|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED STATES
|
SECURITIES AND EXCHANGE COMMISSION
|
Washington, D.C. 20549
|
FORM 10-Q
|
(Mark One)
|
[x]
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended September
30, 2016
|
|
|
|
|
|
|
|
|
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
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yes
|
No
|
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) h
as been subject to such filing requirements for the past 90 days.
|
[x]
|
[ ]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
|
[x]
|
[ ]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer
|
[ ]
|
Accelerated filer
|
[x]
|
Non-accelerated filer
|
[ ]
|
Smaller reporting company
|
[ ]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
|
[ ]
|
[x]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
|
|
|
Outstanding at September 30, 2016
|
Common Shares, $1 par value
|
|
|
51,812,225 Shares
|
Series A Common
Shares, $1 par value
|
|
|
33,005,877 Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Cellular Corporation
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
|
Executive Overview
The following discussion and analysis should be read in conjunction with
United States Cellular Corporation
’s
(“U.S. Cellular
”
)
interim consolidated financial statements and notes included
herein
, and with the description of U.S. Cellular’s business, its a
udited 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, 2015
.
Analysis of U.S. Cellular’s financial results compares the
three and nine
months ended
September 30, 2016
to the
three and nine
months ended
September 30, 2015
. Calculated amounts and percentages are based on the underlying actual numbers rather than the numbers rounded to millions as presented.
This report contains statements that are not based on historical facts, including the words “believes,” “anticipates,” “intends,” “expects” and similar words. These statements constitute and represent “forward looking statements” as this term is defined i
n 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 re
sults, 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 measur
es” throughout 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 accepte
d in the Unit
ed States of America (“GAAP”) are
included in the Supplemental Information
Relating to Non-GAAP Financial Measures
section w
ithin the MD&A of this Form 10-Q
Report.
General
U.S. Cellular
owns, operates, and invests in wireless markets
throughout the United States.
U.S. Cellular is
an
83%
-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 hi
gh-quality network, outstanding customer service, and competitive devices, plans, and pricing, all provided with a local focus.
OPERATIONS
|
|
-
Serves
customers with
approximately
5.0
million connections including
4.5
million postpaid,
0.5
million
prepaid and 0.1 million reseller and other connections
-
Operates in
23
states
-
Employs approximately
6,300
employees
-
Headquartered in Chicago, Illinois
-
6,374
cell sites including
4,015
owned towers in service
|
U.S. Cellular Mission and Strategy
U.S. Cellular’s mission is to provide exceptional wireless communication services which enhance consumers’ lives, increase the competitiveness of local businesses, and improve the efficiency of government operations in the mid-sized and rural markets serve
d.
In 2016, U.S. Cellular will
continue to execute on its strategies to grow revenues by increasing its customer base, driving smartphone adoption and ongoing data usage monetization. Strategic efforts include:
-
U.S. Cellular deployed 4G LTE as a result of U.S. Cellular’s strategic ini
tiative to enhance its network. 4G LTE reaches 99% of postpaid connections and 98% of cell sites. The adoption of data-centric smartphones and connected devices is driving significant growth in data traffic. At the end of the third quarter of 2016,
77%
of postpaid connections had 4G capable devices, with the LTE network handling 90% of data traffic. U.S. Cellular continues to devote efforts to enhance its network capabilities with the deployment of VoLTE technology and plans a mu
lti-year roll out beginning with one market in early 2017. VoLTE, when deployed commercially, will enable customers to utilize the LTE network for both voice and data services, and will enable enhanced services such as high definition voice, video calling
and simultaneous voice and data sessions. The deployment of VoLTE also will expand U.S. Cellular’s ability to offer roaming services to additional carriers.
-
U.S. Cellular continued to enhance its spectrum position and monetize non-strategic assets by ent
ering into multiple agreements with third parties. Certain of these agreements involve the purchase of licenses for cash, while others involve the exchange of licenses in non-operating markets for other licenses in operating markets and cash. As a result
of the closing of multiple exchange agreements in the nine months ended September 30, 2016, U.S. Cellular received $15 million of cash and recognized gains of $16 million. The remaining license purchase and exchange transactions are expected to close in
the fourth quarter of 2016, at which point U.S. Cellular expects to recognize additional gains. See Note
5
—
Acquisitions, Divestitures and Exchanges
for additional information related to these transactions.
-
U.S. Cellular is focused on expanding its solutions available to business and government customers, including a growing suite of machine-to-machine solutions across various categories. U.S. Cellul
ar will continue to enhance its advanced wireless services and connected solutions for consumer, business and government customers.
-
U.S. Cellular is committed to continuous innovation
so as to provide customers in the markets it serves with the latest tech
nology that can enhance their lives or businesses. During the third quarter of 2016, U.S. Cellular successfully tested 5G technology in both indoor and outdoor environments for the first time. The company plans additional tests geared towards understandi
ng the propagation characteristics of the new technology and contributing to the development of 5G standards. When deployed commercially, 5G technology is expected to help address customers’ growing demand for data services as well as create opportunities
for new services requiring high speed and low latency.
Terms U
sed b
y U.S. Cellular
All defined terms in this MD&A are used
as defined in the Notes to C
onsolidated
F
inancial
S
tatements, and additional terms are defined below:
-
4G LTE
– fourth generation Long-Term Evolution which is a wireless broadband technology.
-
5G
– fifth generation wireless broadband technology.
-
Account
– represents an individual or business
financially responsible for
one or multiple
associated connections.
A
n
account may include a variety of
types of connections such as
handsets and connected devices.
-
Auction 97 –
An FCC auction of AWS-3 spectrum licenses that ended in January 2015.
-
Auctions 1000, 1001, and 1002 –
Auction 1000 is an FCC auction of 600 MHz spect
rum licenses being held in 2016 involving: (1) a “reverse auction” in which broadcast television licensees submit bids to voluntarily relinquish spectrum usage rights in exchange for payments (referred to as Auction 1001); (2) a “repacking” of the broadcas
t television bands in order to free up certain broadcast spectrum for other uses; and (3) a “forward auction” of licenses for spectrum cleared through this process to be used for wireless communications (referred to as Auction 1002).
-
Churn Rate
– represent
s the percentage of the c
onnections
that disconnect service each month. These rates represent the average monthly churn rate for each respective period.
-
Connections
-
individual line
s
of service associated with each device activated by a customer
. This
includes smartphones, feature phones, tablets, modems, and machine-to-machine devices.
-
FCC
– Federal Communications Commission
.
-
Gross Additions
– represents the total number of
new
connections
a
dded
during the period
, without regard to connections that wer
e terminated during that period.
-
Machine-
to-Machin
e or M2M
– technology that involves the transmission of data between networked devices, as well as the performance of actions by devices without human intervention. U.S. Cellular sells and supports M2M sol
utions to customers, provides connectivity for M2M solutions via the U.S. Cellular network, and has partnerships with device manufacturers and software developers which offer M2M solutions.
-
Net Additions
–
represents
the
total
number of new
connections
add
ed
during the period,
net of connections that were
terminate
d during that period
.
-
Postpaid Average Billings per Account (“Postpaid
AB
PA”)
–
non-GAAP
metric is calculated by dividing total postpaid
service
revenues
plus equipment installment plan billings
by the average number of postpaid accounts
and
by the number of months in the period.
-
Postpaid Average Billings per User (“Postpaid
A
B
PU”)
–
non-GAAP
metric is calculated by dividing total postpaid
service
revenues
plus equipment installment plan billings
by the average number of postpaid
connections and
by the number of months in the period.
-
Postpaid
Average Revenue per Account
(“
Postpaid
ARPA”) –
metric is calculated by dividing total postpaid service revenues by the average number of postpaid accounts
and
by the number of months in the period.
-
Postpaid Average Revenue per User (“Postpaid ARPU”) –
met
ric is calculated by dividing total postpaid service
revenue
s by the
average number of
postpaid connections
and
by the number of months in the period.
-
Re
tail Connections –
the sum of postpaid connections and prepaid connections.
-
Smartphone Penetration
– is calculated by dividing postpaid smartphone
connections by
postpaid
handset
connections
.
-
Universal Service Fund (“USF”)
– A system of telecommunications
collected fees and support payments managed by the FCC intended to promote universal access to telecommunications services in the United States.
-
VoLTE
– Voice over Long-Term Evolution is a technology specification that defines the standards and procedures
for delivering voice communications and related services over 4G LTE networks.
Operational Overview
|
|
|
|
YTD
2015
|
YTD
2016
|
|
|
Postpaid
Connections
|
|
|
|
|
|
Gross Additions
|
591,000
|
586,000
|
|
|
|
Net Additions
|
43,000
|
75,000
|
|
|
|
Churn
|
1.41%
|
1.27%
|
|
|
|
Handsets
|
1.32%
|
1.17%
|
|
|
|
Connected Devices
|
2.31%
|
1.97%
|
|
|
|
Connections
–
end of
period
|
4,341,000
|
4,484,000
|
|
|
Prepaid
Net Additions
|
32,000
|
93,000
|
|
|
Retail C
onnections
–
end of period
|
4,721,000
|
4,964,000
|
|
The increase in postpaid net additions in 2016 is
driven by improvement in postpaid churn. Postpaid churn declined over the past two years due to enhancements in the customer experience and improvement in the overall credit mix of gross additions. In addition, U.S. Cellular continues to see growth in po
stpaid net additions from connected devices. The increase in prepaid net additions was due primarily to successful promotional activity.
|
|
|
|
|
|
|
|
|
|
Smartphones represented
92%
and
87%
of total postpaid handset sales for the
nine months ended
September 30, 2016
and
2015
, respectively. As a result, s
ma
rtphone penetration increased to
78%
of
the
post
paid handset base as of
September 30, 2016
, up from
72%
a year ago.
Smartphone customers generally use more d
ata than feature phone customers, thereby driving growth in service revenues.
Continued growth in customer usage related to data
services
and
products may result in increased operating expenses and the need for additional investment in spectrum, network ca
pacity and network enhancements.
|
|
|
1
The
discontinuation
of the loyalty rewards points
program
had the effect of increasing
Postpaid
ARPU
/ABPU
and
Postpaid
ARPA
/ABPA
by $4.48 and $11.34 for the three months ended September 2015, respectively, and $1.50 and $3.74 for the nine months ended September 2015, respectively.
2
Postpaid ABPU and Postpaid ABPA are
non-GAAP financial measure
s
. Refer to Supplementa
l Informatio
n Relating to Non-
GAAP Financial Measures within this MD&A for a reconciliation of this measure.
|
Postpaid ARPU
and Postpaid ARPA
decreased for the
three and nine
months ended
September 30, 2016
due primarily to the impact of the loyalty rewards points program that was discontinued in September 2015, industry-wide price competition, and discounts on shared data plans provided to customers on
equipment
installment plans and
those providing their own device at the time of activation or
renewal.
Postpaid ARPU also decreased due to growth in the number of connected devices, which on a per unit basis contribute less revenue than handsets. These factors were partially offset by
the impacts of continued adoption of smartphones and the related increase in service revenues from data usage.
Equipment installment plans increase equipment sales revenue as customers pay for their wireless devices in installments at a total device pric
e that is generally higher than the device price offered to customers in conjunction with alternative plans that are
subject
to a service contract.
Equipment installment plans also have the impact of reducing service revenues as many equipment installment
plans provide for reduced monthly access charges.
In order to show the trends in total service and equipment revenues received, U.S. Cellular has presented Postpaid ABPU and Postpaid ABPA, which are calculated as Postpaid ARPU and Postpaid ARPA plus aver
age monthly equipment installment plan billings per connection and account, respectively.
Equipment installment plan billings increased for the
three and nine
months ended
September 30, 2016
due to increased adoption of equipment installment plans by postpaid customers.
Postpaid ABPU
and ABPA
decreased in 2016 as the incre
ase in equipment installment plan billings was more than offset by the
decline in
Postpaid ARPU
and ARPA
discussed above.
U.S. Cellular expects the adoption and penetration of equipment installment plans to continue to increase as plan offerings shift mor
e toward equipment installment plans.
Effective in September 2016, new postpaid handset sales to retail consumers are made under equipment installment plans; business and government customers may purchase equipment under either installment plans or altern
ative plans that are subject to a service contract.
Financial Overview
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2016 vs.
|
|
|
|
|
2016 vs.
|
|
|
|
|
|
2016
|
|
2015
|
|
2015
|
|
2016
|
|
2015
|
|
2015
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail service
|
|
$
|
681
|
|
$
|
797
|
|
(14)%
|
|
$
|
2,044
|
|
$
|
2,278
|
|
(10)%
|
Inbound roaming
|
|
|
45
|
|
|
59
|
|
(25)%
|
|
|
118
|
|
|
149
|
|
(20)%
|
Other
|
|
|
45
|
|
|
40
|
|
12%
|
|
|
131
|
|
|
122
|
|
7%
|
|
Serv
ice revenues
|
|
|
771
|
|
|
896
|
|
(14)%
|
|
|
2,293
|
|
|
2,549
|
|
(10)%
|
Equipment sales
|
|
|
239
|
|
|
173
|
|
38%
|
|
|
655
|
|
|
461
|
|
42%
|
|
Tota
l operating revenues
|
|
|
1,010
|
|
|
1,069
|
|
(6)%
|
|
|
2,948
|
|
|
3,010
|
|
(2)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System operations (excluding Depreciation, amortization
and accretion reported below)
|
|
|
196
|
|
|
199
|
|
(1)%
|
|
|
572
|
|
|
586
|
|
(2)%
|
Cost of equipment sold
|
|
|
280
|
|
|
287
|
|
(2)%
|
|
|
799
|
|
|
779
|
|
2%
|
Selling, general and administrative
|
|
|
370
|
|
|
375
|
|
(1)%
|
|
|
1,089
|
|
|
1,107
|
|
(2)%
|
|
|
|
|
|
|
846
|
|
|
861
|
|
(2)%
|
|
|
2,460
|
|
|
2,472
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flow*
|
|
|
164
|
|
|
208
|
|
(21)%
|
|
|
488
|
|
|
538
|
|
(9)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization
and accretion
|
|
|
155
|
|
|
152
|
|
2%
|
|
|
462
|
|
|
450
|
|
3%
|
(Gain) loss on asset disposals, net
|
|
|
7
|
|
|
3
|
|
>100%
|
|
|
16
|
|
|
12
|
|
33%
|
(Gain) loss on sale of business
and other exit costs, net
|
|
|
–
|
|
|
(1)
|
|
N/M
|
|
|
–
|
|
|
(114)
|
|
100%
|
(Gain) loss on license sales
and exchanges
|
|
|
(7)
|
|
|
(24)
|
|
70%
|
|
|
(16)
|
|
|
(147)
|
|
89%
|
|
Tota
l operating expenses
|
|
|
1,001
|
|
|
991
|
|
1%
|
|
|
2,922
|
|
|
2,673
|
|
9%
|
Operating income
|
|
$
|
9
|
|
$
|
78
|
|
(88)%
|
|
$
|
26
|
|
$
|
337
|
|
(92)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18
|
|
$
|
65
|
|
(73)%
|
|
$
|
54
|
|
$
|
250
|
|
(78)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA*
|
|
$
|
216
|
|
$
|
257
|
|
(16)%
|
|
$
|
639
|
|
$
|
673
|
|
(5)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
103
|
|
$
|
135
|
|
(23)%
|
|
$
|
275
|
|
$
|
335
|
|
(18)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Represents a non-GAAP financial measure. Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M - Percentage change not meaningful
|
|
S
ervice revenues consist of:
-
Retail Service -
Charges for access, airtime, roaming, recovery of regulatory costs and value added services, including data
services and
products
-
Inbound Roaming -
Charges to other wireless carriers whose customers use
U.S. Cellular’s wireless systems when roaming
-
Other – Primarily a
mount
s received from the Federal USF and tower rental revenues
Equipment revenues consist of:
-
Sales of
wireless devices and related accessories to new and existing customers, agent
s, and third-party distributors
|
Key components of changes in the statement of operations line items were as follows:
Total operating revenues
Service revenues
decreased
for the
three and nine
months ended
September 30, 2016
as a result of
(i) a
decrease
in retail service revenues
driven by the $58 million impact of the loyalty rewards program that ended in September 2015; (ii)
industry-wide price competition, including discounts on shared data plans provided to customers on equipment installment plans and those providing their own
device at the time of activation or renewal
; and (ii
i
) reductions in
inbound roaming revenue
s
driven by lower roaming rates.
Such reductions were partially offset by an increase in the average connections base and continued adoption of
smartphones and
shared data plans.
Federal USF
revenue was $23 million and $69 million for the
three and nine
months ended
September 30, 2016
, respectively
,
which remained flat
when comp
ared to the same periods last year
. Pursuant to the FCC's Reform Order (“
Reform
Order”), U.S. Cellular’s
Federal USF support was to be phased down at the rate of 20% per year beginning July 1, 2012. The Phase II Mobility Fund was not operational as of July
2014 and
, therefore, as provided by the Reform Order, the phase down was suspended at 60% of the baseline amount. U.S. Cellular will continue to receive
USF support at the 60% level until the FCC takes further action. At this time, U.S. Cellular c
annot pr
edict t
he
changes that the
FCC might make to the USF
high cost support program and, accordingly, cannot predict whether such changes will have a material adverse effect on U.S. Cellular’s business, financial
condition or results of operations.
Equipment
sales revenues
increased
for the
three months ended
September 30, 2016
when compared to
the
three months ended
September 30, 2015
due primarily to
a shift in mix to sales under equipment installment plans together with
an increase in average r
evenue per device sold under
such
plans
.
Equipment install
ment plan sales contributed $192
million and $
8
9 million during the
three months ended
September 30, 2016
and
2015
, respectively.
Equipment sales revenues
increased
for the
nine months ended
September
30, 2016
when compared to the
nine months ended
September 30, 2015
due to
an overall increase in the number of devices sold, and a shift in mix to sales under equipment installment plans together with
an increase in average revenue per device sold under
such
plans
.
Equipment install
ment plan sales contributed $501
million and $
226
million during the
nine months ended
September 30, 2016
and
2015
, respectively.
Equipment installment
plan connections
represented 40% and 23%
of total
postpaid connections as of
September 30, 2016
and
2015
, respectively.
System operations expenses
System operations expenses decreased by modest amounts for the
three and nine
months ended
September 30, 2016
when compared to the same periods last year.
U.S. Cellular expects system operations expenses to increase in the future to support the continued growth in cell sites and other network facilities as it continues to add capacity, enhance quality and deploy new technologies as well as to support increas
es in total customer
data
usage. However, these increases are expected to be offset to some extent by cost savings generated by shifting data traffic to the 4G LTE network from the 3G network.
Cost of equipment sold
Cost of equipment sold decreased for th
e
three months ended
September 30, 2016
when compared to the
three months ended
September 30, 2015
as a result of a decrease in the average cost per device sold driven by the lower cost of smartphones and to a lesser extent the lower sales of accessories. Cost of equipment sold included $200 million and $113 million related
to equipment installment plan sales for the
three months ended
September 30, 2016
and
2015
, respectively.
Loss on equipment
, defined as Equipment
sales revenues less Cost of equipment sold,
was $
41
million and $
114
million
for the
three months ended
September 30, 2016
and
2015
.
Cost of equipm
ent sold increased for the
nine months ended
September 30, 2016
when compared to the
nine months ended
September 30, 2015
primarily as the result of a 4% increase in devices sold, partially offset by a decrease in the average cost per device sold. Cost of equipment sold included $534 million and $305 million related
to equipment installment plan sales for the
nine months ended
September 30, 2016
and
2015
, respectively.
Loss on equipment
was $
144
million and $
318
million
for the
nine months ended
September 30, 2016
and
2015
, respectively.
Selling, general and administrative expenses
Sell
ing, general and administrative expenses decreased by modest amounts for the
three and nine
months ended
September 30, 2016
when compared to
the same periods last year. This decrease was attributable to various expense reductions that were partially offset by a $13 million expense recognized in the three months ended September 30, 2016 as a result of the termination of a naming rights agreeme
nt.
Depreciation, amortization, and accretion
expenses
The increase
s
in
Depreciation, amortization, and accretion expenses
for the
three and nine
months ended
September 30, 2
016
were mainly driven by the increase in amortization expense related to billing system upgrades.
(Gain) loss on
asset disposals
, net
The increases in Loss on asset disposals were primarily driven by more disposals of certain network assets during the
three and nine
months ended
September 30, 2016
when compared to the same periods last year.
(Gain) loss on sale of business and other exit costs, net
The net gain for the
nine months ended
September 30, 2015
was due primarily to a $108 million gain recognized on sale of towers and certain related contracts, as
sets and liabilities.
(Gain) loss on license sales and exchanges
, net
The net gains in
2016
and
2015
were due to gains recognized on license exchange transactions with third parties.
See
Note 5 —
Acquisitions, Divestitures and Exchanges
in the Notes to Consolidated Financial Statements for additional information.
Components of Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
2016 vs.
|
|
|
|
|
|
|
|
2016 vs.
|
|
|
|
|
|
2016
|
|
2015
|
|
2015
|
|
2016
|
|
2015
|
|
2015
|
(D
ollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
9
|
|
$
|
78
|
|
(88)%
|
|
$
|
26
|
|
$
|
337
|
|
(92)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated entities
|
|
|
38
|
|
|
40
|
|
(5)%
|
|
|
110
|
|
|
110
|
|
-
|
Interest and dividend income
|
|
|
14
|
|
|
9
|
|
51%
|
|
|
41
|
|
|
26
|
|
59%
|
Interest expense
|
|
|
(28)
|
|
|
(21)
|
|
(32)%
|
|
|
(84)
|
|
|
(61)
|
|
(37)%
|
Other, net
|
|
|
–
|
|
|
–
|
|
20%
|
|
|
–
|
|
|
(1)
|
|
26%
|
Total investment and othe
r income
|
|
|
24
|
|
|
28
|
|
(14)%
|
|
|
67
|
|
|
74
|
|
(10)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
33
|
|
|
106
|
|
(69)%
|
|
|
93
|
|
|
411
|
|
(77)%
|
Income tax expense
|
|
|
15
|
|
|
41
|
|
(63)%
|
|
|
39
|
|
|
161
|
|
(76)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
18
|
|
|
65
|
|
(73)%
|
|
|
54
|
|
|
250
|
|
(78)%
|
Less: Net income attributable to noncontrolling
interests, net of tax
|
|
|
1
|
|
|
1
|
|
(53)%
|
|
|
1
|
|
|
7
|
|
(84)%
|
Net income attributable to U.S. Cellular
shareholders
|
|
$
|
17
|
|
$
|
64
|
|
(73)%
|
|
$
|
53
|
|
$
|
243
|
|
(78)%
|
Equity in earnings of
unconsolidated entities
Equity in earnings of unconsolidated entities r
epresents 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 $17 million and $19 million to Equity in earnings of unconsolidated entities for the
three months ended
September 30, 2016
and
2015
, respectively, and $57 million and $58 million for the nine months ended
September 30, 2016
and 2015, respectively.
See Note
7
—
Investments in Unconsolidated Entities
in the Notes to Consolidated Financial Statements for additional information
.
Interest and dividend income
Interest and dividend income increased due to imputed interest income
recognized on equipment installment plans
of $
13 million
and $
9 million during the
three months ended
September 30, 2016
and
2015
, respectively, an
d $37 million and $24 million during the
nine months ended
September 30, 2016
and
2015
, respectively
.
See
Note
3
—
Equipment Installment Plans
in the Notes to Consolidated Financial Statements for additional information.
Interest expense
The increase in Interest expense for the
three and nine
months ended
September 30, 2016
is primarily driven by U.S. Cellular’s issuance of $300 million of 7.25% Senior Notes due 2064 in November 2015 and borrowing of $225
million on its senior term loan facility that was drawn in July 2015.
Income tax expense
U.S. Cellular’s effective tax rate on Income before income taxes for the
three and nine
months ended
September 30, 2016
was 46.0% and 41.4
%
, respectively, and for the
three and nine
months ended
September 30, 2015
was 38.5%
and 39.2%
, respectively.
The effective tax rates for the three and nine month periods primarily reflect a normalized combined rate of federal and state taxes, but are also affected by certain discrete items in
each period which increase or decrease the effective tax rate for each period. Because certain discrete items are not annualized, these rates may not be indicative of the annual rate for 2016.
Net income attributable to noncontrolling interests, net of ta
x
The decrease for the
three and nine
months ended
September 30, 2016
is due primarily to lower income from certain partnerships in 2016.
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 facility, funds from other financing sources, including a term loan and other long-term debt, and cash flows from operating, investing and financing activiti
es, 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 f
und acquisitions, primarily of spectrum licenses. There is no assurance that this will be the case in the future.
U.S. Cellular believes that existing cash and investment balances, funds available under its revolving credit facility, and expected cash f
lows from operating and investing activities provide liquidity for U.S. Cellular to meet its normal day-to-day operating needs and debt service requirements for the coming year.
Although U.S. Cellular currently has a significant cash balance, in certain r
ecent periods, U.S. Cellular has incurred negative free cash flow (
defined as Cash flows from operating activities
less Cash paid for additions to property, plant and equipment) and this will continue in the future if operating results do not improve or ca
pital expenditures are not reduced. U.S. Cellular
currently expects to have negative free cash flow in 2016 due to anticipated growth in equipment installment plan receivables combined with significant capital expenditures.
U.S. Cellular
may require sub
stantial additional capital for, among other uses, funding day-to-day operating needs, working capital, acquisitions of providers of wireless telecommunications services, spectrum license or system acquisitions, system development and network capacity expa
nsion, debt service requirements, the repurchase of shares, the payment of dividends, or making additional investments.
It may be necessary from time-to-time to increase the size of the existing revolving credit facility, to put in place a new credit faci
lity, or to obtain other forms of financing in order to fund potential expenditures. U.S. Cellular’s liquidity would be adversely affected if, among other things, U.S. Cellular is unable to obtain short or long-term financing on acceptable terms, U.S. Cel
lular makes significant spectrum license purchases in FCC auctions or from other parties, the LA Partnership discontinues or reduces distributions compared to historical levels, or Federal USF and/or other regulatory support payments continue to decline.
In addition, although sales of assets or businesses by U.S. Cellular have been an important source of liquidity in recent periods, U.S. Cellular does not expect a similar level of such sales in the future, which will reduce a source of liquidity.
In recen
t years, U.S. Cellular’s credit rating has declined to 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. Insuffic
ient cash flows from operating activities, further changes in its credit ratings, defaults of the terms of debt or credit agreements, uncertainty of access to capital, deterioration in the capital markets, reduced regulatory capital at banks which in turn
limits their ability to borrow and lend, other changes in the performance of U.S. Cellular or in market conditions or other factors could limit or restrict the availability of financing on terms and prices acceptable to U.S. Cellular, which could require U
.S. Cellular to reduce its acquisition, capital expenditure and business development programs
, reduce the acquisition of spectrum licenses, and/or reduce or cease share repurchases and/or the payment of dividends
. U.S. Cellular cannot provide assurance t
hat circumstances that could have a material adverse effect on its liquidity or capital resources will not occur. Any of the foregoing would have an adverse impact on U.S. Cellular’s businesses, financial condition or results of operations.
Cash and Cas
h 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
.
|
A
t
September 30, 2016
, U.S. Cellular’s cash and cash equivalents
totaled $
674
million
compared to $
715
million at
December 31, 2015
. T
he majority of U.S. Cellular’s Cash and cash equivalents w
as
held in bank deposit accounts and in money market funds that invest exclusively in U.S. Treasury Notes or in repurchase agreements fully collateralized by such oblig
ations.
U.S. Cellular monitors the financial viability of the money market funds and direct investments in which it invests and believes that the credit risk associated with these investments is low.
|
Financing
U.S. Cellular has a revolving credit facility available for general corporate purposes.
I
n June 2016, U.S. Cellular entered into a new $
300
million revolving credit agreement with certain lenders and other parties.
As a result
of the new agreement, U.S. Cellular’s revolving credit agreement due to expire in December 2017 was terminated.
Amounts under the new revolving credit facility may be borrowed, repaid and reborrowed from time-to-time until maturity in June 2021.
Certain
U.S. Cellular wholly-owned subsidiaries have jointly and severally unconditionally guaranteed the payment and performance of the obligations of U.S. Cellular under the revolving credit agreement. As of
September 30,
2016
, there were no outstanding borrowings under the revolving credit facility, except for letters of credit, and
U.S. Cellular’s unused capacity under its revolving credit facility
was $
284
million
. The continued availabilit
y of the new revolving credit facility requires U.S. Cellular to comply with certain negative and affirmative covenants, maintain certain financial ratios and provide representations on certain matters at the time of each borrowing. See Note
8
—
Debt
in the
Notes to Consolidated Financial Statements for additional information
.
In June 2016, U.S. Cellular also amended and restated its senior term loan credit facility. Certain modifications were made to the financial covenants and subsidiary guarantees were added in order to align with the new revolving credit agreement. There w
ere no significant changes to the maturity date or other key terms of the agreement.
U.S. Cellular believes it was in compliance with all of the financial covenants and requirements set forth in its revolving credit facility
and the senior term loan cred
it facility
as of
September 30, 2016
.
U.S. Cellular has in place an effective shelf registration statement on Form S-3 to issue senior or subordinated debt securities.
The proceeds from any of the aforementioned fi
nancing facilities are available for general corporate purposes, including spectrum purchases and capital expenditures.
The long-term debt payments due for the remainder of
2016
and the next four years represent less than
3%
of U.S. Cellular’s total long-term debt obligation measured as of
September 30, 2016
.
Capital Expenditures
Capital expenditures (i.e., additions to property, plant and equipment and sy
stem development expenditures), which
in
clude
accruals and capitalized interest
, in
2016
and
2015
were as follows:
|
U.S. Cellular’s
capital expenditures for
2016
are expected to be
approximately $500 million
. These expenditures are expected to be for the following general purposes:
-
Expand and enhance network coverage, including construction of a new regional c
onnectivity center
and provide
additional capacity to accommodate increased network usage, principally data usage, by current customers;
-
Deploy VoLTE technology;
-
Expand and enhance the retail store network; and
-
Develop and enhance business systems.
|
U.S. Cellular plans to f
inance its capital expenditures program for
2016
using primarily Cash flows from operating activities and, as necessary, existing cash balances and borrowings under its revolving credit agreement and/or other long-
term debt.
Acquisitions, Divestitures and Exchanges
U
.S.
Cellular may be engaged from time-to-time in negotiations relating to the acquisition, divestiture or exchange of companies, properties or wireless spectrum. In general, U.S. Cellular may not disclo
se such transactions until there is a definitive agreement. U.S.
Cellular assesses its existing wireless interests on an ongoing basis with a goal of improving the competitiveness of its operations and maximizing its long-term return on capital. As part
of this strategy, U.S.
Cellular reviews attractive opportunities to acquire additional wireless operating markets and wireless spectrum, including pursuant to FCC auctions.
U.S.
Cellular also may seek to divest outright or include in exchanges for other w
ireless interests those interests that are not strategic to its long-term success.
On July 15, 2016, the FCC announced U.S. Cellular as a qualified bidder in the FCC’s
forward auction of 600 MHz spectrum licenses, referred to as Auction 100
2
,
which then co
mmenced on August 16, 2016
.
In recent FCC auctions, U.S. Cellular has not been a bidder, but has participated as a limited partner in “designated entities” that qualified for a 25% bidding credit on licenses won in the auction. U.S. Cellular will not par
ticipate through a designated
entity in Auction 1002. See
“Regulatory Matters — FCC Auction 100
2
.”
Prior to becoming a qualified bidder, U.S. Cellular
was required to
make an upfront payment, the size of which establishe
d
its initial bidding eligibility
.
Accordingly, i
n
the second quarter of
2016, U.S. Cellular made an upfront payment to the FCC of
$
143
m
illion.
If U.S. Cellular
becomes
a winning bidder in the auction, it
could
be required to make additional payments to the FCC tha
t
could
be substantial.
In such event, U.S. Cellular
could
finance such payments from its existing cash balances, borrowings under its revolving credit agreement and/or additional long-term debt.
Further, if U.S. Cellular is not the winning bidder
for
an
y licenses, or
is
the winning bidder
for
licenses with an aggregate bid price that is less than the upfront payment, all or a portion of the upfront payment will be refunded to U.S. Cellular.
In 2015 and 2016, U.S. Cellular entered into multiple spectrum l
icense purchase agreements. The aggregate purchase price for these spectrum licenses is $
56
million, of which $
46
million closed in the
nine months ended
September 30, 2016
. In 2016, U.S. Cellular also entered into multiple agreements with third parties to transfer FCC licenses in non-operating markets and receive FCC licenses in operating markets. The agreements
provide for the transfer of certain AWS and PCS spectrum licenses and approximately $
29
million, net, in cash to U.S. Cellular, in exchange for U.S. Cellular transferring certain AWS, PCS and 700 MHz spectrum licenses to the thir
d parties.
Through September 30, 2016, certain of the exchange transactions have closed and
U.S. Cellular
has
received $
15
million of cash
in conjunction with such closed transactions
. The remaining license purchase and exchang
e transactions are expected to close in the fourth quarter of 2016. See Note
5
—
Acquisitions, Divestitures and Exchanges
in the Notes to Consolidated Financial Statements for additional
information related to these transactions.
Variable Interest Entities
U.S.
Cellular consolidates certain entities
as
“variable interest entities” under GAAP.
See Note
9
—
Va
riable 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 capital contributions and/or advances to variable interest entities in or
der 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.
Share repurchases made under this program in
2016
and
2015
were as follows:
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
Number of shares
|
|
46,861
|
|
|
153,878
|
Average cost per share
|
$
|
34.77
|
|
$
|
34.85
|
Dollar Amount (in millions)
|
$
|
2
|
|
$
|
5
|
|
|
|
|
|
|
|
For additional information related to the current repurchase authorization
, see
Unregistered Sales of Equity Securities and U
se of Proceeds.
Contractual and Other Obligations
There w
ere
no material change
s outside the
ordinary course of business
between
December 31, 2015
and
September 30, 2016
to the Contractual and Other Obligations disclosed in Man
agement’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, 2015
.
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, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Consolidated Cash Flow Analysis
U.S. Cellular operates a capital- and marketing-intensive busines
s.
U.S. Cellular makes substantial investments to acquire wireless licenses and properties and to construct and upgrade wireless telecommunications networks and facilities as a basis for creating long-term value for shareholders. In recent years, rapid c
hanges in technology and new opportunities have required substantial investments in potentially revenue
‑
enhancing and cost-reducing upgrades to U.S. Cellular’s
networks.
U.S. Cellular utilizes cash on hand, cash from operating activities, cash proceeds fr
om divestitures and dispositions of investments, short-term credit facilities and long-term debt financing to fund its acquisitions (including licenses), construction costs, operating expenses and share repurchases. Cash flows may fluctuate from quarter-t
o-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
nin
e months ended
September 30, 2016
and
2015
.
2016
Commentary
U.S. Cellular’s Cash and cash equivalents decreased $
41
million in 2016. Net cash provided by operating activities was $
415
million in 2016 due primarily to net income of $
54
million plus non-cash items of $
450
million and distributions received from unconsolidated entities of $
55
million, including a $10 million distribution from the LA Partnership. This was partially offset by changes in working capital items which decreased cash by $
144
million. The decrease in working capital items was due primarily to a $
160
million increase in equipment installment plan receivables, which are expected to continue to increase and further require the use of
working capital in the near term.
This was partially offset by a federal tax refund of $28 million related to an overpayment of the 2015 tax liability, which resulted from the enactment of federal bonus depreciation in December 2015.
The net cash provid
ed by operating activities was offset by Cash flows used for investing activities of $
449
million. Cash paid for additions to property, plant and equipment totaled $
280
million. In June 2016, U.S. Cellular made
a deposit of $
143
million to the FCC for its participation in Auction 1002. Cash paid for acquisitions and licenses in 2016 was $
46
million partially offset by Cash received from divestitures and exchanges of $
20
million. See Note
5
—
Acquisitions, Divestitures and Exchanges
in the Notes to Consolidated Financial Statements for additional information related to these transacti
ons.
Cash flows
used for
financing activities were $
7
million, reflecting ordinary activity such as scheduled repayments of debt.
2015
Commentary
U.S. Cellular’s Cash and cash equivalents increased $
385
million in 2015. Net cash provided by operating activities
w
as
$
555
million in
2015
due to net income
of $
250
million plus non-cash items of $
168
million, distributions received of $
45
million and positive changes in w
orking capital
items of $
92
million
.
The LA P
artnership did not make a distribution in 2015.
Cash flows
used for
investing activities were $
377
million in
2015
.
Cash
paid
for additions to property, plant and equipment totaled $
407
million in 2015.
During 2015, a $278
million payment was made by Advantage Spectrum L.P.
(see Note 9 — Variable Interest Entities in the Notes to Co
nsolidated Financial Statements)
to the FCC for licenses for which it was the provisional winning bidder
in Auction 97
.
Cash received from divestitures and exchanges in
2015
included $
145
million related to licenses and $
142
million related to the sale of 359 towers and certain related contracts, assets and liabilities.
Cash flows
from
financing activities were $
207
million due primarily to U.S. Cellular borrowing $
225
million on its senior term loan credit facility in July 2015.
Other Information
In October 2016, U.S. Cellular was informed by the general partner of the
LA Partnership that U.S. Cellular will receive a distribution of $19 million in November 2016.
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
2016
are as follows:
Other current assets
Other current assets decreased $
30
million due primarily to the receipt of a federal income tax refund of $
28
million in March
2016
.
A
ssets held for sale
Assets held for sale increased
$
16
million due to reclassification of Licenses to this account as a result of exchan
ges with third parties. The license exchange agreements are expected to close in the fourth quarter of 2016. See Note
5
—
Acquisitions, Divestitures and Exchanges
in the Notes to Consol
idated Financial Statements for additional information.
Other assets and deferred charges
Other assets and deferred charges increased
$
195
million due primarily to an upfront payment of $
143
million to the FCC to establish U.S. Cellular’s initial bidding eligibility for its participation in Auction 1002 and a $
75
million increase in the long-term portion of unbilled equipment installment plan receivabl
es, net, due to the offering of longer term equipment installment plan contracts and the increased adoption of such contracts. See Note
3
—
Equipment Installment Plans
and
Note
5
—
Acquisitions, Divestitures and Exchanges
in the Notes to Consolidated Financial Statements for additional information related to these balances.
Other current liabilities
Other current liabilities decreased $
27
million due primarily to a decline in the amounts due to agents driven by lower sales volume and
mix shift to lower cost devices.
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.
Certain of these measures are considered “non-GAAP financial measures” under U.S. Sec
urities and Exchange Commission Rules.
Specifically,
U.S. Cellular
has
referred to the following measures in this Form 10-Q Report:
-
EBITDA
-
Adjusted EBITDA
-
Operating cash flow
-
Free cash flow
-
Adjusted free cash flow
-
Postpaid ABPU
Following are
explanations of each of these measures.
Adjusted EBITDA and Operating Cash Flow
Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization and accretion) is defined as net income adjusted for the items set forth in the reconciliation bel
ow.
Operating cash flow is defined as net income adjusted for the items set forth in the reconciliation below.
Adjusted EBITDA and Operating cash flow are not measures of financial performance under GAAP and should not be considered as alternatives to Ne
t 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 item
s may occur in the future.
Management uses Adjusted EBITDA and Operating cash flow as measurements of profitability, and therefore reconciliations to Net income are deemed appropriate. Management believes Adjusted EBITDA and Operating cash flow 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 fi
nancial 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 Operating cash flow 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 operat
ing activities excluding investment activities. The following table reconciles Adjusted EBITDA and Operating cash flow to the corresponding GAAP measure, Net income.
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
Net income (GAAP)
|
$
|
18
|
|
$
|
65
|
|
$
|
54
|
|
$
|
250
|
Add back:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
15
|
|
|
41
|
|
|
39
|
|
|
161
|
|
Interest expense
|
|
28
|
|
|
21
|
|
|
84
|
|
|
61
|
|
Depreciation, amortization and accretion
|
|
155
|
|
|
152
|
|
|
462
|
|
|
450
|
EBITDA (Non-GAAP)
|
|
216
|
|
|
279
|
|
|
639
|
|
|
922
|
Add back or deduct:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss on sale of business and other exit costs, net
|
|
–
|
|
|
(1)
|
|
|
–
|
|
|
(114)
|
|
(Gain) loss on license sales and exchanges, net
|
|
(7)
|
|
|
(24)
|
|
|
(16)
|
|
|
(147)
|
|
(Gain) loss on asset disposals, net
|
|
7
|
|
|
3
|
|
|
16
|
|
|
12
|
Adjusted EBITDA (Non-GAAP)
|
|
216
|
|
|
257
|
|
|
639
|
|
|
673
|
Deduct:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated entities
|
|
38
|
|
|
40
|
|
|
110
|
|
|
110
|
|
Interest and dividend income
|
|
14
|
|
|
9
|
|
|
41
|
|
|
26
|
|
Other, net
|
|
–
|
|
|
–
|
|
|
–
|
|
|
(1)
|
Operating cash flow (Non-GAAP)
|
|
164
|
|
|
208
|
|
|
488
|
|
|
538
|
Deduct:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and accretion
|
|
155
|
|
|
152
|
|
|
462
|
|
|
450
|
|
(Gain) loss on sale of business and other exit costs, net
|
|
–
|
|
|
(1)
|
|
|
–
|
|
|
(114)
|
|
(Gain) loss on license sales and exchanges, net
|
|
(7)
|
|
|
(24)
|
|
|
(16)
|
|
|
(147)
|
|
(Gain) loss on asset disposals, net
|
|
7
|
|
|
3
|
|
|
16
|
|
|
12
|
Operating income (GAAP)
|
$
|
9
|
|
$
|
78
|
|
$
|
26
|
|
$
|
337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free Cash Flow and Adjusted Free Cash Flow
The following table presents
Free cash flow and
Adjust
ed free cash flow.
Management uses
Free cash flow as a liquidity measure and it is defined as
Cash flows from operating activities
less Cash paid for additions to property, plant and equipment.
Adjusted free cash flow is defined as Cash flows from operat
ing activities (which includes cash outflows related to the Sprint decommissioning), as adjusted for cash proceeds from the Sprint Cost Reimbursement (which are included in Cash flows from investing activities in the Consolidated Statement of Cash Flows),
less Cash paid for additions to property, plant and equipment.
Free cash flow and
Adjusted free cash flow
are non-GAAP financial measures
which U.S. Cellular believes may be useful to investors and other users of its financial information in evaluating li
quidity, specifically, the amount of cash generated by business operations (including cash proceeds from the Sprint Cost Reimbursement), after Cash paid for additions to property, plant and equipment.
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
(Dollars in millions)
|
|
|
|
|
|
Cash flows from operating activities (GAAP)
|
$
|
415
|
|
$
|
555
|
Less: Cash paid for additions to property, plant and equipment
|
|
280
|
|
|
407
|
|
Free cash flow (Non-GAAP)
|
$
|
135
|
|
$
|
148
|
Add: Sprint Cost Reimbursement
1
|
|
5
|
|
|
28
|
|
Adjusted
free cash flow (Non-GAAP)
|
$
|
140
|
|
$
|
176
|
|
|
|
|
|
|
|
1
|
On May 16, 2013, pursuant to a Purchase and Sale Agreement, U.S. Cellular sold customers and certain PCS spectrum licenses to subsidiaries of Sprint Corp. fka Sprint Nextel Corporation (“Sprint”) in U.S.
Cellular’s Chicago, central Illinois, St. Louis and certain Indiana/Michigan/Ohio markets in consideration for $480 million in cash. The Purchase and Sale Agreement also contemplated certain other agreements. These agreements require Sprint to reimburse
U.S. Cellular up to $200 million (the “Sprint Cost Reimbursement”) for certain network decommissioning costs, network site lease rent and termination costs, network access termination costs, and employee termination benefits for specified engineering emplo
yees.
|
Postpaid ABPU and Postpaid ABPA
U.S. Cellular presents Postpaid ABPU and Postpaid ABPA to reflect the revenue shift from Service revenues to Equipment sales resulting from the increased adoption of equipment installment plans. Postpaid ABPU and Postpaid ABPA, as previously defined, are
non-GAAP financial measures which U.S. Cellular believes are useful to investors and other users of its financial information in showing trends in both service and equipment sales revenues received from customers.
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
(Dollars and connection counts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
Calculation of Postpaid ARPU
|
|
|
|
|
|
|
|
|
|
|
|
Postpaid service revenues
|
$
|
635
|
|
$
|
755
|
|
$
|
1,910
|
|
$
|
2,156
|
Average number of postpaid connections
|
|
4.49
|
|
|
4.33
|
|
|
4.46
|
|
|
4.31
|
Number of months in period
|
|
3
|
|
|
3
|
|
|
9
|
|
|
9
|
|
Postpaid ARPU (GAAP metric)
|
$
|
47.08
|
|
$
|
58.12
|
|
$
|
47.54
|
|
$
|
55.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation of Postpaid ABPU
|
|
|
|
|
|
|
|
|
|
|
|
Postpaid
service revenues
|
$
|
635
|
|
$
|
755
|
|
$
|
1,910
|
|
$
|
2,156
|
Equipment installment plan billings
|
|
131
|
|
|
75
|
|
|
353
|
|
|
180
|
|
Total billings to postpaid connections
|
$
|
766
|
|
$
|
830
|
|
$
|
2,263
|
|
$
|
2,336
|
Average number of postpaid connections
|
|
4.49
|
|
|
4.33
|
|
|
4.46
|
|
|
4.31
|
Number of months in period
|
|
3
|
|
|
3
|
|
|
9
|
|
|
9
|
|
Postpaid ABPU (Non-GAAP metric)
|
$
|
56.79
|
|
$
|
63.88
|
|
$
|
56.34
|
|
$
|
60.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation of Postpaid ARPA
|
|
|
|
|
|
|
|
|
|
|
|
Postpaid service revenues
|
$
|
635
|
|
$
|
755
|
|
$
|
1,910
|
|
$
|
2,156
|
Average number of postpaid accounts
|
|
1.69
|
|
|
1.71
|
|
|
1.69
|
|
|
1.73
|
Number of months in period
|
|
3
|
|
|
3
|
|
|
9
|
|
|
9
|
|
Postpaid ARPA (GAAP metric)
|
$
|
125.31
|
|
$
|
147.00
|
|
$
|
125.21
|
|
$
|
138.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation of Postpaid ABPA
|
|
|
|
|
|
|
|
|
|
|
|
Postpaid service revenues
|
$
|
635
|
|
$
|
755
|
|
$
|
1,910
|
|
$
|
2,156
|
Equipment installment plan billings
|
|
131
|
|
|
75
|
|
|
353
|
|
|
180
|
|
Total billings to postpaid accounts
|
$
|
766
|
|
$
|
830
|
|
$
|
2,263
|
|
$
|
2,336
|
Average number of postpaid accounts
|
|
1.69
|
|
|
1.71
|
|
|
1.69
|
|
|
1.73
|
Number of months in period
|
|
3
|
|
|
3
|
|
|
9
|
|
|
9
|
|
Postpaid ABPA (Non-GAAP metric)
|
$
|
151.16
|
|
$
|
161.57
|
|
$
|
148.37
|
|
$
|
150.06
|
Application
of Critical Accounting Policies a
nd Estimates
U.S. Cellular
prepares its consolidated financial statemen
ts 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 in the Notes to Consolidat
ed Financial Statements and U.S. Cellular’s
Applicati
on of Critical Accounting Policies and Estimates is discussed in detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations, b
oth of which are included in U.S. Cellular
’
s
Form
10-K for the year ended
December 31, 2015
. There
were no material changes to U.S. Cellular’s
application of critical accounting policies and estimates during the
nine months ended
September 30, 2016
.
Recent Accounting Pronouncements
See Note
1
—
Basis of Presentation
in the Notes to Consolidated Financial Statements for information
on recent accounting pronouncements.
Regulatory Matters
The discussion below includes updates related to recent regulatory developments.
These updates should be read in conjunction with the disclosures previously provided under “Regulatory Matters” in U.S. Cellular’s Form 10
-K for the year ended
December 31, 2015
.
FCC Auction 1002
On July 15, 2016, the FCC announced
U.S. Cellular
as a qualified bidder
in the FCC’s forward auction of 600 MHz spectrum licenses, referred to as Auction 10
02. The first stage of forward auction bidding began on August 16, 2016 and ended on August 30, 2016 when the forward auction failed to reach the reserve price established by the FCC based on the first stage reverse auction. The second stage of the revers
e auction began on September 13, 2016 and
was
followed by a second stage forward auction
which began and ended on October 19, 2016. As
necessary, the FCC will run additional reverse and forward auctions that will result in progressively lower prices in ea
ch reverse auction and less available spectrum for wireless carriers in each forward auction, until the prices in the reverse and forward auctions clear. Following a final and successful stage of the forward auction, the FCC will conduct an Assignment Pha
se Auction to assign specific frequencies to winners of licenses. It is expected that this process will continue into 2017. As a result of its
application to participate in Auction 1002
, since February 10, 2016,
U.S. Cellular
has been subject to FCC anti
-collusion rules that place certain restrictions on public disclosures and business communications with other companies relating to U.S. Cellular’s participation. These restrictions will continue until the down payment deadline for Auction 1002, which wil
l be ten business days after release of the FCC’s Channel Reassignment Public Notice, following the end of the auction.
These anti-collusion rules, which could last
a year
or more from
February 10, 2016, may restrict the conduct of certain
U.S. Cellular
a
ctivities with other auction applicants as well as with nationwide providers of wireless services which are not applicants.
The restrictions could have an adverse effect on
U.S. Cellular’s
business, financial condition or results of operations.
FCC Net N
eutrality Order
U.S. Cellular previously disclosed that the FCC adopted rules relating to net neutrality which reclassified broadband internet access service under Title II, and that lawsuits had bee
n filed challenging such rules and reclassification. In
June 2016, the U.S. Court of Appeals for the District of Columbia Circuit upheld the FCC’s rules and reclassification
. A request for a rehearing of this decision was filed in July 2016
,
and
it is expected that this court decision
also
will be appealed and
subject to further proceedings. U
.S. Cellular cannot predict the outcome of any further proceedings or the impact on its business.
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,” “anticipat
es,” “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 r
isks, 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 an
d other factors include 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, 2015
. 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, 2015
, the following factors and other information contained in, or incorpor
ated by reference into, this Form 10-Q to understand the material risks relating to U.S. Cellular’s business.
-
Intense competition in the markets in which U.S. Cellular operates could adversely affect U.S. Cellular’s revenues or increase its costs to compet
e.
-
A failure by U.S. Cellular to successfully execute its business strategy (including planned acquisitions,
spectrum acquisitions,
divestitures and exchanges) or allocate resources or capital could have an adverse effect on U.S. Cellular’s business, finan
cial condition or results of operations.
-
Uncertainty in U.S. Cellular’s future cash flow and liquidity or in the ability to access capital, deterioration in the capital markets, other changes in U.S. Cellular’s performance or market conditions, changes in
U.S. Cellular’s credit ratings or other factors could limit or restrict the availability of financing on terms and prices acceptable to U.S. Cellular, which could require U.S. Cellular to reduce its construction, development or acquisition programs, reduce
the acquisition of spectrum licenses, and/or reduce or cease share repurchases.
-
U.S. Cellular has a significant amount of indebtedness which could adversely affect its financial performance and in turn adversely affect its ability to make payments on its
indebtedness, comply with terms of debt covenants and incur additional debt.
-
Changes in roaming practices or other factors could cause U.S. Cellular's roaming revenues to decline from current levels, roaming expenses to increase from current levels and/or
impact U.S. Cellular's ability to service its customers in geographic areas where U.S. Cellular does not have its own network, which could have an adverse effect on U.S. Cellular's business, financial condition or results of operations.
-
A failure by U.S.
Cellular to obtain access to adequate radio spectrum to meet current or anticipated future needs and/or to accurately predict future needs for radio spectrum could have an adverse effect on U.S. Cellular’s business, financial condition or results of operat
ions.
-
To the extent conducted by the FCC, U.S. Cellular may participate in FCC auctions of additional spectrum in the future directly or indirectly and, during certain periods, will be subject to the FCC’s anti-collusion rules, which could have an adverse
effect on U.S.
Cellular.
-
Changes in the regulatory environment or a failure by U.S.
Cellular to timely or fully comply with any applicable regulatory requirements could adversely affect U.S.
Cellular’s business, financial condition or results of operations
.
-
An inability to attract people of outstanding potential, to develop their potential through education and assignments, and to retain them by keeping them engaged, challenged and properly rewarded could have an adverse effect on U.S. Cellular's business,
financial condition or results of operations.
-
U.S.
Cellular’s assets are concentrated in the U.S.
wireless telecommunications industry. Consequently, its operating results may fluctuate based on factors related primarily to conditions in this industry.
-
U.S
. Cellular’s smaller scale relative to larger competitors that may have much 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 condi
tion or results of operations.
-
Changes in various business factors, including changes in demand, customer preferences and perceptions, price competition, churn from customer switching activity and other factors, could have an adverse effect on U.S.
Cellula
r’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 rece
ives 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.
-
Performance under device purchase agreements c
ould have a material adverse impact on U.S. Cellular's business, financial condition or results of operations.
-
Changes in U.S.
Cellular’s enterprise value, changes in the market supply or demand for wireless licenses, adverse developments in the business
or the industry in which U.S.
Cellular is involved and/or other factors could require U.S.
Cellular to recognize impairments in the carrying value of its licenses, goodwill and/or physical assets.
-
Costs, integration problems or other factors associated wit
h acquisitions, divestitures or exchanges of properties or licenses and/or expansion of U.S.
Cellular’s business could have an adverse effect on U.S.
Cellular’s business, financial condition or results of operations.
-
U.S. Cellular offers customers the opti
on to purchase certain devices under installment contracts which, compared to fixed-term service contracts, includes risks that U.S. Cellular may possibly incur greater churn, lower cash flows, increased costs and/or increased bad debt
s
expense due to diff
erences in contract terms, which could have an adverse impact on U.S. Cellular’s financial condition or results of operations.
-
A failure by U.S.
Cellular to complete significant network construction and systems implementation activities as part of its plan
s 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, includi
ng 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, financ
ial 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, financi
al condition or results of operations.
-
The market price of U.S.
Cellular’s Common Shares is subject to fluctuations due to a variety of factors.
-
Changes in facts or circumstances, including new or additional information, could require U.S.
Cellular to
record charges in excess of amounts accrued in the financial statements, which could have an adverse effect on U.S.
Cellular’s business, financial condition or results of operations.
-
Disruption in credit or other financial markets, a deterioration of U.S.
or global economic conditions or other events could, among other things, impede U.S. Cellular’s access to or increase the cost of financing its operating and investment activities and/or result in reduced revenues and lower operating income and cash flows,
which would have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
-
Settlements, judgments, restraints on its current or future manner of doing business and/or legal costs resulting from pending and future litigat
ion 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.
-
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 car
efully 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, 2015
, which could materially affec
t 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, 2015
, 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 foregoin
g, 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, 2015
.
Quantitative a
nd 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, 2015
for additional information, including information
regarding required principal payments and the weighted average interest rates related to U.S. Cellular’s Long-term debt. There have been no material changes to such information since
December 31, 2015
.
See Note
8
—
Debt
in the Notes to Consolidated Financial Statements for
additional information.
See Note
2
—
Fair Value Measurements
in the Notes to Consolidated Financial Statements for additional information related to the fa
ir value of U.S. Cellular’s L
ong-term debt as of
September 30, 2016
.
Financial Statements
United States Cellular Corpor
ation
Consolidated Statement of Operations
(Unaudited)
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
(Dollars and shares in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
|
$
|
771
|
|
$
|
896
|
|
$
|
2,293
|
|
$
|
2,549
|
|
Equip
ment sales
|
|
239
|
|
|
173
|
|
|
655
|
|
|
461
|
|
|
Total operating revenues
|
|
1,010
|
|
|
1,069
|
|
|
2,948
|
|
|
3,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
System operations (excluding Depreciation,
amortization and accretion reported below)
|
|
196
|
|
|
199
|
|
|
572
|
|
|
586
|
|
Cost
of equipment sold
|
|
280
|
|
|
287
|
|
|
799
|
|
|
779
|
|
Selli
ng, general and administrative (including charges
from affiliates of $21 million and $22 million, respectively,
for the three months, and $69 million and $66 million,
respectively, for the nine months)
|
|
370
|
|
|
375
|
|
|
1,089
|
|
|
1,107
|
|
Depreciation, amortization and accretion
|
|
155
|
|
|
152
|
|
|
462
|
|
|
450
|
|
(Gain) loss on asset disposals, net
|
|
7
|
|
|
3
|
|
|
16
|
|
|
12
|
|
(Gain
) loss on sale of business and other exit costs, net
|
|
–
|
|
|
(1)
|
|
|
–
|
|
|
(114)
|
|
(Gain) loss on license sales and exchanges, net
|
|
(7)
|
|
|
(24)
|
|
|
(16)
|
|
|
(147)
|
|
|
Tota
l operating expenses
|
|
1,001
|
|
|
991
|
|
|
2,922
|
|
|
2,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
9
|
|
|
78
|
|
|
26
|
|
|
337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated entities
|
|
38
|
|
|
40
|
|
|
110
|
|
|
110
|
|
Inter
est and dividend income
|
|
14
|
|
|
9
|
|
|
41
|
|
|
26
|
|
Inter
est expense
|
|
(28)
|
|
|
(21)
|
|
|
(84)
|
|
|
(61)
|
|
Other, net
|
|
–
|
|
|
–
|
|
|
–
|
|
|
(1)
|
|
|
Tota
l investment and other income
|
|
24
|
|
|
28
|
|
|
67
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
33
|
|
|
106
|
|
|
93
|
|
|
411
|
|
Income tax expense
|
|
15
|
|
|
41
|
|
|
39
|
|
|
161
|
Net income
|
|
18
|
|
|
65
|
|
|
54
|
|
|
250
|
Less: Net income attributable to noncontrolling
interests, net of tax
|
|
1
|
|
|
1
|
|
|
1
|
|
|
7
|
Net income attributable to U.S. Cellular
shareholders
|
$
|
17
|
|
$
|
64
|
|
$
|
53
|
|
$
|
243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
85
|
|
|
84
|
|
|
85
|
|
|
84
|
Basic earnings per share attributable to
U.S. Cellular shareholders
|
$
|
0.20
|
|
$
|
0.75
|
|
$
|
0.63
|
|
$
|
2.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
85
|
|
|
85
|
|
|
85
|
|
|
85
|
Diluted earnings per share attributable to
U.S. Cellular shareholders
|
$
|
0.20
|
|
$
|
0.75
|
|
$
|
0.63
|
|
$
|
2.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
United States Cellular Corporation
Consolidated Statement of Cash Flows
(Unaudited)
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
September 30,
|
|
2016
|
|
2015
|
(Dollars in millions)
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income
|
$
|
54
|
|
$
|
250
|
|
Add (deduct) adjustments to reconcile net income to net cash flows
|
|
|
|
|
|
|
|
from operating
activities
|
|
|
|
|
|
|
|
|
Depreciation, amortization and accretion
|
|
462
|
|
|
450
|
|
|
|
Bad debts expense
|
|
69
|
|
|
78
|
|
|
|
Stock-based compensation expense
|
|
19
|
|
|
18
|
|
|
|
Deferred income taxes, net
|
|
11
|
|
|
(20)
|
|
|
|
Equity in earnings of unconsolidated entities
|
|
(110)
|
|
|
(110)
|
|
|
|
Distributions from unconsolidated entities
|
|
55
|
|
|
45
|
|
|
|
(Gain) loss on asset disposals, net
|
|
16
|
|
|
12
|
|
|
|
(Gain) loss on sale of business and other exit costs, net
|
|
–
|
|
|
(114)
|
|
|
|
(Gain) loss on license sales and exchanges, net
|
|
(16)
|
|
|
(147)
|
|
|
|
Noncash interest expense
|
|
1
|
|
|
1
|
|
|
|
Other operating activities
|
|
(2)
|
|
|
–
|
|
Changes in assets and liabilities from operations
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
1
|
|
|
(54)
|
|
|
|
Equipment installment plans receivable
|
|
(160)
|
|
|
(96)
|
|
|
|
Inventory
|
|
2
|
|
|
91
|
|
|
|
Accounts
payable
|
|
45
|
|
|
117
|
|
|
|
Customer deposits and deferred revenues
|
|
(41)
|
|
|
(51)
|
|
|
|
Accrued taxes
|
|
38
|
|
|
161
|
|
|
|
Accrued interest
|
|
7
|
|
|
11
|
|
|
|
Other assets and liabilities
|
|
(36)
|
|
|
(87)
|
|
|
|
|
Net cash provided by operating activities
|
|
415
|
|
|
555
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
Cash paid for additions to property, plant and equipment
|
|
(280)
|
|
|
(407)
|
|
Cash paid for acquisitions and licenses
|
|
(46)
|
|
|
(286)
|
|
Cash received from divestitures and exchanges
|
|
20
|
|
|
314
|
|
Federal Communications
Commission deposit
|
|
(143)
|
|
|
–
|
|
Other investing activities
|
|
–
|
|
|
2
|
|
|
|
|
Net cash used in investing activities
|
|
(449)
|
|
|
(377)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
Issuance of long-term debt
|
|
–
|
|
|
225
|
|
Repayment of long-term debt
|
|
(8)
|
|
|
–
|
|
Common shares reissued for benefit plans, net of tax payments
|
|
4
|
|
|
(1)
|
|
Common shares repurchased
|
|
(2)
|
|
|
(4)
|
|
Payment of debt issuance costs
|
|
(2)
|
|
|
(3)
|
|
Acquisition of assets in common control transaction
|
|
–
|
|
|
(2)
|
|
Distributions to noncontrolling
interests
|
|
(1)
|
|
|
(6)
|
|
Other financing activities
|
|
2
|
|
|
(2)
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
(7)
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
(41)
|
|
|
385
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
Beginning of period
|
|
715
|
|
|
212
|
|
End of period
|
$
|
674
|
|
$
|
597
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
United States Cellular Corporation
Consolidated Balance Sheet
— Assets
(Unaudited)
|
September 30,
|
|
December 31,
|
|
2016
|
|
2015
|
(Dollars in millions)
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
674
|
|
$
|
715
|
|
Accounts receivable
|
|
|
|
|
|
|
|
Customers and agents, less allowances of $49 and $45, respectively
|
|
621
|
|
|
608
|
|
|
Roaming
|
|
21
|
|
|
20
|
|
|
Other, less allowances of $1 and $1, respectively
|
|
46
|
|
|
44
|
|
Inventory, net
|
|
140
|
|
|
149
|
|
Prepaid expenses
|
|
80
|
|
|
81
|
|
Other current assets
|
|
25
|
|
|
55
|
|
|
|
Total current assets
|
|
1,607
|
|
|
1,672
|
|
|
|
|
|
|
|
|
|
Assets held for sale
|
|
16
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
1,866
|
|
|
1,834
|
Goodwill
|
|
370
|
|
|
370
|
Investments in unconsolidated entities
|
|
420
|
|
|
363
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
|
|
|
|
In service and under construction
|
|
7,609
|
|
|
7,669
|
|
Less: Accumulated depreciation and amortization
|
|
5,151
|
|
|
5,020
|
|
|
|
Property, plant and equipment, net
|
|
2,458
|
|
|
2,649
|
|
|
|
|
|
|
|
|
|
Other assets and deferred charges
|
|
367
|
|
|
172
|
|
|
|
|
|
|
|
|
|
Total assets
1
|
$
|
7,104
|
|
$
|
7,060
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial
statements.
|
United States Cellular Corporation
Consolidated Balance Sheet — Liabilities and Equity
(Unaudited)
|
September 30,
|
|
December 31,
|
|
2016
|
|
2015
|
(Dollars and shares in millions, except per share amounts)
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Current portion of long-term debt
|
$
|
11
|
|
$
|
11
|
|
Accounts payable
|
|
|
|
|
|
|
|
Affiliated
|
|
9
|
|
|
10
|
|
|
Trade
|
|
300
|
|
|
275
|
|
Customer deposits and deferred revenues
|
|
204
|
|
|
251
|
|
Accrued taxes
|
|
29
|
|
|
28
|
|
Accrued compensation
|
|
64
|
|
|
68
|
|
Other current liabilities
|
|
78
|
|
|
105
|
|
|
|
Total current liabilities
|
|
695
|
|
|
748
|
|
|
|
|
|
|
|
|
|
Deferred liabilities and credits
|
|
|
|
|
|
|
Deferred income tax liability, net
|
|
831
|
|
|
821
|
|
Other deferred liabilities and credits
|
|
311
|
|
|
290
|
|
|
|
|
|
|
|
|
|
Long-term debt, net
|
|
1,621
|
|
|
1,629
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests with redemption features
|
|
1
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
U.S. Cellular shareholders’ equity
|
|
|
|
|
|
|
|
Series A Common and Common Shares
|
|
|
|
|
|
|
|
|
Authorized 190 shares (50 Series A Common
and 140 Common Shares)
|
|
|
|
|
|
|
|
|
Issued 88 shares (33 Series A Common and 55 Common Shares)
|
|
|
|
|
|
|
|
|
Outstanding 85 shares (33 Series A Common and 52 Common Shares) and 84 shares (33 Series A Common and 51 Common Shares), respectively
|
|
|
|
|
|
|
|
|
Par Value
($1.00 per share) ($33 Series A Common and $55 Common Shares)
|
|
88
|
|
|
88
|
|
|
Additional paid-in capital
|
|
1,516
|
|
|
1,497
|
|
|
Treasury shares, at cost, 3 and 4 Common Shares, respectively
|
|
(136)
|
|
|
(157)
|
|
|
Retained earnings
|
|
2,167
|
|
|
2,133
|
|
|
|
Total U.S. Cellular
shareholders' equity
|
|
3,635
|
|
|
3,561
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests
|
|
10
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
3,645
|
|
|
3,571
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
1
|
$
|
7,104
|
|
$
|
7,060
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
The consolidated total assets as of September 30, 2016 and December 31, 2015 include assets held by consolidated VIEs of $828 million and $658 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, 2016 and December 31, 2015 include certain liabilities of consolidated VIEs of $18 million and $1 million, respectively, for which the creditors of the
VIEs have no recourse to the general credit of U.S. Cellular. See Note 9 — Variable Interest Entities for additional information.
|
|
|
|
|
|
United States Cellular Corporation
Consolidated Statement of Changes in
Equity
(Unaudited)
|
|
U.S. Cellular Shareholders
|
|
|
|
|
|
|
|
|
Series A
Common and
Common
shares
|
|
Additional
paid-in
capital
|
|
Treasury
shares
|
|
Retained
earnings
|
|
Total
U.S. Cellular
shareholders'
equity
|
|
Noncontrolling
interests
|
|
Total equity
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
$
|
88
|
|
$
|
1,497
|
|
$
|
(157)
|
|
$
|
2,133
|
|
$
|
3,561
|
|
$
|
10
|
|
$
|
3,571
|
Net income attributable to U.S. Cellular shareholders
|
|
–
|
|
|
–
|
|
|
–
|
|
|
53
|
|
|
53
|
|
|
–
|
|
|
53
|
Net income attributable to noncontrolling interests
classified as equity
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
1
|
|
|
1
|
Repurchase of Common shares
|
|
–
|
|
|
–
|
|
|
(2)
|
|
|
–
|
|
|
(2)
|
|
|
–
|
|
|
(2)
|
Incentive and compensation plans
|
|
–
|
|
|
–
|
|
|
23
|
|
|
(19)
|
|
|
4
|
|
|
–
|
|
|
4
|
Stock-based compensation awards
|
|
–
|
|
|
19
|
|
|
–
|
|
|
–
|
|
|
19
|
|
|
–
|
|
|
19
|
Distributions to noncontrolling interests
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
(1)
|
|
|
(1)
|
Balance, September 30, 2016
|
$
|
88
|
|
$
|
1,516
|
|
$
|
(136)
|
|
$
|
2,167
|
|
$
|
3,635
|
|
$
|
10
|
|
$
|
3,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
United States Cellular Corporation
Consolidated Statement of Changes in
Equity
(Unaudited)
|
|
U.S. Cellular Shareholders
|
|
|
|
|
|
|
|
|
Series A
Common and
Common
shares
|
|
Additional
paid-in
capital
|
|
Treasury
shares
|
|
Retained
earnings
|
|
Total
U.S. Cellular
shareholders'
equity
|
|
Noncontrolling
interests
|
|
Total equity
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2014
|
$
|
88
|
|
$
|
1,473
|
|
$
|
(169)
|
|
$
|
1,910
|
|
$
|
3,302
|
|
$
|
11
|
|
$
|
3,313
|
Net income attributable to U.S. Cellular shareholders
|
|
–
|
|
|
–
|
|
|
–
|
|
|
243
|
|
|
243
|
|
|
–
|
|
|
243
|
Net loss attributable to noncontrolling interests
classified as equity
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
2
|
|
|
2
|
Repurchase of Common shares
|
|
–
|
|
|
–
|
|
|
(5)
|
|
|
–
|
|
|
(5)
|
|
|
–
|
|
|
(5)
|
Incentive and compensation plans
|
|
–
|
|
|
–
|
|
|
14
|
|
|
(16)
|
|
|
(2)
|
|
|
–
|
|
|
(2)
|
Stock-based compensation awards
|
|
–
|
|
|
17
|
|
|
–
|
|
|
–
|
|
|
17
|
|
|
–
|
|
|
17
|
Distributions to noncontrolling interests
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
(1)
|
|
|
(1)
|
Acquisition of assets in common control transaction
|
|
–
|
|
|
1
|
|
|
–
|
|
|
(2)
|
|
|
(1)
|
|
|
–
|
|
|
(1)
|
Balance, September 30, 2015
|
$
|
88
|
|
$
|
1,491
|
|
$
|
(160)
|
|
$
|
2,135
|
|
$
|
3,554
|
|
$
|
12
|
|
$
|
3,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
United States Cellular Corporation
Notes to Consolidated Financial Statements
Note
1
Basis of Presentation
United States Cellular Corporation (“U.S. Cellular”), a Delaware corporation, is an
83%
-owned subsidiary of Telephone and Data Systems, Inc. (“TDS”).
The accounting policies of U.S. Cellular conform to accounting principles generall
y accepted in the United States of America (“GAAP”) as set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The consolidated financial statements include the accounts of U.S. Cellular, subsidiaries in w
hich it has a controlling financial interest, general partnerships in which U.S. Cellular has a majority partnership interest and certain entities in which U.S. Cellular has a variable interest that require consolidation under GAAP.
All material intercomp
any accounts and transactions have been eliminated.
The unaudited consolidated financial statements included herein have been prepared by U.S. Cellular pursuant to the rules
and regulations of the Securities and Exchange Commission (“SEC”). Certain inform
ation and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules
and regulations. However, U.S. Cellular believes that the disclosures included herein are adequate to ma
ke the information presented not misleading.
Calculated amounts and percentages are based on the underlying actual numbers rather than the numbers rounded to millions as presented. These unaudited consolidated financial statements should be read in conju
nction with the consolidated financial statements and the notes thereto included in U.S. Cellular’s Annual Report on Form
10-K (“Form
10-K”) for the year ended
December 31, 2015
.
The accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring items, unless otherwise disclosed) necessary for the fair statement of U.S. Cellular’s financial position as of
September 30, 2016
and
December 31, 2015
, its results of operations for the
three and nine
months ended
September 30, 2016
and
2015
, and its cash flows and changes in equity for the
nine months ended
September 30, 2016
and
2015
. The Consolidated Statement of Comprehensive Income was not included because comprehensive income for the
three and nine
months ended
September 30, 2016
and
2015
equaled net income.
These results are not necessarily indicative of the results to be expected for the full year.
Recently Issued Accounting Pronou
ncements
In May 2014, the FASB issued Accounting Standards Update 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”) and has since amended the standard with Accounting Standards Update 2015-14,
Revenue from Contracts with Customers: Deferral of
the Effective Date,
Accounting Standards Update 2016-08,
Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net),
Accounting Standards Update 2016-10,
Revenue from Contracts with Customers: Identif
ying Performance Obligations and Licensing,
and Accounting Standards Update 2016-12,
Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients.
These standards replace existing revenue recognition rules with a single compre
hensive model to use in accounting for revenue arising from contracts with customers. U.S. Cellular is required to adopt ASU 2014-09, as amended, on January 1, 2018. Early adoption as of January 1, 2017 is permitted; however, U.S. Cellular does not inten
d to adopt early. ASU 2014-09, as amended, impacts U.S. Cellular’s revenue recognition related to the allocation of contract revenues between various services and equipment, and the timing of when those revenues are recognized. In addition, the new requi
rements require deferral of incremental contract acquisition and fulfillment costs and subsequent expense recognition over the contract period or expected customer life. U.S. Cellular expects to transition to the new standard under the modified retrospect
ive transition method whereby a cumulative effect adjustment is recognized upon adoption and the guidance is applied prospectively. U.S. Cellular is currently evaluating the guidance, developing its implementation plan, and evaluating the effects ASU 2014
-09, as amended, will have on its financial position and results of operations upon adoption.
In August 2014, the FASB issued Accounting Standards Update 2014-15,
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
(“ASU 20
14-15”). ASU 2014-15 requires U.S. Cellular to assess its ability to continue as a going concern each interim and annual reporting period and provide certain disclosures if there is substantial doubt about the entity’s ability to continue as a going conce
rn, including management’s plan to alleviate the substantial doubt. U.S. Cellular is required to adopt the provisions of ASU 2014-15 for the annual period ending December 31, 2016. The adoption of ASU 2014-15 will not impact U.S. Cellular’s financial pos
ition or results of operations but may impact future disclosures.
In July 2015, the FASB issued Accounting Standards Update 2015-11,
Inventory: Simplifying the Measurement of Inventory
(“ASU 2015-11”), which requires inventory to be measured at the lower o
f cost or net realizable value. U.S. Cellular is required to adopt ASU 2015-11 on January 1, 2017. Early adoption is permitted. The adoption of ASU 2015-11 is not expected to have a significant impact on U.S. Cellular’s financial position or results of
operations.
In January 2016, the FASB issued Accounting Standards Update 2016-01,
Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
(“ASU 2016-01”).
This ASU introduces changes to current accounting
for equity investments and financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments.
U.S. Cellular is required to adopt ASU 2016-01 on January 1, 2018.
Certain provisions are eligible f
or early adoption.
The adoption of ASU 2016-01 is not expected to have a significant impact on U.S. Cellular’s financial position or results of operations.
In February 2016, the FASB issued Accounting Standards Update 2016-02,
Leases
(“ASU 2016-02”). ASU 2016-02 requires lessees to record a right-of-use asset and lease liability for almost all leases. This ASU does not substantially impact lessor accounting. U.S. Cellular is required to adopt ASU 2016-02 on January 1, 2019. Early
adoption is permitted. Upon adoption of ASU 2016-02, U.S. Cellular expects a substantial increase to assets and liabilities on its balance sheet. U.S. Cellular is evaluating the full effects that adoption of ASU 2016-02 will have on its financial positio
n and results of operations.
In March 2016, the FASB issued Accounting Standards Update 2016-04,
Liabilities – Extinguishments of Liabilities: Recognition of Breakage from Certain Prepaid Stored-Value Products
(“ASU 2016-04”).
ASU 2016-04 requires compani
es that sell prepaid stored-value products redeemable for goods, services or cash at third-party merchants to recognize breakage (i.e., the value that is ultimately not redeemed by the consumer) in a way that is consistent with how it will be recognized un
der the new revenue recognition standard. U.S. Cellular is required to adopt ASU 2016-04 on January 1, 2018.
Early adoption is permitted.
The adoption of ASU 2016-04 is not expected to have a significant impact on U.S. Cellular’s financial position or r
esults of operations.
In March 2016, the FASB issued Accounting Standards Update 2016-09,
Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”). ASU 2016-09 intends to simplify the accounting for share-
based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. U.S. Cellular will adopt ASU 2016-09 on January 1, 2017. The adoption of ASU 2
016-09 is not expected to have a significant impact on U.S. Cellular’s financial position, results of operations, or cash flows.
In June 2016, the FASB issued Accounting Standards Update 2016-13,
Financial Instruments – Credit Losses: Measurement of Credit
Losses on Financial Instruments
(“ASU 2016-13”). ASU 2016-13 requires entities to use a new forward-looking, expected loss model to estimate credit losses. It also requires additional disclosure relating to the credit quality of trade and other receivables, including information relat
ing to management’s estimate of credit allowances. U.S. Cellular is required to adopt ASU 2016-13 on January 1, 2020. Early adoption as of January 1, 2019 is permitted. U.S. Cellular is evaluating the effects that adoption of ASU 2016-13 will have on it
s financial position, results of operations and disclosures.
In August 2016, the FASB issued Accounting Standards Update 2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”). ASU 2016-15 provides guid
ance on eight targeted cash flow classification issues. U.S. Cellular is required to adopt ASU 2016-15 on January 1, 2018. U.S. Cellular is evaluating the effects that adoption of ASU 2016-15 will have on its statement of cash flows.
In October 2016, the
FASB issued Accounting Standards Update 2016-16,
Income Taxes:
Intra-Entity Transfers of Assets Other Than Inventory
(“ASU 2016-16”). ASU 2016-16 impacts the accounting for the income tax consequences of intra-entity transfers of assets other than invent
ory when the transfer occurs between entities in different tax jurisdictions. U.S. Cellular is required to adopt ASU 2016-16 on January 1, 2018. Early adoption is permitted. The adoption of ASU 2016-16 is not expected to have a significant impact on U.S
. Cellular’s financial position or results of operations.
In October 2016, the FASB issued Accounting Standards Update 2016-17,
Consolidation:
Interests Held through Related Parties That Are under Common Control
(“ASU 2016-17”). ASU 2016-17 provides guida
nce on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in an entity held through related parties that are under common control. U.S. Cellular is required to adopt ASU 2016-17 on January 1, 2017. Early ado
ption is permitted. U.S. Cellular is evaluating the effects that adoption of ASU 2016-17 will have on its financial position, results of operations and disclosures.
Amounts Collected from Customers and Remitted to Governmental Authorities
U.S. Cellular re
cords amounts collected from customers and remitted to governmental authorities net within a tax liability account if the tax is assessed upon the customer and U.S. Cellular merely acts as an agent in collecting the tax on behalf of the imposing government
al authority. If the tax is assessed upon U.S. Cellular, then amounts collected from customers as recovery of the tax are recorded in Service revenues and amounts remitted to governmental authorities are recorded in Selling, general and administrative exp
enses in the Consolidated Statement of Operations. The amounts recorded gross in revenues that are billed to customers and remitted to governmental authorities totaled $
15
million and $
49
million for t
he
three and nine
months ended
September 30, 2016
, respectively,
and $
19
million and $
60
million for the
three and nine
months ended
September 30, 2015
, respectively.
Note
2
Fair Value
Measurements
As of
September 30, 2016
and
December 31, 2015
, U.S. Cellular did not have any financial or nonfinancial assets or liabilities that were required to be
recorded at fair value in its Consolidated Balance Sheet in accordance with GAAP.
The provisions of GAAP establish a fair value hierarchy that contains three levels for inputs used in fair value measurements. Level 1 inputs include quoted market prices fo
r identical assets or liabilities in active markets. Level 2 inputs include quoted market prices for similar assets and liabilities in active markets or quoted market prices for identical assets and liabilities in inactive markets. Level 3 inputs are uno
bservable. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. A financial instrument’s level within the fair value hierarchy is not representative of
its expected performance or its overall risk profile and, therefore, Level 3 assets are not necessarily higher risk than Level 2 or Level 1 assets.
U.S. Cellular has applied the provisions of fair value accounting for purposes of computing the fair value
of financial instruments for disclosure purposes as displayed below.
|
|
|
Level within the Fair Value Hierarchy
|
|
September 30, 2016
|
|
December 31, 2015
|
|
|
|
|
Book Value
|
|
Fair Value
|
|
Book Value
|
|
Fair Value
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
1
|
|
$
|
674
|
|
$
|
674
|
|
$
|
715
|
|
$
|
715
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
2
|
|
|
917
|
|
|
978
|
|
|
917
|
|
|
929
|
|
In
stitutional
|
2
|
|
|
533
|
|
|
555
|
|
|
533
|
|
|
501
|
|
Ot
her
|
2
|
|
|
205
|
|
|
205
|
|
|
214
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of Cash and cash equivalents approximates the book value due to the short-term nature of these financial instruments. Long-term debt excludes capital lease obligations and the current portion of Long-term debt. The fair value of “Retail” L
ong-term debt was estimated using market prices for the 6.95% Senior Notes, 7.25% Senior Notes due 2063 and 7.25% Senior Notes due 2064. U.S. Cellular’s “Institutional” debt consists of the 6.7% Senior Notes which are traded over the counter. U.S. Cellul
ar’s “Other” debt consists of a senior term loan credit facility. U.S. Cellular estimated the fair value of its Institutional and Other debt through a discounted cash flow analysis using the interest rates or estimated yield to maturity for each borrowing
, which ranged from
3.57%
to
6.50%
and
3.19%
to
7.51%
at
September 30, 2016
and
December 31, 2015
, respectively.
Note
3
Equipment Installment Plans
U.S. Cellular sells devices to customers, through its owned and agent distribution channels, under equipment installment contracts over a specified time period. For certain equipment installment plans (“EIP”), after a specified period of time or amount of
payments, the customer may have the right to upgrade to a new device and have the remaining unpaid equipment installment contract balance waived, subject to certain conditions, including trading in the original device in good working condition and signing
a new equipment installment contract. U.S. Cellular values this trade-in right as a guarantee liability. The guarantee liability is initially measured at fair value and is determined based on assumptions including the probability and timing of the custo
mer upgrading to a new device and the fair value of the device being traded-in at the time of trade-in. As of
September 30, 2016
and
December 31, 2015
, the guarantee liabi
lity related to these plans was $
44
million and $
93
million, respectively, and is reflected in Customer deposits and deferred revenues in the Consolidated Balance Sheet.
U.S. Cellular equipmen
t installment plans do not provide for explicit interest charges. For equipment installment plans with a duration of greater than twelve months, U.S. Cellular imputes interest. U.S. Cellular records imputed interest as a reduction to the related accounts
receivable and it is recognized over the term of the installment agreement. Equipment installment plan receivables had a weighted average effective imputed interest rate of
10.7%
and
9.7%
as of
September 30, 2016
and
December 31, 2015
, respectively.
The following table summarizes unbilled equipment installment plan receivables as of
September 30, 2016
and
December 31, 2015
. Such amounts are included in the Consolidated Balance Sheet as Accounts receivable – customers and agents and Other assets and deferred charges, where applicable.
|
Sept
ember 30, 2016
|
|
December 31, 2015
|
(Dollars in millions)
|
|
|
|
|
|
Short-term portion of unbilled equipment installment plan receivables, gross
|
$
|
339
|
|
$
|
279
|
Short-term portion of unbilled deferred interest
|
|
(33)
|
|
|
(21)
|
Short-term portion of unbilled
allowance for credit losses
|
|
(22)
|
|
|
(14)
|
Short-term portion of unbilled equipment installment plan receivables, net
|
$
|
284
|
|
$
|
244
|
|
|
|
|
|
|
|
Long-term portion of unbilled equipment installment plan receivables, gross
|
$
|
165
|
|
$
|
76
|
Long-term portion of
unbilled deferred interest
|
|
(9)
|
|
|
(2)
|
Long-term portion of unbilled allowance for credit losses
|
|
(13)
|
|
|
(6)
|
Long-term portion of unbilled equipment installment plan receivables, net
|
$
|
143
|
|
$
|
68
|
U.S. Cellular assesses the collectability of the
equipment installment plan receivables based on historical payment experience, account aging and other qualitative factors and provides an allowance for estimated losses. The credit profiles of U.S. Cellular’s customers on equipment installment plans are
similar to those of U.S. Cellular customers with traditional subsidized plans. Customers with a higher risk credit profile are required to make a down payment for equipment purchased through an installment contract.
U.S. Cellular recorded out-of-period adjustments during the three and
nine months ended
September 30, 2016 due to errors related to equipment installment plan transactions occurring in 2015 and 2016 (“2016 EIP adju
stments”). For the three months ended September 30, 2016, the 2016 EIP adjustments had the impact of increasing Equipment sales revenues by $4 million, decreasing bad debts expense, which is a component of Selling, general and administrative expense, by $
2 million and increasing Income before income taxes by $6 million. For the nine months ended September 30, 2016, the 2016 EIP adjustments had the impact of increasing Equipment sales revenues by $2 million, decreasing bad debts expense by $2 million and i
ncreasing Income before income taxes by $4 million.
Additionally, U.S. Cellular recorded out-of-period adjustments during the nine months ended September 30, 2015 due to errors related to equipment installment plan transactions (“2015 EIP adjustments”) th
at were attributable to 2014. The 2015 EIP adjustments had the impact of reducing Equipment sales revenues and Income before income taxes by $6 million for the nine months ended September 30, 2015. The 2015 EIP adjustments were made in the first six mont
hs of 2015. U.S. Cellular has determined that these adjustments were not material to any of the periods impacted.
Note
4
Earnings Per Share
Basic earnings per share attr
ibutable to U.S. Cellular shareholders is computed by dividing Net income attributable to U.S. Cellular shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share attributable to U.S. Cellular sh
areholders is computed by dividing Net income attributable to U.S. Cellular shareholders by the weighted average number of common shares outstanding during the period adjusted to include the effects of potentially dilutive securities. Potentially dilutive
securities primarily include incremental shares issuable upon the exercise of outstanding stock options and the vesting of restricted stock units.
The amounts used in computing earnings per common share and the effects of potentially dilutive securities o
n the weighted average number of common shares were as follows:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
(Dollars and shares in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
Net income
attributable to U.S. Cellular shareholders
|
$
|
17
|
|
$
|
64
|
|
$
|
53
|
|
$
|
243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used in basic
earnings per share
|
|
85
|
|
|
84
|
|
|
85
|
|
|
84
|
Effects of dilutive
securities
|
|
–
|
|
|
1
|
|
|
–
|
|
|
1
|
Weighted average number of shares used in diluted
earnings per share
|
|
85
|
|
|
85
|
|
|
85
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share attributable to U.S. Cellular
shareholders
|
$
|
0.20
|
|
$
|
0.75
|
|
$
|
0.63
|
|
$
|
2.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share attributable to
U.S. Cellular shareholders
|
$
|
0.20
|
|
$
|
0.75
|
|
$
|
0.63
|
|
$
|
2.86
|
Certain Common Shares issuable upon the exercise of stock options or vesting of restricted stock units were not included in aver
age diluted shares outstanding for the calculation of Diluted earnings per share attributable to U.S. Cellular shareholders because their effects were antidilutive. The number of such Common Shares excluded was
3
million shares
for each of the
three and nine
months ended
September 30, 2016
and
2015
.
Note
5
Acquisitions, Divestitures and Exchanges
In February 2016, U.S. Cellular entered into an agreement with a third party to exchange certain 700 MHz licenses for certain AWS and PCS licenses and $
28
million of cash.
This license exchange will be accomplished in two closings. The first closing occurred in the second quarter of 2016 at which time U.S. Cellular received $
13
million of cash and recorded a gain of $
9
million. The second closing is expected to occur in the fourth quarter of 2016 and U.S. Cellular expects to recognize a gain at that time. As a result of this exchange, the remaining licenses with a carrying value of $
8
millio
n have been classified as “Assets held for sale” in the Consolidated Balance Sheet as of
September 30, 2016
.
In February 2016, U.S. Cellular entered into an additional agreement with a third party that provided for
the transfer of certain AWS spectrum licenses and $
2
million in cash to U.S. Cellular, in exchange for U.S. Cellular transferring certain AWS, PCS and 700 MHz licenses with a carrying value of $
7
milli
on to the third party. This transaction closed in the third quarter of 2016, at which time U.S. Cellular recorded a gain of $
7
million.
In March 2016, U.S. Cellular entered into an additional agreement with a third party to tran
sfer FCC licenses in non-operating markets and receive FCC licenses in operating markets. The agreement provides for the transfer of certain AWS and PCS spectrum licenses to U.S. Cellular in exchange for U.S. Cellular transferring certain PCS spectrum lic
enses and $
1
million of cash to the third party. This transaction is subject to regulatory approval and other customary closing conditions, and is expected to close in the fourth quarter of 2016. Upon closing of this transactio
n, U.S. Cellular expects to recognize a gain. As a result of this additional exchange agreement, licenses with a carrying value of $
8
million have been classified as “Assets held for sale” in the Consolidated Balance Sheet as of
September 30, 2016
.
In 2015 and 2016, U.S. Cellular entered into multiple agreements to purchase spectrum licenses located in U.S. Cellular’s existing operating markets. The aggregate purchase price for these spe
ctrum licenses is $
56
million, of which $
46
million closed in the second quarter of 2016. The remaining agreements are expected to close in the fourth quarter of 2016.
U.S. Cellular is participating in the FCC’s forward auction
of 600 MHz spectrum licenses, referred to as Auction 1002, which commenced in August 2016. In the second quarter of 2016, U.S. Cellular made an upfront payment to the FCC of $
143
million to establish its initial bidding eligibil
ity.
Note
6
Intangible Assets
Changes in U.S. Cellular’s Licenses for the
nine months ended
September 30, 2016
are presented below.
There were no changes to Goodwill during the
nine months ended
September 30, 2016
.
Licenses
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in
millions)
|
|
|
Balance December 31, 2015¹
|
$
|
1,834
|
|
Acquisitions
|
|
46
|
|
Transferred to Assets held for sale
|
|
(16)
|
|
Exchanges - Licenses received
|
|
12
|
|
Exchanges - Licenses surrendered
|
|
(10)
|
Balance September 30, 2016
|
$
|
1,866
|
|
|
|
|
|
1
|
Amounts include
payments totaling $338 million made by Advantage Spectrum L.P. to the FCC for licenses in which it was the provisional winning bidder in Auction 97. These licenses were granted by the FCC in July 2016. See Note 9 — Variable Interest Entities for addition
al information.
|
Note
7
Investments in Unconsolidated Entities
Investments in unconsolidated entities consist of amounts invested in wireless entities in which U.S.
Cellular holds a noncontrolling interest. These investments are accounted for using either the equity or cost method.
The following table, which is based in part on information provided by third parties, summarizes the combined results of operations of U.
S. Cellular’s equity method investments.
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,674
|
|
$
|
1,733
|
|
$
|
4,992
|
|
$
|
5,184
|
Operating expenses
|
|
1,249
|
|
|
1,263
|
|
|
3,647
|
|
|
3,827
|
Operating income
|
|
425
|
|
|
470
|
|
|
1,345
|
|
|
1,357
|
Other income (expense), net
|
|
(2)
|
|
|
(10)
|
|
|
(9)
|
|
|
(15)
|
Net income
|
$
|
423
|
|
$
|
460
|
|
$
|
1,336
|
|
$
|
1,342
|
Note
8
Debt
Revolving Credit Facilities
U.S. Cellular has a revolving credit facility available for general corporate purposes. In June 2016, U.S. Cellular entered into a new $300 million revolving credit agreement with certain lenders and other parties. As a result
of the new agreement, U.S. Cellular’s revolving credit agreement due to expire in December 2017 was terminated. Amounts under the new revolving credit facility may be borrowed, repaid and reborrowed from time-to-time until maturity in June 2021. As of
September 30, 2016
, there were no outstanding borrowings under the revolving credit facility, except for letters of credit. Interest expense representing commitment fees on the unused portion of the revol
ving line of credit was $
1
million for each of the
nine months ended
September 30, 2016
and
201
5
.
The following table summarizes the terms of the revolving credit facility as of
September 30, 2016
:
(Dollars in millions)
|
|
|
Maximum borrowing capacity
|
$
|
300
|
Letters of credit outstanding
|
$
|
16
|
Amount
borrowed
|
$
|
–
|
Amount available for use
|
$
|
284
|
Illustrative borrowing rate: One-month London Interbank Offered Rate ("LIBOR") plus contractual spread
1
|
|
2.28%
|
|
Illustrative LIBOR Rate
|
|
0.53%
|
|
Contractual spread
|
|
1.75%
|
Commitment fees on amount available
for use
2
|
|
0.30%
|
|
|
|
|
|
Agreement date
|
|
June 2016
|
Maturity date
|
|
June 2021
|
|
|
|
|
|
1
|
Borrowings under the revolving credit facility bear interest either at a LIBOR rate or at an alternative Base Rate as defined in the revolving credit agreement, plus an
applicable margin, at U.S. Cellular’s option. U.S. Cellular may select a borrowing period of either one, two, three or six months (or other period of twelve months or less if requested by U.S. Cellular and approved by the lenders).
|
|
|
|
|
|
2
|
The revolving
credit facility has commitment fees based on the unsecured senior debt ratings assigned to U.S. Cellular by certain ratings agencies.
|
The new revolving credit agreement includes the following financial covenants:
-
Consolidated Interest Coverage Ratio may
not be less than 3.00 to 1.00 as of the end of any fiscal quarter.
-
Consolidated Leverage Ratio may not be greater than the ratios indicated as of the end of any fiscal quarter for each period specified below:
|
Period
|
Ratios
|
|
|
|
|
|
|
From the agreement date
of June 15, 2016 through June 30, 2019
|
3.25 to 1.00
|
|
|
|
|
|
|
From July 1, 2019 and thereafter
|
3.00 to 1.00
|
|
Certain U.S. Cellular wholly-owned subsidiaries have jointly and severally unconditionally guaranteed the payment and performance of the obligations of U.S. Cellular under the revolving credit agreement pursuant to a guaranty dated June 15, 2016. Other su
bsidiaries that meet certain criteria will be required to provide a similar guaranty in the future.
U.S. Cellular believes it was in compliance with all of the financial and other covenants and requirements set forth in the revolving credit facility as of
September 30, 2016
.
At
September 30, 2016
, U.S. Cellular had recorded $
3
million of unamortized debt issuance costs related to the revolving cr
edit facility which is included in Other assets and deferred charges in the Consolidated Balance Sheet. Included in that amount was $
2
million related to the new revolving credit facility.
Term Loan
In June 2016, U.S. Cellular
also amended and restated its senior term loan credit facility. Certain modifications were made to the financial covenants and subsidiary guarantees were added in order to align with the new revolving credit agreements. There were no significant changes
to the maturity date or other key terms of the agreement.
Note
9
Variable Interest Entities
In February 2015, the FASB issued Accounting Standards Update 2015-02,
Consolidation: Amendments to the Consolidation Analysis
(“ASU 2015-02”). ASU 2015-02 changes consolidation accounting including revising certain criteria for identifying variable interest entities. U.S. Cellular adopted the provisions of this standard as of January 1, 2016. As a result, certain consolidated
subsidiaries and unconsolidated entities that were not defined as variable interest entities under previous accounting guidance are defined as variable interest entities under the provisions of ASU 2015-02. U.S. Cellular’s modified retrospective adoption
of ASU 2015-02 did not change the group of entities which U.S. Cellular is required to consolidate in its financial statements. Accordingly, the adoption of ASU 2015-02 did not impact its financial position or results of operations.
Consolidated VIEs
U.S
. Cellular consolidates variable interest entities (“VIEs”) in which it has a controlling financial interest
as defined by GAAP and is therefore deemed the primary beneficiary. A controlling financial interest will have both of the following characteristi
cs: (a) the power to direct the VIE activities that most significantly impact economic performance and (b) the obligation to absorb the VIE losses and right to receive benefits that are significant to the VIE. U.S. Cellular reviews these criteria initiall
y at the time it enters into agreements and subsequently when events warranting reconsideration occur.
These VIEs
have risks similar to those described in the “Risk Factors” in U.S. Cellular’s Form 10-K for the year ended
December 31, 2015
.
The following VIEs were formed to participate in FCC auctions of wireless spectrum and to fund, establish, and provide wireless service with respect to any FCC licenses won in the auctions:
-
Advantage Spectrum L.P. (“Advantage
Spectrum”) and Frequency Advantage L.P., the general partner of Advantage Spectrum;
-
Aquinas Wireless L.P. (“Aquinas Wireless”); and
-
King Street Wireless L.P. (“King Street Wireless”) and King Street Wireless, Inc., the general partner of King Street Wirele
ss.
These particular VIEs are collectively referred to as designated entities. Historically and as of
September 30, 2016
, U.S. Cellular consolidated these VIEs.
The power to direct the activities that most sign
ificantly impact the economic performance of these VIEs is shared. Specifically, the general partner of these VIEs has the exclusive right to manage, operate and control the limited partnerships and make all decisions to carry on the business of the partn
erships. The general partner of each partnership needs the consent of the limited partner, an indirect U.S. Cellular subsidiary, to sell or lease certain licenses, to make certain large expenditures, admit other partners or liquidate the limited partnersh
ips. Although the power to direct the activities of these VIEs is shared, U.S. Cellular has the most significant level of exposure to the variability associated with the economic performance of the VIEs, indicating that U.S. Cellular is the primary benefi
ciary of the VIEs. Therefore, in accordance with GAAP, these VIEs are consolidated.
In March 2015, King Street Wireless made a $
60
million distribution to its owners.
Of this distribution, $
6
million
was provided to King Street Wireless, Inc. and $
54
million was provided to U.S. Cellular.
FCC Auction 97 ended in January 2015. U.S. Cellular participated in Auction 97 indirectly through its interest in Advantage Spectrum. An
indirect subsidiary of U.S. Cellular is a limited partner in Advantage Spectrum. Advantage Spectrum applied as a designated entity, and received bid credits with respect to spectrum purchased in Auction 97. Advantage Spectrum was the winning bidder for
124
licenses for an aggregate bid of $
338
million, after its designated entity discount of
25
%.
This amount is classified as Licenses in U.S. Cellular’s Consolidated Balance
Sheet.
Advantage Spectrum’s bid amount, less the initial deposit of $
60
million paid in 2014, plus certain other charges totaling $
2
million, was paid to the FCC in March 2015.
These licenses were gra
nted by the FCC in July 2016.
U.S. Cellular also consolidates other VIEs that are limited partnerships that provide wireless service. ASU 2015-02 modified the manner in which limited partnerships and similar legal entities are evaluated under the variab
le interest model. A limited partnership is a variable interest entity unless the limited partners hold substantive participating rights or kick-out rights over the general partners. For certain limited partnerships, U.S. Cellular is the general partner
and manages the operations. In these partnerships, the limited partners do not have substantive kick-out or participating rights and, further, such limited partners do not have the authority to remove the general partner. Therefore, beginning January 1,
2016, these limited partnerships are also recognized as VIEs and are consolidated under the variable interest model. Prior to the adoption of ASU 2015-02, these limited partnerships were consolidated under the voting interest model.
The following table
presents the classification and balances of the consolidated VIEs’ assets and liabilities in U.S. Cellular’s Consolidated Balance Sheet.
|
|
|
September 30,
|
|
December 31,
|
|
|
|
2016¹
|
|
2015¹
|
(Dollars in millions)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
2
|
|
$
|
1
|
|
Accounts receivable
|
|
43
|
|
|
–
|
|
Other current assets
|
|
7
|
|
|
–
|
|
Assets held for sale
|
|
2
|
|
|
–
|
|
Licenses
2
|
|
652
|
|
|
649
|
|
Property, plant and equipment, net
|
|
108
|
|
|
8
|
|
Other assets and deferred charges
|
|
14
|
|
|
–
|
|
|
Total assets
|
$
|
828
|
|
$
|
658
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Current liabilities
|
$
|
22
|
|
$
|
–
|
|
Deferred liabilities and credits
|
|
12
|
|
|
1
|
|
|
Total liabilities
|
$
|
34
|
|
$
|
1
|
|
|
|
|
|
|
|
|
1
|
The increase in amounts from December 31, 2015 are primarily due to the adoption of ASU 2015-02 as disclosed above. ASU 2015-02 was adopted on a modified retrospective basis and, accordingly, prior year amounts
have not been revised to reflect the change in guidance.
|
2
|
As disclosed above, payments totaling $338 million were made by Advantage Spectrum to the FCC relating to Auction 97. These licenses were granted and issued as of September 30, 2016. Although
the licenses had not yet been granted as of December 31, 2015, the payments to the FCC were classified as Licenses at such date.
|
Unconsolidated VIEs
U.S. Cellular manages the operations of and holds a variable interest in certain other limited
partnerships, but is not the primary beneficiary of these entities and, therefore, does not consolidate them under the variable interest model outlined in ASU 2015-02.
U.S. Cellular’s total investment in these unconsolidated entities was $
6
million and $
5
million at
September 30, 2016
and
December 31, 2015
, respectively, and is included in Investments in unconsolidated entities in U.S. Cellular’s Consolidated Balance Sheet. The maximum exposure from unconsolidated VIEs is limited to the investment held by U.S. Cellular in those entities.
Other Related Ma
tters
U.S. Cellular made contributions, loans and/or advances to its VIEs totaling $
100
million and $
281
million during the
nine months ended
September 30, 2016
and
September 30, 2015
, respectively
. U.S. Cellular may agree to make additional capital contributions and/or advances to these or other VIEs and/or to
their general partners to provide additional funding for operations or the development of licenses granted in various auctions. U.S. Cellular may finance such amounts with a combination of cash on hand, borrowings under its revolving credit agreement and
/or other long-term debt. There is no assurance that U.S. Cellular will be able to obtain additional financing on commercially reasonable terms or at all to provide such financial support.
During the three and nine months ended September 30, 2015, U.S. Cellular recorded out-of-period
adjustments attributable to the third quarter of 2013 through the second quarter of 2015 related to an agreement with King Street Wireless. U.S. Cellular determined that these adjustments were not material to the quarterly periods or the annual results fo
r 2015. These out-of-period adjustments had the impact of reducing Net income by $
3
million for both the three and nine months ended September 30, 2015, and Net income attributable to U.S. Cellular shareholders by $
5
million and $
4
million, for the three and nine months ended September 30, 2015, respectively.
United States Cellular Corporation
Additional Required Information
C
ontrols and Procedures
Evaluation of Disclosure Controls and Procedures
U.S. Cellular maintains disclosure controls and procedures (as defined in Rules
13a-15(e)
and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure
that information required to be disclosed in its reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules
and forms, and that such information is accumulated and
communicated to U.S. Cellular’s management, including its principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and pr
ocedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
As required by SEC Rule
13a-15(b), U.S. Cellular carried out an e
valuation, under the supervision and with the participation of management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of U.S. Cellular’s disclosure controls and procedures as
of the end of the period covered by this Quarterly Report.
Based on this evaluation, U.S. Cellular’s principal executive officer and principal financial officer concluded that U.S. Cellular’s disclosure controls and procedures were effective as of
September 30, 2016
, at the reasonable assurance level
.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal controls over financial reporting that have occurred during the quarter ended
September 30, 2016
that have materially affected, or are reasonably likely to materially affect, U.S. Cellular’s internal control over financial reporting.
Legal Proceedings
Refer to the disclosure under Legal Proceedings in U.S. Cellular’s Form 10-K for the year ended
December 31, 2015
. There have been no material changes to such information since
December 31, 2015
.
Unregistered Sales of Equity Securities and Use of Proceeds
On November 20, 2009,
U.S. Cellular announced by Form 8-K that
the Board of Direc
tors of U.S. Cellular authorized the repurchase of up to 1,300,000 Common Shares on an annual basis beginning in 2009 and continuing each year thereafter, on a cumulative basis. Depending on market conditions, such shares may be repurchased in compliance
with Rule 10b-18 of the Exchange Act, pursuant to Rule 10b5-1 under the Exchange Act, or pursuant to accelerated share repurchase arrangements, prepaid share
repurchases, private transactions or as otherwise authorized. This authorization does not have an
expiration date.
U.S. Cellular
did not determine to terminate the foregoing Common
Share
repurchase
program
, or cease making further purchases thereunder, during the
third
quarter of
2016
.
The following table provides certain information with respect to all purchases made by or on behalf of U.S. Cellular, and any open market purchases made by any “affiliated purchaser” (as defined by the SEC) of U.S. Cellular, of U.S. Cell
ular Common Shares during the quarter covered by this Form 10-Q.
Period
|
|
Total Number of Shares Purchased
|
|
|
Average Price Paid per Share
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
|
|
Maximum Number of Shares that May
Yet Be Purchased Under the Plans or Programs
|
July 1 – 31, 2016
|
|
–
|
|
$
|
–
|
|
–
|
|
6,008,437
|
August 1 – 31, 2016
|
|
–
|
|
|
–
|
|
–
|
|
6,008,437
|
September 1 – 30, 2016
|
|
–
|
|
|
–
|
|
–
|
|
6,008,437
|
|
Total for or as of the end of the quarter ended September 30, 2016
|
|
–
|
|
$
|
–
|
|
–
|
|
6,008,437
|
Other Information
The following information is being provided
to update prior disclosures made pursuant to the requirements of Form 8-K, Item 2.03 — Creation of a Direct Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement of a Registrant.
A description of U.S. Cellular’s revolving credit faci
lity is included in U.S. Cellular’s Current Report on Form
8-K dated
June 15, 2016
, and is
incorporated by reference herein.
U.S. Cellular did not borrow or repay any
cash
amounts under its revolving credit facility in the
third
quarter of
2016
or through the filing date of this Form 10-Q. U.S. Cellular had no
cash
borrowings outstanding under its revolving credit facility as of
September 30, 2016
or as of the filing
date of this Form 10-Q.
Exhibits
Exhibit 4.1
|
|
Revolving Credit Agreement, among U.S. Cellular, Toronto Dominion (Texas) LLC, as administrative agent, and the other lenders thereto, dated as of June 15, 2016, including Schedules and Exhibits, including
the form of the subsidiary Guaranty and Subordination Agreement, is hereby incorporated by reference to Exhibit 4.1 to U.S. Cellular's Form 8-K dated June 15, 2016.
|
|
|
|
Exhibit 4.2
|
|
Amended and Restated Term Loan Credit Agreement, among U.S. Cellular and
CoBank, ACB, as administrative agent, and the other lenders thereto, dated as of June 15, 2016, including Schedules and Exhibits, including the forms of the subsidiary Guaranty and Subordination Agreement, is hereby incorporated by reference to Exhibit 4.1
to U.S. Cellular's Form 8-K dated June 15, 2016.
|
|
|
|
Exhibit 10.1
|
|
Form of 2013 Long-Term Incentive Plan Stock Option Award Agreement for Officers other than the President and CEO, is hereby incorporated by reference to Exhibit 10.1 to U.S. Cellular’s
Current Report on Form 8-K dated March 14, 2016.
|
|
|
|
Exhibit 10.2
|
|
Form of 2013 Long-Term Incentive Plan Restricted Stock Unit Award Agreement for Officers other than the President and CEO, is hereby incorporated by reference to Exhibit 10.2 to U.S. Cellular’s Current Report on Form 8-K dated March 14, 2016.
|
|
|
|
Exhibit
10.3
|
|
Form of 2013 Long-Term Incentive Plan Stock Option Award Agreement for the President and CEO, is hereby incorporated by reference to Exhibit 10.3 to U.S. Cellular’s Current Report on Form 8-K dated March 14, 2016.
|
|
|
|
Exhibit 10.4
|
|
Form of 2013
Long-Term Incentive Plan Restricted Stock Unit Award Agreement for the President and CEO, is hereby incorporated by reference to Exhibit 10.4 to U.S. Cellular’s Current Report on Form 8-K dated March 14, 2016.
|
|
|
|
Exhibit 10.5
|
|
United States Cellular
Corporation 2016 Officer Annual Incentive Plan effective January 1, 2016, is hereby incorporated by reference to Exhibit 10.1 to U.S. Cellular's Current Report on Form 8-K dated June 7, 2016.
|
|
|
|
Exhibit 10.6
|
|
U.S. Cellular 2013 Long-Term Incentive Plan,
is hereby incorporated by reference from Exhibit B to the U.S. Cellular definitive proxy statement dated April 12, 2016, which was filed with the SEC on Schedule 14A on April 12, 2016.
|
|
|
|
Exhibit 10.7
|
|
Amendment No. 1 to U.S. Cellular 2013 Long-Term
Incentive Plan, is hereby incorporated by reference from Exhibit A to the U.S. Cellular definitive proxy statement dated April 12, 2016, which was filed with the SEC on Schedule 14A on April 12, 2016.
|
|
|
|
Exhibit 11
|
|
Statement regarding computation of
per share earnings is included herein as Note 4 — Earnings Per Share in the Notes to Consolidated Financial Statements.
|
|
|
|
Exhibit 12
|
|
Statement regarding computation of ratio of earnings to fixed charges.
|
|
|
|
Exhibit 31.1
|
|
Principal executive officer
certification pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.
|
|
|
|
Exhibit 31.2
|
|
Principal financial officer certification pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.
|
|
|
|
Exhibit 32.1
|
|
Principal executive officer
certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.
|
|
|
|
Exhibit 32.2
|
|
Principal financial officer certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.
|
|
|
|
Exhibit 101.INS
|
|
XBRL Instance Document
|
|
|
|
Exhibit 101.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
|
|
|
Exhibit 101.PRE
|
|
XBRL Taxonomy Presentation Linkbase Document
|
|
|
|
Exhibit 101.CAL
|
|
XBRL Taxonomy Calculation Linkbase Document
|
|
|
|
Exhibit 101.LAB
|
|
XBRL Taxonomy
Label Linkbase Document
|
|
|
|
Exhibit 101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
The foregoing exhibits include only the exhibits that relate specifically to this Form 10-Q or that supplement the exhibits identified in U.S. Cellular’s Form 10-K for the year ended
December 31, 2015
. Reference i
s made to U.S. Cellular’s Form 10-K for the year ended
December 31, 2015
for a complete list of exhibits, which are incorporated herein except to the extent supplemented or superseded above.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
UNITED STATES CELLULAR CORPORATION
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
Date:
|
November 4, 2016
|
|
/s/ Kenneth R. Meyers
|
|
|
|
Kenneth R. Meyers
President and Chief Executive Officer
(principal executive officer)
|
|
|
|
|
|
|
Date:
|
November 4, 2016
|
|
/s/ Steven T. Campbell
|
|
|
|
Steven T. Campbell
Executive Vice President-Finance,
Chief Financial Officer and Treasurer
(principal financial officer)
|
|
|
|
|
|
|
Date:
|
November 4, 2016
|
|
/s/ Douglas D. Shuma
|
|
|
|
Douglas D. Shuma
Chief Accounting Officer
(principal accounting officer)
|
|
|
|
|
|
|
Date:
|
November 4, 2016
|
|
/s/ Kristin A. MacCarthy
|
|
|
|
Kristin A. MacCarthy
Vice President and Controller
|
|
US Cellular (NYSE:USM)
Historical Stock Chart
From Apr 2024 to May 2024
US Cellular (NYSE:USM)
Historical Stock Chart
From May 2023 to May 2024