 
 
Cash flows from investing activities
 
 
 
Cash paid for additions to property, plant and equipment
(471
)
 
(282
)
Cash paid for licenses
(144
)
 
(255
)
Cash received from investments
1

 
11

Cash paid for investments
(1
)
 
(11
)
Cash received from divestitures and exchanges
1

 
32

Advance payments for license acquisitions
(16
)
 

Other investing activities
(1
)
 
(1
)
Net cash used in investing activities
(631
)
 
(506
)
 
 
 
 
Cash flows from financing activities
 
 
 
Issuance of long-term debt
125

 

Repayment of long-term debt
(4
)
 
(10
)
Common Shares reissued for benefit plans, net of tax payments
(8
)
 
(8
)
Repurchase of Common Shares
(23
)
 

Payment of debt issuance costs
(4
)
 

Distributions to noncontrolling interests
(1
)
 
(2
)
Other financing activities
(1
)
 
(1
)
Net cash provided by (used in) financing activities
84

 
(21
)
 
 
 
 
Net increase (decrease) in cash, cash equivalents and restricted cash
145

 
(51
)
 
 
 
 
Cash, cash equivalents and restricted cash
 
 
 
Beginning of period
291

 
583

End of period
$
436

 
$
532


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

25


United States Cellular Corporation
Consolidated Balance Sheet — Assets
(Unaudited)
 
June 30, 2020
 
December 31, 2019
(Dollars in millions)
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
418

 
$
285

Accounts receivable
 
 
 
Customers and agents, less allowances of $69 and $70, respectively
874

 
919

Roaming
23

 
27

Affiliated
1

 
1

Other, less allowances of $2 and $1, respectively
56

 
63

Inventory, net
145

 
162

Prepaid expenses
50

 
50

Income taxes receivable
122

 
46

Other current assets
29

 
20

Total current assets
1,718

 
1,573

 
 
 
 
Licenses
2,621

 
2,471

 
 
 
 
Investments in unconsolidated entities
445

 
447

 
 
 
 
Property, plant and equipment
 
 
 
In service and under construction
8,481

 
8,293

Less: Accumulated depreciation and amortization
6,223

 
6,086

Property, plant and equipment, net
2,258

 
2,207

 
 
 
 
Operating lease right-of-use assets
914

 
900

 
 
 
 
Other assets and deferred charges
544

 
566

 
 
 
 
Total assets1
$
8,500

 
$
8,164

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

26


United States Cellular Corporation
Consolidated Balance Sheet — Liabilities and Equity
(Unaudited)
 
June 30, 2020
 
December 31, 2019
(Dollars and shares in millions, except per share amounts)
 
 
 
Current liabilities
 
 
 
Current portion of long-term debt
$
4

 
$
8

Accounts payable
 
 
 
Affiliated
9

 
8

Trade
285

 
296

Customer deposits and deferred revenues
139

 
148

Accrued taxes
30

 
30

Accrued compensation
53

 
76

Short-term operating lease liabilities
112

 
105

Other current liabilities
65

 
79

Total current liabilities
697

 
750

 
 
 
 
Deferred liabilities and credits
 
 
 
Deferred income tax liability, net
613

 
507

Long-term operating lease liabilities
874

 
865

Other deferred liabilities and credits
346

 
319

 
 
 
 
Long-term debt, net
1,625

 
1,502

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Noncontrolling interests with redemption features
11

 
11

 
 
 
 
Equity