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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
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(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For
the quarterly period ended March 31, 2015
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For
the transition period from to
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Commission
file number 1-9712
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UNITED
STATES CELLULAR CORPORATION
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(Exact
name of Registrant as specified in its charter)
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Delaware
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62-1147325
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(State
or other jurisdiction of incorporation or organization)
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(IRS
Employer Identification No.)
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8410
West Bryn Mawr, Chicago, Illinois 60631
(Address
of principal executive offices) (Zip code)
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Registrant's
telephone number, including area code: (773) 399-8900
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Indicate by check mark
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Yes
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No
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• whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
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x
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o
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• 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).
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x
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o
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• 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.
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Large
accelerated filer
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o
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Accelerated
filer
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x
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Non-accelerated
filer
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o
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Smaller
reporting company
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o
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• whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
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x
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Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date.
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Class
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Outstanding
at March 31, 2015
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Common
Shares, $1 par value
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51,029,748 Shares
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Series
A Common Shares, $1 par value
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33,005,877 Shares
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Part
I. Financial Information
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Item
1. Financial Statements
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United States Cellular Corporation
Consolidated Statement of Operations
(Unaudited)
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Three Months Ended
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March 31,
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(Dollars and shares
in thousands, except per share amounts)
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2015
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2014
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Operating revenues
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Service
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$
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828,211
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$
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853,613
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Equipment sales
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137,034
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72,198
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Total operating
revenues
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965,245
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925,811
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Operating expenses
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System operations
(excluding Depreciation, amortization and accretion reported below)
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190,677
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180,607
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Cost of equipment
sold
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238,301
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270,474
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Selling, general
and administrative (including charges from affiliates of $22.0 million and
$21.2 million,
respectively)
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368,968
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395,564
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Depreciation, amortization
and accretion
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147,085
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167,753
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(Gain) loss on
asset disposals, net
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4,251
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1,934
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(Gain) loss on sale
of business and other exit costs, net
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(111,477)
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(6,900)
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(Gain) loss on
license sales and exchanges, net
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(122,873)
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(91,446)
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Total operating
expenses
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714,932
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917,986
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Operating income
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250,313
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7,825
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Investment and
other income (expense)
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Equity in earnings
of unconsolidated entities
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34,471
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37,075
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Interest and
dividend income
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7,566
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884
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Interest expense
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(19,964)
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(14,862)
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Other, net
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105
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86
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Total investment
and other income (expense)
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22,178
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23,183
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Income before
income taxes
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272,491
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31,008
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Income tax expense
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107,501
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12,604
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Net income
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164,990
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18,404
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Less: Net income
(loss) attributable to noncontrolling interests, net of tax
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4,926
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(1,078)
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Net income
attributable to U.S. Cellular
shareholders
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$
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160,064
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$
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19,482
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Basic weighted
average shares outstanding
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84,042
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84,213
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Basic earnings per
share attributable to U.S. Cellular shareholders
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$
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1.90
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$
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0.23
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Diluted weighted
average shares outstanding
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84,838
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85,065
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Diluted earnings
per share attributable to U.S. Cellular shareholders
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$
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1.89
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$
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0.23
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The accompanying notes are an integral part of these
consolidated financial statements.
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United States Cellular Corporation
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Consolidated Statement of Cash Flows
(Unaudited)
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Three Months Ended
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March 31,
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(Dollars in
thousands)
|
2015
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2014
|
Cash flows from
operating activities
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Net income
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$
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164,990
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$
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18,404
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Add (deduct)
adjustments to reconcile net income to cash flows from operating activities
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Depreciation,
amortization and accretion
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147,085
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167,753
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Bad debts expense
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29,132
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20,492
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Stock-based
compensation expense
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5,740
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4,955
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Deferred income
taxes, net
|
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(26,166)
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|
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(4,817)
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Equity in earnings
of unconsolidated entities
|
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(34,471)
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(37,075)
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Distributions from
unconsolidated entities
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12,985
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12,818
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(Gain) loss on
asset disposals, net
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4,251
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|
|
1,934
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|
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(Gain) loss on sale
of business and other exit costs, net
|
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(111,477)
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(6,900)
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(Gain) loss on
license sales and exchanges, net
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(122,873)
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(91,446)
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Noncash interest
expense
|
|
386
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269
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Other operating
activities
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|
-
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47
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Changes in assets
and liabilities from operations
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Accounts receivable
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(1,437)
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79,586
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Equipment
installment plans receivable
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(36,498)
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|
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2,394
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Inventory
|
|
102,167
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|
|
19,306
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|
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Accounts payable
|
|
(18,691)
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|
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(40,557)
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Customer deposits
and deferred revenues
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|
13,419
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(1,510)
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Accrued taxes
|
|
189,387
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|
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(15,403)
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|
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Accrued interest
|
|
9,504
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|
|
9,182
|
|
|
|
Other assets and
liabilities
|
|
(71,955)
|
|
|
(75,896)
|
|
|
|
|
|
|
255,478
|
|
|
63,536
|
|
|
|
|
|
|
|
|
|
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Cash flows from
investing activities
|
|
|
|
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|
|
Cash used for
additions to property, plant and equipment
|
|
(116,079)
|
|
|
(109,498)
|
|
Cash paid for
acquisitions and licenses
|
|
(279,656)
|
|
|
(9,135)
|
|
Cash received from divestitures
and exchanges
|
|
274,111
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|
|
103,042
|
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Cash received for
investments
|
|
-
|
|
|
10,000
|
|
Other investing
activities
|
|
1,151
|
|
|
584
|
|
|
|
|
|
|
(120,473)
|
|
|
(5,007)
|
|
|
|
|
|
|
|
|
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|
Cash flows from
financing activities
|
|
|
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|
|
|
Common shares
reissued for benefit plans, net of tax payments
|
|
487
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|
|
316
|
|
Common shares
repurchased
|
|
(2,302)
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|
|
(2,000)
|
|
Payment of debt
issuance costs
|
|
(3,018)
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|
|
-
|
|
Acquisition of
towers in common control transaction
|
|
(2,437)
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|
|
-
|
|
Distributions to
noncontrolling interests
|
|
(225)
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|
|
(346)
|
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Other financing
activities
|
|
(2,130)
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|
|
(23)
|
|
|
|
|
|
|
(9,625)
|
|
|
(2,053)
|
|
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|
|
|
|
|
|
|
|
Net increase in
cash and cash equivalents
|
|
125,380
|
|
|
56,476
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|
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|
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Cash and cash
equivalents
|
|
|
|
|
|
|
Beginning of period
|
|
211,513
|
|
|
342,065
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|
End of period
|
$
|
336,893
|
|
$
|
398,541
|
|
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|
|
|
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|
The accompanying notes are an integral part of these
consolidated financial statements.
|
United States Cellular Corporation
|
Consolidated Balance Sheet — Assets
(Unaudited)
|
(Dollars in
thousands)
|
March 31,
2015
|
|
December 31,
2014
|
Current assets
|
|
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|
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|
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Cash and cash
equivalents
|
$
|
336,893
|
|
$
|
211,513
|
|
Accounts receivable
|
|
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|
Customers and
agents, less allowances of $39,673 and $37,654, respectively
|
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466,830
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|
466,048
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Roaming
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|
5,342
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|
|
23,865
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|
|
Affiliated
|
|
29,054
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|
994
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|
|
Other, less
allowances of $842 and $859, respectively
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|
57,772
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|
66,051
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Inventory, net
|
|
164,900
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|
|
267,068
|
|
Prepaid expenses
|
|
69,702
|
|
|
59,744
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|
Net deferred income
tax asset
|
|
77,246
|
|
|
93,058
|
|
Other current
assets
|
|
18,112
|
|
|
90,834
|
|
|
|
|
1,225,851
|
|
|
1,279,175
|
|
|
|
|
|
|
|
|
Assets held for
sale
|
|
22,203
|
|
|
107,055
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
Licenses
|
|
1,827,102
|
|
|
1,443,438
|
|
Goodwill
|
|
370,151
|
|
|
370,151
|
|
Investments in
unconsolidated entities
|
|
304,501
|
|
|
283,014
|
|
|
|
|
2,501,754
|
|
|
2,096,603
|
Property, plant and
equipment
|
|
|
|
|
|
|
In service and
under construction
|
|
7,426,410
|
|
|
7,458,740
|
|
Less: Accumulated
depreciation
|
|
4,781,293
|
|
|
4,730,523
|
|
|
|
|
2,645,117
|
|
|
2,728,217
|
|
|
|
|
|
|
|
|
Other assets and
deferred charges
|
|
211,453
|
|
|
276,218
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
6,606,378
|
|
$
|
6,487,268
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
|
United States Cellular Corporation
|
Consolidated Balance Sheet — Liabilities and Equity
(Unaudited)
|
(Dollars and shares
in thousands)
|
March 31,
2015
|
|
December 31,
2014
|
Current liabilities
|
|
|
|
|
|
|
Current portion of
long-term debt
|
$
|
57
|
|
$
|
46
|
|
Accounts payable
|
|
|
|
|
|
|
|
Affiliated
|
|
8,044
|
|
|
9,774
|
|
|
Trade
|
|
245,170
|
|
|
306,845
|
|
Customer deposits
and deferred revenues
|
|
301,419
|
|
|
287,562
|
|
Accrued taxes
|
|
139,407
|
|
|
36,652
|
|
Accrued
compensation
|
|
36,957
|
|
|
66,162
|
|
Other current
liabilities
|
|
130,780
|
|
|
149,853
|
|
|
|
|
|
|
|
861,834
|
|
|
856,894
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities held
for sale
|
|
-
|
|
|
20,934
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
liabilities and credits
|
|
|
|
|
|
|
Net deferred income
tax liability
|
|
816,999
|
|
|
859,867
|
|
Other deferred
liabilities and credits
|
|
295,287
|
|
|
284,002
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
1,151,901
|
|
|
1,151,819
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
interests with redemption features
|
|
6,619
|
|
|
1,150
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
U.S. Cellular
shareholders' equity
|
|
|
|
|
|
|
|
Series A Common and
Common Shares
|
|
|
|
|
|
|
|
|
Authorized 190,000
shares (50,000 Series A Common and 140,000 Common Shares)
|
|
|
|
|
|
|
|
|
Issued 88,074
shares (33,006 Series A Common and 55,068 Common Shares)
|
|
|
|
|
|
|
|
|
Outstanding 84,036
shares (33,006 Series A Common and 51,030 Common Shares) and 84,080 shares
(33,006 Series A Common and 51,074 Common Shares), respectively
|
|
|
|
|
|
|
|
|
Par Value ($1 per
share) ($33,006 Series A Common and $55,068 Common Shares)
|
|
88,074
|
|
|
88,074
|
|
|
Additional paid-in
capital
|
|
1,478,910
|
|
|
1,472,558
|
|
|
Treasury shares, at
cost, 4,038 and 3,994 Common Shares, respectively
|
|
(170,544)
|
|
|
(169,139)
|
|
|
Retained earnings
|
|
2,067,455
|
|
|
1,910,498
|
|
|
|
Total U.S. Cellular
shareholders' equity
|
|
3,463,895
|
|
|
3,301,991
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
interests
|
|
9,843
|
|
|
10,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
3,473,738
|
|
|
3,312,602
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
and equity
|
$
|
6,606,378
|
|
$
|
6,487,268
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
(Dollars in
thousands)
|
Series A Common and Common Shares
|
|
Additional Paid-In Capital
|
|
Treasury Shares
|
|
Retained Earnings
|
|
Total U.S. Cellular Shareholders' Equity
|
|
Noncontrolling Interests
|
|
Total Equity
|
Balance, December
31, 2014
|
$
|
88,074
|
|
$
|
1,472,558
|
|
$
|
(169,139)
|
|
$
|
1,910,498
|
|
$
|
3,301,991
|
|
$
|
10,611
|
|
$
|
3,312,602
|
Add (Deduct)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
attributable to U.S. Cellular shareholders
|
|
-
|
|
|
-
|
|
|
-
|
|
|
160,064
|
|
|
160,064
|
|
|
-
|
|
|
160,064
|
Net income (loss)
attributable to noncontrolling interests
classified as
equity
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(691)
|
|
|
(691)
|
Repurchase of Common
Shares
|
|
-
|
|
|
-
|
|
|
(2,302)
|
|
|
-
|
|
|
(2,302)
|
|
|
-
|
|
|
(2,302)
|
Incentive and compensation
plans
|
|
-
|
|
|
186
|
|
|
897
|
|
|
(670)
|
|
|
413
|
|
|
-
|
|
|
413
|
Stock-based
compensation awards
|
|
-
|
|
|
5,492
|
|
|
-
|
|
|
-
|
|
|
5,492
|
|
|
-
|
|
|
5,492
|
Tax windfall
(shortfall) from stock awards
|
|
-
|
|
|
(206)
|
|
|
-
|
|
|
-
|
|
|
(206)
|
|
|
-
|
|
|
(206)
|
Distributions to
noncontrolling interests
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(77)
|
|
|
(77)
|
Acquisition of
towers in common control transaction
|
|
-
|
|
|
885
|
|
|
-
|
|
|
(2,437)
|
|
|
(1,552)
|
|
|
-
|
|
|
(1,552)
|
Adjust investment in
subsidiaries for noncontrolling
interest purchases
|
|
-
|
|
|
(5)
|
|
|
-
|
|
|
-
|
|
|
(5)
|
|
|
-
|
|
|
(5)
|
Balance, March 31,
2015
|
$
|
88,074
|
|
$
|
1,478,910
|
|
$
|
(170,544)
|
|
$
|
2,067,455
|
|
$
|
3,463,895
|
|
$
|
9,843
|
|
$
|
3,473,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
(Dollars in
thousands)
|
Series A Common and Common Shares
|
|
Additional Paid-In Capital
|
|
Treasury Shares
|
|
Retained Earnings
|
|
Total U.S. Cellular Shareholders' Equity
|
|
Noncontrolling Interests
|
|
Total Equity
|
Balance, December
31, 2013
|
$
|
88,074
|
|
$
|
1,424,729
|
|
$
|
(164,692)
|
|
$
|
2,043,095
|
|
$
|
3,391,206
|
|
$
|
18,391
|
|
$
|
3,409,597
|
Add (Deduct)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
attributable to U.S. Cellular shareholders
|
|
-
|
|
|
-
|
|
|
-
|
|
|
19,482
|
|
|
19,482
|
|
|
-
|
|
|
19,482
|
Net income (loss)
attributable to noncontrolling interests
classified as
equity
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,107)
|
|
|
(1,107)
|
Repurchase of Common
Shares
|
|
-
|
|
|
-
|
|
|
(2,300)
|
|
|
-
|
|
|
(2,300)
|
|
|
-
|
|
|
(2,300)
|
Incentive and
compensation plans
|
|
-
|
|
|
-
|
|
|
1,415
|
|
|
(1,016)
|
|
|
399
|
|
|
-
|
|
|
399
|
Stock-based
compensation awards
|
|
-
|
|
|
4,576
|
|
|
-
|
|
|
-
|
|
|
4,576
|
|
|
-
|
|
|
4,576
|
Tax windfall
(shortfall) from stock awards
|
|
-
|
|
|
(157)
|
|
|
-
|
|
|
-
|
|
|
(157)
|
|
|
-
|
|
|
(157)
|
Distributions to
noncontrolling interests
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(324)
|
|
|
(324)
|
Balance, March 31,
2014
|
$
|
88,074
|
|
$
|
1,429,148
|
|
$
|
(165,577)
|
|
$
|
2,061,561
|
|
$
|
3,413,206
|
|
$
|
16,960
|
|
$
|
3,430,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
|
United States Cellular
Corporation
Notes to Consolidated Financial Statements
1.
Basis of Presentation
United
States Cellular Corporation (“U.S. Cellular”), a Delaware corporation, is an
84%-owned subsidiary of Telephone and Data Systems, Inc. (“TDS”).
The
accounting policies of U.S. Cellular conform to accounting principles generally
accepted in the United States of America (“GAAP”) as set forth in the Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).
The consolidated financial statements include the accounts of U.S. Cellular, subsidiaries
in which it has a controlling financial interest, general partnerships in which
U.S. Cellular has a majority partnership interest and certain entities in which
U.S. Cellular has a variable interest that require consolidation under
GAAP. All material intercompany accounts and transactions have been
eliminated.
The
consolidated financial statements included herein have been prepared by U.S.
Cellular, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”). Certain information 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
make the information presented not misleading. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in U.S. Cellular’s Annual
Report on Form 10-K (“Form 10-K”) for the year ended
December 31, 2014.
The
accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring items, unless otherwise
disclosed) necessary for a fair statement of the financial position as of March
31, 2015 and December 31, 2014, and the results of operations, cash flows and
changes in equity for the three months ended March 31, 2015 and 2014. The
Consolidated Statement of Comprehensive Income was not included because
comprehensive income for the three months ended March 31, 2015 and 2014 equaled
net income. These results are not necessarily indicative of the results
to be expected for the full year.
Recently
Issued Accounting Pronouncements
On
May 28, 2014, the FASB issued Accounting Standards Update 2014-09, Revenue
from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 outlines a
single comprehensive model to use in accounting for revenue arising from
contracts with customers. This update has an effective date of January 1,
2017. However, on April 1, 2015, the FASB voted to propose a one-year deferral
of the effective date of ASU 2014-09. If the proposal is adopted, U.S.
Cellular could elect to adopt the provisions of ASU 2014-09 effective January
1, 2018. Under this proposal, early adoption as of January 1, 2017 also would
be permissible. U.S. Cellular is evaluating the effects that adoption of ASU
2014-09 will have on its financial position, results of operations, and
disclosures.
On August 27, 2014, the
FASB issued Accounting Standards Update 2014-15, Disclosure of Uncertainties
about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).
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 concern, including management’s plan to alleviate the
substantial doubt. U.S. Celluar is required to adopt the provisions of ASU
2014-15 effective January 1, 2016, but early adoption is permitted. The
adoption of ASU 2014-15 is not expected to impact U.S. Cellular’s financial
position or results of operations.
On
February 18, 2015, the FASB issued Accounting Standards Update 2015-02, Consolidation:
Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02
simplifies consolidation accounting by reducing the number of consolidation
models. Additionally, ASU 2015-02 changes certain criteria for identifying variable
interest entities. U.S. Cellular is required to adopt the provisions of ASU
2015-02 effective January 1, 2016. Early adoption is permitted. U.S. Cellular
is evaluating the effects that adoption of ASU 2015-02 will have on its
financial position, results of operations, and disclosures.
On April 7, 2015, the FASB issued Accounting Standard Update
2015-03, Simplifying the Presentation of Debt Issuance Costs, which
requires debt issuance costs to be presented in the balance sheet as an offset
to the related debt obligation. U.S. Cellular is required to apply the
standards of this update effective January 1, 2016 on a retrospective basis. Early
adoption is permitted. As of March 31, 2015, U.S. Cellular had $29.7 million
in debt issuance costs classified as Other assets and deferred charges that, upon
adoption of the new standard, would be reclassified as an offset to Long-term
debt.
Amounts Collected from Customers and Remitted to
Governmental Authorities
U.S. Cellular records
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 governmental authority. If the tax is assessed upon U.S. Cellular,
then amounts collected from customers as recovery of the tax are recorded in
Service revenues and amounts remitted to governmental authorities are recorded
in Selling, general and administrative expenses in the Consolidated Statement
of Operations. The amounts recorded gross in revenues that are billed to
customers and remitted to governmental authorities totaled $21.2 million and $26.4
million for the three months ended March 31, 2015 and 2014, respectively.
2.
Fair Value Measurements
As
of March 31, 2015 and December 31, 2014, 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 for identical assets or liabilities in active markets. Level 2
inputs include quoted market prices for similar assets and liabilities in
active markets or quoted market prices for identical assets and liabilities in
inactive markets. Level 3 inputs are unobservable. A financial instrument’s
level within the fair value hierarchy is based on the lowest level of any input
that is significant to the fair value measurement. A financial instrument’s
level within the fair value hierarchy is not representative of its expected
performance or its overall risk profile and, therefore, Level 3 assets are not
necessarily higher risk than Level 2 assets or Level 1 assets.
U.S.
Cellular has applied the provisions of fair value accounting for purposes of
computing the fair value of financial instruments for disclosure purposes as
displayed below.
|
|
Level within the Fair Value Hierarchy
|
|
March 31, 2015
|
|
December 31, 2014
|
|
|
|
Book Value
|
|
|
Fair Value
|
|
Book Value
|
|
Fair Value
|
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
1
|
|
$
|
336,893
|
|
$
|
336,893
|
|
$
|
211,513
|
|
$
|
211,513
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
2
|
|
|
617,000
|
|
|
625,855
|
|
|
617,000
|
|
|
608,462
|
|
Institutional
|
2
|
|
|
532,793
|
|
|
526,199
|
|
|
532,722
|
|
|
513,647
|
The
fair value of Cash and cash equivalents approximate their book values 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” Long-term debt was estimated using market prices for the
6.95% Senior Notes and 7.25% Senior Notes. U.S. Cellular’s “Institutional”
debt consists of the 6.7% Senior Notes which are traded over the counter. U.S.
Cellular estimated the fair value of its Institutional debt through a
discounted cash flow analysis using an estimated yield to maturity of 7.02% and
7.25% at March 31, 2015 and December 31, 2014, respectively.
3.
Equipment Installment Plans
U.S. Cellular
offers customers the option to purchase certain devices under an equipment installment
contract over a period of up to 24 months. For certain equipment installment
plans, after a specified period of time, the customer may have the right to
upgrade to a new device and have the remaining unpaid equipment installment
contract balance waived, subject to certain conditions, including trading in
the original device in good working condition and signing a new equipment
installment contract. U.S. Cellular values this trade-in right as a
guarantee liability. The guarantee liability is initially measured at
fair value and is determined based on assumptions including the probability and
timing of the customer upgrading to a new device and the fair value of the
device being traded-in at the time of trade-in. As of March 31, 2015 and
December 31, 2014, the guarantee liability related to these plans was $67.8
million and $57.5 million respectively, and is reflected in Customer deposits
and deferred revenues in the Consolidated Balance Sheet.
U.S. Cellular equipment 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.
|
The following table summarizes unbilled equipment installment
plan receivables as of March 31, 2015 and December 31, 2014. Such amounts
are presented on the Consolidated Balance Sheet as Accounts receivable –
customers and agents and Other assets and deferred charges, as applicable.
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
March
31, 2015
|
|
December
31, 2014
|
Short-term portion of unbilled equipment installment plan
receivables, gross
|
$
|
166,551
|
|
$
|
127,400
|
Short-term portion of
unbilled deferred interest
|
|
(17,739)
|
|
|
(16,365)
|
Short-term portion of unbilled allowance for credit losses
|
|
(5,631)
|
|
|
(3,686)
|
Short-term portion of unbilled equipment installment plan
receivables, net
|
$
|
143,181
|
|
$
|
107,349
|
|
|
|
|
|
|
|
Long-term portion of unbilled equipment installment plan
receivables, gross
|
$
|
83,215
|
|
$
|
89,435
|
Long-term portion of unbilled deferred interest
|
|
(1,585)
|
|
|
(2,791)
|
Long-term portion of unbilled allowance for credit losses
|
|
(5,805)
|
|
|
(6,065)
|
Long-term portion of unbilled equipment installment plan
receivables, net
|
$
|
75,825
|
|
$
|
80,579
|
U.S. Cellular assesses the
collectability of the equipment installment plan receivables based on
historical payment experience, account aging and other qualitative factors.
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 deposit
for equipment purchased through an installment contract.
4. Income
Taxes
U.S. Cellular is included in a
consolidated federal income tax return and in certain state income tax returns
with other members of the TDS consolidated group. For financial statement
purposes, U.S. Cellular and its subsidiaries compute their income tax expense
as if they comprised a separate affiliated group and were not included in the
TDS consolidated group.
U.S.
Cellular’s overall effective tax rate on Income before income taxes for the
three months ended March 31, 2015 and 2014 was 39.5% and 40.6%, respectively.
U.S. Cellular
incurred a federal net operating loss in 2014 largely attributable to 50% bonus
depreciation applicable to qualified 2014 capital expenditures. U.S.
Cellular carried back this federal net operating loss to prior tax years. As a
result of the carryback, together with recovery of federal estimated taxes paid
in 2014, U.S. Cellular received a $65.8 million federal income tax refund in
the three months ended March 31, 2015. Income taxes receivable are included as
part of Other current assets in U.S. Cellular’s Consolidated Balance Sheet.
5. Earnings Per Share
Basic earnings per share attributable to U.S. Cellular
shareholders is computed by dividing Net income attributable to U.S. Cellular
shareholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share attributable to U.S. Cellular
shareholders is computed by dividing Net income attributable to U.S. Cellular
shareholders by the weighted average number of common shares outstanding during
the period adjusted to include the effects of potentially dilutive securities.
Potentially dilutive securities primarily include incremental shares issuable
upon 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 on the weighted average number of common shares
were as follows:
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2015
|
|
2014
|
(Dollars and shares
in thousands, except per share amounts)
|
|
|
|
|
|
Net income
attributable to U.S. Cellular shareholders
|
$
|
160,064
|
|
$
|
19,482
|
|
|
|
|
|
|
|
Weighted average
number of shares used in basic
earnings per
share
|
|
84,042
|
|
|
84,213
|
Effects of dilutive
securities:
|
|
|
|
|
|
|
Stock options
|
|
157
|
|
|
203
|
|
Restricted stock
units
|
|
639
|
|
|
649
|
Weighted average
number of shares used in diluted
earnings per
share
|
|
84,838
|
|
|
85,065
|
|
|
|
|
|
|
|
Basic earnings per
share attributable to U.S. Cellular
shareholders
|
$
|
1.90
|
|
$
|
0.23
|
|
|
|
|
|
|
|
Diluted earnings
per share attributable to U.S. Cellular
shareholders
|
$
|
1.89
|
|
$
|
0.23
|
Certain Common Shares issuable upon the
exercise of stock options or vesting of restricted stock units were not
included in average diluted shares outstanding for the calculation of Diluted
earnings per share attributable to U.S. Cellular shareholders because their
effects were antidilutive. The number of such Common Shares excluded, if any, is
shown in the table below.
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2015
|
|
2014
|
(Shares in
thousands)
|
|
|
|
Stock options
|
2,360
|
|
1,276
|
|
|
|
|
|
6. Acquisitions, Divestitures and Exchanges
Divestiture Transaction
On May 16, 2013, pursuant to a
Purchase and Sale Agreement, U.S. Cellular sold customers and certain PCS
license spectrum 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 (“Divestiture Markets”) in consideration for $480
million in cash. The Purchase and Sale Agreement also contemplated certain
other agreements, together with the Purchase and Sale Agreement collectively
referred to as the “Divestiture Transaction.”
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 employees. As of March 31, 2015, U.S. Cellular had
received a total of $97.4 million pursuant to the Sprint Cost Reimbursement. For
the three months ended March 31, 2015 and 2014, $15.7 million and $11.3
million, respectively, of the Sprint Cost Reimbursement had been received and
recorded in Cash received from divestitures and exchanges in the Consolidated
Statement of Cash Flows.
For the three months ended March
31, 2015 and 2014, as a result of the Divestiture Transaction, U.S. Cellular
recognized gains of $4.4 million and $7.1 million, respectively, in (Gain) loss
on sale of business and other exit costs, net.
Other
Acquisitions, Divestitures and Exchanges
·
In
March 2015, U.S. Cellular exchanged certain of its unbuilt PCS licenses for
certain other PCS licenses located in U.S. Cellular’s existing operating
markets and $117.0 million of cash. The licenses received in the transaction
have an estimated fair value, per a market approach, of $43.5 million. A gain
of $125.2 million was recorded in (Gain) loss on license sales and exchanges,
net in the Consolidated Statement of Operations in the first quarter of 2015.
·
An
FCC auction of AWS-3 spectrum licenses, referred to as Auction 97, ended in
January 2015. U.S. Cellular participated in Auction 97 indirectly through its
limited partnership interest in Advantage Spectrum L.P. (“Advantage Spectrum”).
Advantage Spectrum was the provisional winning bidder of 124 licenses for an
aggregate winning bid of $338.3 million, after its designated entity discount
of 25%. Advantage Spectrum’s bid amount, less the initial deposit amount of
$60.0 million paid in 2014, was paid to the FCC in March 2015. These licenses
are expected to be granted by the FCC during 2015. See Note 9 — Variable Interest Entities (VIEs) for additional
information.
·
In
December 2014, U.S. Cellular entered into an agreement with a third party to
sell 595 towers and certain related contracts, assets, and liabilities for
$159.0 million. This transaction was accomplished in two closings. The first
closing occurred in December 2014 and included the sale of 236 towers, without
tenants, for $10.0 million. On this same date, U.S. Cellular received $7.5
million in earnest money. At the time of the first closing, a $3.8 million
gain was recorded. The second closing for the remaining 359 towers, primarily
with tenants, took place in January 2015, at which time U.S. Cellular received
$141.5 million in additional cash proceeds and recorded a gain of $107.7
million in (Gain) loss on sale of business and other exit costs, net.
·
In
September 2014, U.S. Cellular entered into an agreement with a third party to
exchange certain PCS and AWS licenses for certain other PCS and AWS licenses
and $28.0 million of cash. This license exchange will be accomplished in two
closings. The first closing occurred in December 2014 at which time U.S.
Cellular received licenses with an estimated fair value, per a market approach,
of $51.5 million, recorded a $21.7 million gain and recorded an $18.3 million
deferred credit in Other current liabilities. The second closing is expected
to occur in the second half of 2015. A license with a $22.2 million book
value will be transferred and has been classified as “Assets held for sale” in
the Consolidated Balance Sheet as of March 31, 2015. At the time of the second
closing, U.S. Cellular will recognize the deferred credit from the first
closing and expects to record a gain on this part of the license exchange.
7. Intangible Assets
Changes in U.S. Cellular’s Licenses
for the three months ended March 31, 2015 are presented below. There was no
change to Goodwill during the three months ended March 31, 2015.
Licenses
|
|
|
|
|
|
|
|
(Dollars in
thousands)
|
|
|
Balance December
31, 2014
|
$
|
1,443,438
|
|
Acquisitions (1)
|
|
339,657
|
|
Exchanges (2)
|
|
43,485
|
|
Other
|
|
522
|
Balance March 31,
2015
|
$
|
1,827,102
|
|
|
|
|
|
(1)
|
Amount includes
payments totaling $338.3 million made by Advantage Spectrum to the FCC for
licenses in which it was the provisional winning bidder in Auction 97. See
Note 6 — Acquisitions, Divestitures and Exchanges, and Note 9 — Variable
Interest Entities (VIEs) for further information.
|
(2)
|
Amount represents
licenses received in the PCS license exchange. See Note 6 — Acquisitions,
Divestitures and Exchanges for further information. Licenses disposed of in
the exchange were previously removed from the License balance and reflected
in Assets held for sale in the Consolidated Balance Sheet as of December 31,
2014.
|
8. 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.
Equity
in earnings of unconsolidated entities totaled $34.5 million and $37.1 million
in the three months ended March 31, 2015 and 2014, respectively; of those
amounts, U.S. Cellular’s investment in the Los Angeles SMSA Limited Partnership
(“LA Partnership”) contributed $19.9 million and $21.2 million in the three
months ended March 31, 2015 and 2014, respectively. U.S. Cellular held a 5.5%
ownership interest in the LA Partnership during these periods.
|
The following
table, which is based on information provided in part by third parties,
summarizes the combined results of operations of U.S. Cellular’s equity
method investments.
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2015
|
|
2014
|
(Dollars in
thousands)
|
|
|
|
|
|
Revenues
|
$
|
1,729,820
|
|
$
|
1,620,402
|
Operating expenses
|
|
1,286,721
|
|
|
1,137,209
|
Operating income
|
|
443,099
|
|
|
483,193
|
Other income, net
|
|
4,829
|
|
|
1,764
|
Net income
|
$
|
447,928
|
|
$
|
484,957
|
9.
Variable Interest Entities (VIEs)
U.S.
Cellular consolidates variable interest entities in which it has a controlling
financial interest and is the primary beneficiary. A controlling financial
interest will have both of the following characteristics: (a) the power to
direct the VIE activities that most significantly impact economic performance
and (b) the obligation to absorb VIE losses and the right to receive benefits
that are significant to the VIE. U.S. Cellular reviews these criteria
initially at the time it enters into agreements and subsequently when
reconsideration events occur.
Consolidated VIEs
As of March 31,
2015, U.S. Cellular holds a variable
interest in and consolidates the following VIEs under GAAP:
·
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 Wireless.
The
power to direct the activities that most significantly impact the economic
performance of Advantage Spectrum, Aquinas Wireless and King Street Wireless
(collectively, the “limited partnerships”) 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 partnerships; however, the
general partner of each partnership needs the consent of the limited partner, a
U.S. Cellular subsidiary, to sell or lease certain licenses, to make certain
large expenditures, admit other partners or liquidate the limited
partnerships. Although the power to direct the activities of the VIEs is
shared, U.S. Cellular has a
disproportionate level of exposure to the variability associated with the
economic performance of the VIEs, indicating that U.S. Cellular is the primary
beneficiary of the VIEs in accordance with GAAP. Accordingly, these VIEs are
consolidated.
The
following table presents the classification of the consolidated VIEs’ assets
and liabilities in U.S. Cellular’s Consolidated Balance Sheet.
|
|
|
March 31,
2015
|
|
December 31,
2014
|
(Dollars in
thousands)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
|
11,670
|
|
$
|
2,588
|
|
Other current
assets
|
|
234
|
|
|
278
|
|
Licenses
|
|
651,281
|
|
|
312,977
|
|
Property, plant and
equipment, net
|
|
10,129
|
|
|
10,671
|
|
Other assets and
deferred charges
|
|
247
|
|
|
60,059
|
|
|
Total assets
|
$
|
673,561
|
|
$
|
386,573
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Current liabilities
|
$
|
3,634
|
|
$
|
110
|
|
Deferred
liabilities and credits
|
|
599
|
|
|
622
|
|
|
Total liabilities
|
$
|
4,233
|
|
$
|
732
|
Other Related Matters
In
March 2015, King Street Wireless made a $60.0 million distribution to its
investors. Of this distribution, $6.0 million was provided to King Street
Wireless, Inc. and $54.0 million was provided to U.S. Cellular. This
distribution has no impact on U.S. Cellular’s consolidated cash flows as both
King Street Wireless and King Street Wireless, Inc. are consolidated VIEs.
An
FCC auction of AWS-3 spectrum licenses, referred to as Auction 97, ended in
January 2015. U.S. Cellular participated
in Auction 97 indirectly through its interest in Advantage Spectrum. A
subsidiary of U.S. Cellular is a limited partner in Advantage Spectrum.
Advantage Spectrum qualified as a “designated entity,” and thereby was eligible
for bid credits with respect to spectrum purchased in Auction 97. Advantage
Spectrum was the winning bidder for 124 licenses for an aggregate bid of $338.3
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 $60.0 million paid in 2014,
plus certain other charges totaling $2.3 million, was paid to the FCC in March
2015. To help fund this payment, U.S. Cellular made loans and capital
contributions to Advantage Spectrum and Frequency Advantage totaling $280.6
million for the three months ended March
31, 2015. There were no capital contributions, loans or advances made to U.S.
Cellular’s VIEs during the three months ended March 31, 2014.
Advantage Spectrum, Aquinas Wireless and King Street
Wireless 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. As such, these entities have risks similar to those
described in the “Risk Factors” in U.S. Cellular’s Form 10-K for the year ended
December 31, 2014.
U.S.
Cellular may agree to make additional capital contributions and/or advances to Advantage
Spectrum, Aquinas Wireless or King Street Wireless and/or to their general
partners to provide additional funding for 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
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.
10. Common Share Repurchases
On November 17, 2009, the Board of
Directors of U.S. Cellular authorized the repurchase of up to 1,300,000 Common
Shares on an annual basis beginning in 2009 and continuing each year
thereafter, on a cumulative basis. These purchases will be made pursuant to
open market purchases, block purchases, private purchases or otherwise,
depending on market conditions. This authorization does not have an expiration
date.
|
Share repurchases
made under this authorization were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2015
|
|
2014
|
(Dollar amounts and
shares in thousands, except per share data)
|
|
|
|
|
|
Number of shares
|
|
66
|
|
|
59
|
Average cost per
share
|
$
|
34.77
|
|
$
|
39.13
|
Amount
|
$
|
2,302
|
|
$
|
2,300
|
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
United
States Cellular Corporation (“U.S. Cellular”) owns, operates and invests in
wireless markets throughout the United States. U.S. Cellular is an 84%-owned
subsidiary of Telephone and Data Systems, Inc. (“TDS”) as of March 31, 2015.
U.S.
Cellular provides wireless telecommunications services to approximately 4.8 million
customers in 23 states. As of March 31, 2015, U.S. Cellular’s average
penetration rate in its consolidated operating markets was 15.0%. U.S. Cellular
operates on a customer satisfaction strategy, striving to meet or exceed
customer needs by providing a comprehensive range of wireless products and
services, local and convenient points of distribution, excellent customer
support, and a high-quality network.
The
following discussion and analysis should be read in conjunction with U.S.
Cellular’s interim consolidated financial statements and notes included in Item
1 above, and with the description of U.S. Cellular’s business, its audited
consolidated financial statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations included in U.S. Cellular’s
Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2014.
OVERVIEW
The following is a summary of
certain selected information contained in the comprehensive Management’s
Discussion and Analysis of Financial Condition and Results of Operations that follows.
The overview does not contain all of the information that may be important. You
should carefully read the entire Management’s Discussion and Analysis of
Financial Condition and Results of Operations and not rely solely on the
overview.
Financial and operating
highlights in the three months ended March 31, 2015 included the following:
·
Total customers were 4,775,000 at
March 31, 2015, including 4,667,000 retail customers (98% of total).
·
In March 2015, U.S. Cellular
completed a license exchange of certain of its unbuilt PCS licenses for certain
other PCS licenses and $117.0 million in cash. As a result of this
transaction, a gain of $125.2 million was recorded in (Gain) loss on license
sales and exchanges, net in the Consolidated Statement of Operations.
·
In January 2015, the FCC released
the results of Auction 97. U.S. Cellular participated in Auction 97 indirectly
through its limited partnership in Advantage Spectrum, L.P. (“Advantage
Spectrum”). Advantage Spectrum was the provisional winning bidder of 124
licenses for an aggregate winning bid of $338.3 million, after its designated
entity discount of 25%. Advantage Spectrum’s bid amount, less the initial
deposit amount of $60.0 million paid in 2014, was paid to the FCC in March
2015. See Note 6 — Acquisitions,
Divestitures and Exchanges and Note 9 —
Variable Interest Entities (VIEs) in the Notes to Consolidated Financial
Statements for additional information.
·
In December 2014, U.S. Cellular
entered into an agreement to sell 595 towers outside of its operating markets
for $159.0 million in cash. Concurrently, U.S. Cellular closed on the sale of
236 towers, without tenants, for $10.0 million in cash and received $7.5
million in earnest money. In January 2015, U.S. Cellular closed on the sale of
the remaining 359 towers, primarily with tenants and received $141.5 million in
additional cash proceeds. U.S. Cellular recorded a gain of $107.7 million on
this transaction for the three months ended March 31, 2015. An additional gain
of $3.8 million had been recognized at the time of the first closing in
December 2014.
·
Beginning in the second quarter of
2014, U.S. Cellular expanded its offerings for equipment installment plans. In
the three months ended March 31, 2015, 39% of total device sales to postpaid
customers were made under equipment installment plans.
·
Retail customer net additions were
21,000 in 2015 compared to net losses of 80,000 in 2014. In the postpaid
category, there were net additions of 9,000 in 2015, compared to net losses of
93,000 in 2014. Postpaid results improved significantly due to effective
pricing, promotions and retention programs as well as enhanced device offerings
and the resolution of billing system conversion issues. In the prepaid
category, net additions were 12,000 in 2015 compared to net additions of 13,000
in 2014.
·
Postpaid customers comprised
approximately 92% of U.S. Cellular’s retail customers as of March 31, 2015.
The postpaid churn rate was 1.5% in 2015 compared to 2.3% in 2014. The prepaid
churn rate was 5.8% in 2015 compared to 6.9% in 2014.
·
Billed average revenue per user
(“ARPU”) decreased to $52.29 in 2015 from $53.93 in 2014 reflecting a decrease
in postpaid ARPU due to discounts offered on shared data plans for customers on
equipment installment plans. Service revenue ARPU decreased to $58.01 in 2015
from $60.19 in 2014 due primarily to a decrease in postpaid ARPU.
·
Postpaid billed average revenue
per account (“ARPA”) increased to $134.94 in 2015 from $132.03 in 2014 due to
increased adoption of shared data plans and the increasing number of devices
per account.
·
Postpaid handset customers on
smartphone service plans increased to 67% as of March 31, 2015 compared to 56%
as of March 31, 2014. In addition, smartphones represented 86% of all handsets
sold in 2015 compared to 78% in 2014.
·
Retail service revenues of $746.5
million decreased $18.3 million, or 2%, in 2015 due to a decrease in postpaid
ARPU.
·
Equipment sales revenues increased
by $64.8 million, or 90%, to $137.0 million in 2015 due to higher equipment
installment plan sales of smartphones and connected devices.
·
Total operating revenues increased
$39.4 million, or 4%, to $965.2 million in 2015 due to higher equipment sales
revenues, partially offset by lower retail service revenues and inbound roaming
revenues.
·
Cash flows from operating activities were $255.5 million. At
March 31, 2015, Cash and cash equivalents totaled $336.9 million, the revolving
credit facility provided borrowing capacity of $282.5 million, and the term
loan has available borrowing capacity of $225.0 million.
·
Total additions to Property, plant and equipment were $66.5
million, including expenditures to deploy fourth generation Long-term Evolution
(“4G LTE”) equipment, construct cell sites, increase capacity in existing cell
sites and switches, outfit new and remodel existing retail stores, and enhance
billing and other customer management related systems and platforms. Total cell
sites in service increased 0.9% year-over-year to 6,219.
·
Operating income increased $242.5 million, to $250.3 million in
2015. A gain on license sales and exchanges, net and a gain on sale of business
and other exit costs, net contributed $234.4 million and $98.3 million to
operating income in 2015 and 2014, respectively. Excluding these gains, operating
income increased $106.5 million due to lower loss on equipment sold, selling,
general and administrative expenses, and depreciation, amortization and
accretion expense, which were partially offset by lower service revenues and
higher system operations expense.
·
Net income attributable to U.S. Cellular shareholders increased $140.6
million to $160.1 million in 2015 compared to $19.5 million in 2014, due
primarily to the impact of higher operating income. Basic earnings per share
and Diluted earnings per share were $1.90 and $1.89 in 2015, which was $1.67 and
$1.66 higher, respectively, than in 2014.
U.S. Cellular anticipates that
its future results may be affected by the following factors:
·
Effects of industry competition on
service and equipment pricing;
·
Impacts of selling devices under equipment
installment plans, including potential variability in the number of customers
choosing to sign an equipment installment contract as well as uncertainties
related to the number, timing and realizable value of device trade-ins under
equipment installment plans;
·
Uncertainty and variability
related to how frequently customers choose to upgrade their devices;
·
Relative ability to attract and
retain customers in a competitive marketplace in a cost effective manner;
·
Expanded distribution of products
and services in third-party national retailers;
·
The nature and rate of growth in the
wireless industry, requiring U.S. Cellular to grow revenues primarily from
selling additional products and services to its existing customers, increasing
the number of multi-device users among its existing customers, increasing data
products and services and attracting wireless customers switching from other
wireless carriers;
·
Rapid growth in the demand for new
data devices and services which may result in increased operating expenses and
the need for additional investment in spectrum, network capacity and
enhancements;
·
Further consolidation among
carriers in the wireless industry, which could result in increased competition for
customers and/or cause roaming revenues to decline;
·
Uncertainty related to various
rulemaking proceedings underway at the Federal Communications Commission
(“FCC”);
·
The ability to negotiate
satisfactory 4G LTE data roaming agreements with other wireless operators; and
·
The effects of the following:
- U.S. Cellular completed the migration of its customers
to a new Billing and Operational Support System (“B/OSS”) in the third quarter
of 2013. In the fourth quarter of 2014, U.S. Cellular entered into
certain arrangements pursuant to which U.S. Cellular now outsources certain
support functions for its B/OSS to a third-party vendor. B/OSS is a complex
system and any future operational problems with the system, including any
failure by the vendor to provide the required level of service under the
outsourcing arrangements, could have adverse effects on U.S. Cellular’s results
of operations or cash flows;
- In September 2014, U.S. Cellular entered
into a definitive agreement to sell certain non-operating licenses (“unbuilt
licenses”) in exchange for receiving licenses in its operating markets and cash.
The license exchange will be accomplished in two closings. The first closing
occurred in December 2014. The second closing is expected to occur in the second
half of 2015. See Note 6 — Acquisitions,
Divestitures and Exchanges in the Notes to the Consolidated Financial
Statements for additional information related to this transaction.
- In March 2015, U.S. Cellular announced that it would
discontinue its loyalty rewards program on September 1, 2015. As of March 31,
2015, the Company had $95.4 million in deferred revenue related to this
program. On September 1, 2015, any unredeemed rewards points will expire and
any deferred revenue balance related to this program will be recognized as
operating revenues. U.S. Cellular is not able to predict at this time the
impact this termination will have on redemptions or its future results of
operations.
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, 2014.
FCC Net Neutrality Order
On February 26, 2015, the FCC adopted an Open Internet
Order relating to new net neutrality rules. The order reclassified high-speed,
or broadband, internet access service as a "telecommunication
service," making it subject to common carrier regulation under Title II of
the Communications Act of 1934. The order applies equally to fixed and
wireless broadband internet service providers and thus applies to internet
broadband services provided by telephone, cable and wireless providers.
The rules prohibit (i) blocking (broadband providers
may not block access to legal content, applications, services, or non-harmful
devices); (ii) throttling (broadband providers may not impair or degrade lawful
Internet traffic on the basis of content, applications, services, or
non-harmful devices); and (iii) paid prioritization (broadband providers may
not favor some lawful internet traffic over other lawful traffic in exchange
for consideration, i.e., internet “fast lanes” are prohibited). Also, internet
service providers may not prioritize content and services of their affiliates.
In addition, the FCC has now asserted jurisdiction over internet traffic
exchange, so interconnection arrangements will now be subject to a statutory
requirement that all charges, practices, classifications, and regulations for
and in connection with interconnection must be just and reasonable. The rules
also include a general conduct standard that will be applied on a case-by-case
basis to address questionable practices as they occur that unreasonably
interfere with or unreasonably disadvantage lawful content, applications,
services, or devices to be used by end users (individuals or entities that use
a broadband internet access service), or made available by edge providers
(individuals or entities that provide any content, application, or service over
the internet, and any individual or entity that provides a device used for
accessing any content, application, or service over the internet). Although
broadband internet access providers will be allowed to engage in reasonable
network management practices, it is uncertain what practices will be permitted
by the FCC. The order also expands the FCC’s current internet transparency
rules.
All of these requirements will be subject to FCC
enforcement and potential third-party claims for damages or equitable relief.
Under Title II, the FCC will have broad regulatory authority over internet
services and internet service providers. Although the FCC indicated that it
will forbear from a number of utility-style regulations, such as rate
regulation, tariffs, and unbundling requirements, the FCC could determine to
apply such regulations and requirements in the future. Also, it is uncertain
if internet services may be subject to the Federal Universal Service Fund (“USF”)
contributions or taxation in the future as a result of the reclassification
under Title II. Lawsuits have been filed and additional lawsuits are expected
challenging the net neutrality rules and the FCC’s decision to re-classify
broadband internet access service under Title II. U.S. Cellular cannot predict
the outcome of these proceedings or the impact on its business.
RESULTS OF OPERATIONS
Summary
Operating Data for U.S. Cellular Consolidated Markets
Following
is a table of summarized operating data for U.S. Cellular’s Consolidated
Markets.
As of or for Three Months Ended March 31,
|
2015
|
|
|
2014
|
|
Retail Customers
|
|
|
|
|
|
|
|
|
Postpaid
|
|
|
|
|
|
|
|
|
|
Total at end of period
|
|
4,307,000
|
|
|
|
4,174,000
|
|
|
|
Gross additions
|
|
200,000
|
|
|
|
197,000
|
|
|
|
Net additions (losses)
|
|
9,000
|
|
|
|
(93,000)
|
|
|
|
ARPU(1)
|
$
|
54.87
|
|
|
$
|
57.59
|
|
|
|
ARPA(2)
|
$
|
134.94
|
|
|
$
|
132.03
|
|
|
|
Churn rate(3)
|
|
1.5
|
%
|
|
|
2.3
|
%
|
|
|
Smartphone penetration(4)
|
|
66.9
|
%
|
|
|
55.8
|
%
|
|
Prepaid
|
|
|
|
|
|
|
|
|
|
Total at end of period
|
|
360,000
|
|
|
|
356,000
|
|
|
|
Gross additions
|
|
73,000
|
|
|
|
85,000
|
|
|
|
Net additions (losses)
|
|
12,000
|
|
|
|
13,000
|
|
|
|
ARPU(1)
|
$
|
35.72
|
|
|
$
|
32.22
|
|
|
|
Churn rate(3)
|
|
5.8
|
%
|
|
|
6.9
|
%
|
Total customers at end of period
|
|
4,775,000
|
|
|
|
4,684,000
|
|
Billed ARPU(1)
|
$
|
52.29
|
|
|
$
|
53.93
|
|
Service revenue ARPU(1)
|
$
|
58.01
|
|
|
$
|
60.19
|
|
Smartphones sold as a percent of total handsets sold
|
|
85.7
|
%
|
|
|
78.2
|
%
|
Total Population
|
|
|
|
|
|
|
|
|
Consolidated markets(5)
|
|
45,737,000
|
|
|
|
54,817,000
|
|
|
Consolidated operating markets(5)
|
|
31,814,000
|
|
|
|
31,729,000
|
|
Market penetration at end of period
|
|
|
|
|
|
|
|
|
Consolidated markets(6)
|
|
10.4
|
%
|
|
|
8.5
|
%
|
|
Consolidated operating markets(6)
|
|
15.0
|
%
|
|
|
14.8
|
%
|
Capital expenditures (000s)
|
$
|
66,460
|
|
|
$
|
89,581
|
|
Total cell sites in service
|
|
6,219
|
|
|
|
6,165
|
|
Owned towers in service
|
|
3,955
|
|
|
|
4,448
|
|
(1) Average
Revenue per User (“ARPU”) metrics are calculated by dividing a revenue base by
an average number of customers by the number of months in the period. These
revenue bases and customer populations are shown below:
a. Postpaid
ARPU consists of total postpaid service revenues and postpaid customers.
b. Prepaid
ARPU consists of total prepaid service revenues and prepaid customers.
c.
Billed ARPU consists of total postpaid, prepaid and reseller service
revenues and postpaid, prepaid and reseller customers.
d. Service
revenue ARPU consists of total postpaid, prepaid and reseller service revenues,
inbound roaming and other service revenues and postpaid, prepaid and reseller
customers.
(2) Average
Revenue per Account (“ARPA”) metric is calculated by dividing total postpaid
service revenues by the average number of postpaid accounts by the number of
months in the period.
(3) Churn
metrics represent the percentage of the postpaid or prepaid customers that
disconnect service each month. These metrics represent the average monthly
postpaid or prepaid churn rate for each respective period.
(4) Smartphones
represent wireless devices which run on an Android, Apple, BlackBerry or
Windows Mobile operating system, excluding connected devices. Smartphone
penetration is calculated by dividing postpaid smartphone customers by total
postpaid handset customers.
(5) The
decrease in the population of Consolidated markets is due primarily to the license
exchange transactions of certain non-operating licenses in North Carolina in
December 2014 and Illinois and Indiana in March 2015. Total Population is used
only to calculate market penetration of consolidated markets and consolidated
operating markets, respectively. See footnote (6) below.
(6)
Market penetration is calculated by dividing the number of wireless
customers at the end of the period by the total population of consolidated
markets and consolidated operating markets, respectively, as estimated by
Claritas.
Components of
Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2015
|
|
2014
|
|
Change
|
|
Percentage Change
|
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail service
|
|
$
|
746,488
|
|
$
|
764,801
|
|
$
|
(18,313)
|
|
(2)
|
%
|
Inbound roaming
|
|
|
40,329
|
|
|
50,126
|
|
|
(9,797)
|
|
(20)
|
%
|
Other
|
|
|
41,394
|
|
|
38,686
|
|
|
2,708
|
|
7
|
%
|
|
Service revenues
|
|
|
828,211
|
|
|
853,613
|
|
|
(25,402)
|
|
(3)
|
%
|
Equipment sales
|
|
|
137,034
|
|
|
72,198
|
|
|
64,836
|
|
90
|
%
|
|
Total operating
revenues
|
|
|
965,245
|
|
|
925,811
|
|
|
39,434
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System operations
(excluding Depreciation, amortization
and accretion
reported below)
|
|
|
190,677
|
|
|
180,607
|
|
|
10,070
|
|
6
|
%
|
Cost of equipment
sold
|
|
|
238,301
|
|
|
270,474
|
|
|
(32,173)
|
|
(12)
|
%
|
Selling, general
and administrative
|
|
|
368,968
|
|
|
395,564
|
|
|
(26,596)
|
|
(7)
|
%
|
Depreciation,
amortization and accretion
|
|
|
147,085
|
|
|
167,753
|
|
|
(20,668)
|
|
(12)
|
%
|
(Gain) loss on
asset disposals, net
|
|
|
4,251
|
|
|
1,934
|
|
|
2,317
|
|
>100
|
%
|
(Gain) loss on sale
of business and other exit costs, net
|
|
(111,477)
|
|
|
(6,900)
|
|
|
(104,577)
|
|
>100
|
%
|
(Gain) loss on
license sales and exchanges, net
|
|
|
(122,873)
|
|
|
(91,446)
|
|
|
(31,427)
|
|
(34)
|
%
|
|
Total operating
expenses
|
|
|
714,932
|
|
|
917,986
|
|
|
(203,054)
|
|
(22)
|
%
|
|
Operating income
|
|
$
|
250,313
|
|
$
|
7,825
|
|
$
|
242,488
|
|
>100
|
%
|
Operating Revenues
Service revenues
Service revenues consist
primarily of: (i) charges for access, airtime, roaming, recovery of regulatory
costs and value added services, including data products and services, provided
to U.S. Cellular’s retail customers and to end users through third party
resellers (“retail service”); (ii) charges to other wireless carriers whose
customers use U.S. Cellular’s wireless systems when roaming; and (iii) other
revenues including amounts received from the Federal USF, tower rental revenue,
and revenue from spectrum leases.
Retail service revenues
Retail service revenues decreased by $18.3 million, or 2%, in
2015 to $746.5 million due to a decrease in billed ARPU, partially offset by an
increase in U.S. Cellular’s average customer base.
Billed ARPU decreased to $52.29 in 2015 from $53.93 in 2014. This
overall decrease is due primarily to a decrease in postpaid ARPU to $54.87 in 2015
from $57.59 in 2014, due to discounts offered on shared data plans for
customers on equipment installment plans.
U.S. Cellular expects continued
pressure on retail service revenues in the foreseeable future due to industry
competition for customers and related effects on pricing of service plan
offerings offset to some degree by continued adoption of smartphones and data
usage. In addition, beginning in the second quarter of 2014, U.S. Cellular expanded
its offerings of equipment installment plans. To the extent that customers
adopt these plans, U.S. Cellular expects an increase in equipment sales revenues.
However, certain of the equipment installment plans provide the customer with a
reduction in the monthly access charge for the device; thus, to the extent that
existing customers adopt such plans, U.S. Cellular expects a reduction in
retail service revenues and ARPU.
Inbound roaming revenues
Inbound roaming revenues decreased
by $9.8 million, or 20%, in 2015 to $40.3 million. The decrease was due
primarily to a decrease in rates and a decline in both voice volume and data
usage.
Other
revenues
Other revenues increased by
$2.7 million, or 7%, in 2015 compared to 2014 due to an increase in tower
rental revenue and revenue from spectrum leases.
Pursuant to the FCC's Reform
Order (“Reform Order”), U.S. Cellular’s current ETC support is being phased
down at the rate of 20% per year beginning July 1, 2012. The Phase II Mobility
Fund was not operational as of September 2014. Therefore, as provided by the
Reform Order, the phase down is currently suspended and U.S. Cellular will
continue to receive 60% of its baseline support until the Phase II Mobility
Fund is operational. At this time, U.S. Cellular cannot predict the net effect
of the FCC’s changes to the USF high cost support program in the Reform Order.
Accordingly, U.S. Cellular 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
Equipment sales revenues include revenues from sales of
wireless devices and related accessories to both new and existing customers, as
well as revenues from sales of devices to agents. All Equipment sales revenues
are recorded net of rebates.
U.S. Cellular offers a competitive line of quality wireless
devices to both new and existing customers. U.S. Cellular's customer
acquisition and retention efforts include offering new wireless devices to
customers at discounted prices. U.S. Cellular also continues to sell wireless
devices to agents including national retailers; this practice enables U.S.
Cellular to provide better control over the quality of wireless devices sold to
its customers, establish roaming preferences and earn quantity discounts from
wireless device manufacturers which are passed along to agents and other
retailers.
Beginning in the second quarter of 2014, U.S. Cellular
expanded its offerings of equipment installment plans. To the extent that customers
adopt these plans, U.S. Cellular expects an increase in equipment sales
revenues. However, certain of the equipment installment plans provide the
customer with a reduction in the monthly access charge for the device; thus, to
the extent that existing customers adopt such plans, U.S. Cellular expects a
reduction in retail service revenues and ARPU.
Equipment sales revenues increased
$64.8 million, or 90%, to $137.0 million in
2015. The increase is due primarily to an increase in average revenue per
device sold (including the impact of sales under equipment installment plans)
and an increase in sales of connected devices, partially offset by a decrease
in sales of smartphones and feature phones. Equipment sales revenues in 2015
include $68.0 million related to equipment installment plan sales compared to
$3.1 million in 2014.
Operating Expenses
System operations
expenses (excluding Depreciation, amortization and accretion)
System operations expenses
(excluding Depreciation, amortization, and accretion) include charges from
telecommunications service providers for U.S. Cellular’s customers’ use of
their facilities, costs related to local interconnection to the wireline network,
charges for cell site rent and maintenance of U.S. Cellular’s network,
long-distance charges, outbound roaming expenses and payments to third‑party
data product and platform developers.
System operations expenses increased $10.1 million, or 6%, to
$190.7 million. Key components of the net change in System operations expenses
were as follows:
·
Expenses incurred when U.S. Cellular’s customers used other
carriers’ networks while roaming increased $8.7 million, or 22%, due primarily
to an increase in data roaming usage.
·
Maintenance, utility and cell site expenses increased
$3.4 million, or 4%, driven primarily by costs related to 4G LTE support.
·
Customer usage expenses decreased by $2.0 million, or 4%, driven
by lower fees for platform and content providers, partially offset by higher
net LTE migration costs.
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 increases in total customer usage, particularly 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 by $32.2 million, or
12%, to $238.3 million in 2015. The decrease was driven by a decrease in
the average cost per device sold and the impact of selling fewer devices. Average
cost per device sold decreased due to lower costs from original equipment
manufacturers as well as higher sales volume of lower cost connected devices. Smartphones
sold as a percentage of total devices sold were 74% and 73% in 2015 and 2014,
respectively. Total number of devices sold decreased by 15%, due primarily to
a decrease in sales of smartphones and feature phones. Cost of equipment sold
in 2015 includes $86.7 million related to equipment installment plan sales
compared to $3.3 million in 2014.
U.S. Cellular's loss on equipment, defined as equipment sales
revenues less cost of equipment sold, was $101.3 million and $198.3 million for
2015 and 2014, respectively. The $97.0 million decrease in loss on equipment
was driven by higher equipment installment plan sales which have a lower loss
per device. In addition, lower handset sales contributed to the decline in
loss on equipment. U.S. Cellular expects loss on equipment to continue to be a
significant cost in the foreseeable future as iconic data-centric wireless
devices continue to increase in costs and wireless carriers continue to use
device availability and pricing as a means of competitive differentiation. However,
U.S. Cellular expects sales of devices under equipment installment plans, and
for certain devices such as tablets under non-subsidized plans, will offset loss
on equipment to some degree.
Selling, general and administrative expenses
Selling, general and administrative expenses include
salaries, commissions and expenses of field sales and retail personnel and
facilities; telesales department salaries and expenses; agent commissions and
related expenses; corporate marketing and merchandise management; and
advertising expenses. Selling, general and administrative expenses also include
bad debts expense, costs of operating customer care centers and corporate
expenses.
Key components of the $26.6 million, or 7%, decrease to
$369.0 million were as follows:
·
Selling and marketing expense decreased by $9.7 million, or 5%, due
primarily to decreases in commissions expenses, partially offset by increases
in advertising expenses.
·
General and administrative expense decreased by $16.9 million, or
8%, due primarily to lower consulting expenses related to the billing system
conversion and lower outsourcing costs for customer service operations,
partially offset by an increase in bad debts expense due primarily to reserves
related to expanded equipment installment plans launched in the second quarter
of 2014.
Depreciation, amortization
and accretion expenses
Depreciation,
amortization and accretion decreased $20.7 million, or 12%, in 2015 to $147.1
million due primarily to the cessation of accelerated depreciation,
amortization and accretion in the Divestiture Markets, which was completed in
the first quarter of 2014.
(Gain) loss on asset
disposals, net
(Gain) loss on asset
disposals, net was a loss in both 2015 and 2014 ($4.3 million and $1.9 million,
respectively) due primarily to write-offs and disposals of certain network
assets.
(Gain) loss on sale of
business and other exit costs, net
The net gain of $111.5 million
in 2015 was due primarily to a $107.7 million gain recognized from the sale of
towers to a third party which closed in January 2015. The net gain of $6.9
million in 2014 resulted from the continuing impact of the Divestiture
Transaction. See Note 6 — Acquisitions, Divestitures and Exchanges in the
Notes to Consolidated Financial Statements for additional information.
(Gain) loss on license
sales and exchanges, net
The net gain of $122.9 million
in 2015 was due primarily to the license exchange of certain of U.S. Cellular’s
unbuilt PCS licenses for certain other PCS licenses and cash. The net gain of
$91.4 million in 2014 resulted from the sale of the St. Louis area
non-operating market license and the license exchange in Milwaukee. See Note 6
— Acquisitions, Divestitures and Exchanges in the Notes to Consolidated
Financial Statements for additional information.
Components
of Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2015
|
|
2014
|
|
Change
|
|
Percentage
Change
|
(Dollars in
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
250,313
|
|
$
|
7,825
|
|
$
|
242,488
|
|
>100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings
of unconsolidated entities
|
|
|
34,471
|
|
|
37,075
|
|
|
(2,604)
|
|
(7)
|
%
|
Interest and
dividend income
|
|
|
7,566
|
|
|
884
|
|
|
6,682
|
|
>100
|
%
|
Interest expense
|
|
|
(19,964)
|
|
|
(14,862)
|
|
|
(5,102)
|
|
(34)
|
%
|
Other, net
|
|
|
105
|
|
|
86
|
|
|
19
|
|
22
|
%
|
Total investment
and other income
|
|
|
22,178
|
|
|
23,183
|
|
|
(1,005)
|
|
(4)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
income taxes
|
|
|
272,491
|
|
|
31,008
|
|
|
241,483
|
|
>100
|
%
|
Income tax expense
|
|
|
107,501
|
|
|
12,604
|
|
|
94,897
|
|
>100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
164,990
|
|
|
18,404
|
|
|
146,586
|
|
>100
|
%
|
Less: Net income
(loss) attributable to
noncontrolling
interests, net of tax
|
|
|
4,926
|
|
|
(1,078)
|
|
|
6,004
|
|
>100
|
%
|
Net income
attributable to U.S. Cellular shareholders
|
|
$
|
160,064
|
|
$
|
19,482
|
|
$
|
140,582
|
|
>100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per
share attributable to
U.S. Cellular
shareholders
|
|
$
|
1.90
|
|
$
|
0.23
|
|
$
|
1.67
|
|
>100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings
per share attributable to
U.S. Cellular
shareholders
|
|
$
|
1.89
|
|
$
|
0.23
|
|
$
|
1.66
|
|
>100
|
%
|
Equity in earnings of unconsolidated entities
Equity in earnings of unconsolidated entities represents
U.S. Cellular’s share of net income from entities in which it has a noncontrolling
interest and that are accounted for by the equity method.
U.S. Cellular’s investment in the Los Angeles SMSA Limited
Partnership (“LA Partnership”) contributed $19.9 million and $21.2 million
to Equity in earnings of unconsolidated entities in 2015 and 2014, respectively.
See Note 8 — Investments in Unconsolidated Entities in the Notes to
Consolidated Financial Statements for additional information.
Interest and dividend income
Interest and dividend income increased $6.7 million in 2015
to $7.6 million for the three months ended March 31, 2015. This increase is
due to imputed interest income recognized on equipment installment plans. See
Note 3 — Equipment Installment Plans in the Notes to the Consolidated Financial
Statements for additional information.
Interest expense
The increase in interest expense was due primarily to interest
expense related to the $275 million of 7.25% Unsecured Notes which were sold in
December 2014. Interest cost capitalized was $0.8 million and $0.9 million for
2015 and 2014, respectively.
Income tax expense
U.S. Cellular’s future federal income tax liabilities
associated with the benefits realized in prior periods from bonus depreciation
are accrued as a component of Net deferred income tax liability (noncurrent) in
the Consolidated Balance Sheet. There is no federal bonus depreciation
deduction allowed for 2015. Depending on future pretax income levels, U.S.
Cellular’s federal income tax payments could increase in 2015 and remain at a
higher level for several years as the amount of U.S. Cellular’s federal tax
depreciation deduction decreases. This expectation assumes that federal bonus
depreciation provisions are not enacted in future periods. To the extent
further federal bonus depreciation provisions are enacted, this expectation
would change. See Note 4 — Income Taxes in the Notes to Consolidated Financial
Statements for additional discussion of the overall effective tax rate on Income
before income taxes.
Net income (loss) attributable to noncontrolling
interests, net of tax
The increase
from 2014 to 2015 is due primarily to higher income from certain partnerships
in 2015.
RECENT
ACCOUNTING PRONOUNCEMENTS
See Note 1 — Basis of
Presentation in the Notes to the Consolidated Financial Statements for
information on recent accounting pronouncements.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
U.S. Cellular operates a
capital- and marketing-intensive business. U.S. Cellular utilizes cash on hand,
cash from operating activities, cash proceeds from divestitures and dispositions
of investments, short-term credit facilities and long-term debt financing to
fund its acquisitions (including licenses), construction costs, operating
expenses and share repurchases. Cash flows may fluctuate from quarter to
quarter and year to year due to seasonality, the timing of acquisitions and
divestitures, capital expenditures and other factors. The table below and the
following discussion summarize U.S. Cellular's cash flow activities for the
three months ended March 31, 2015 and 2014.
|
|
2015
|
|
2014
|
(Dollars in
thousands)
|
|
|
|
|
|
Cash flows from
(used in):
|
|
|
|
|
|
|
Operating
activities
|
$
|
255,478
|
|
$
|
63,536
|
|
Investing
activities
|
|
(120,473)
|
|
|
(5,007)
|
|
Financing
activities
|
|
(9,625)
|
|
|
(2,053)
|
Net increase in
cash and cash equivalents
|
$
|
125,380
|
|
$
|
56,476
|
Cash Flows from Operating Activities
Cash flows from operating activities were $255.5 million
in 2015 and $63.5 million in 2014. Working capital factors primarily
contributed to increased cash flows from operating activities. As a result of
increased focus by U.S. Cellular to sell through inventory of wireless devices
on hand in 2015, inventory levels decreased. During 2015, U.S. Cellular
received tax refunds of $65.8 million related to an overpayment of 2014 tax
estimates and the carryback of its 2014 net operating loss to the 2012 and 2013
tax years. In addition, income taxes incurred on the sale of towers and on the
license exchange in 2015 are not payable until periods after March 31, 2015,
resulting in increased income tax payable amounts included in Accrued taxes.
Increases in equipment installment plan receivables had the result of partially
offsetting these cash inflows for 2015.
Cash Flows from Investing Activities
Cash flows used in investing activities were $120.5 million
in 2015 and $5.0 million in 2014. This increase in cash outflows was a result
of higher levels of cash used for additions to property, plant, and equipment
and to acquire licenses partially offset by increased cash flows from
divestitures and exchanges.
U.S. Cellular makes
substantial investments to acquire wireless licenses and properties and to
construct and upgrade wireless telecommunications networks and facilities as a
basis for creating long-term value for shareholders. In recent years, rapid
changes in technology and new opportunities have required substantial investments
in potentially revenue‑enhancing and cost-reducing upgrades of U.S.
Cellular’s networks.
Cash used for additions to property, plant and equipment
totaled $116.1 million in 2015 and $109.5 million in 2014, and is reported in
the Consolidated Statement of Cash Flows. Capital expenditures (i.e.,
additions to property, plant and equipment and system development expenditures),
which include the effects of accruals and capitalized interest, totaled
$66.5 million in 2015 and $89.6 million in 2014. See “Capital
Expenditures” below for additional information on capital expenditures.
During 2015, a $278.3 million payment was made by Advantage
Spectrum L.P. to the FCC for licenses for which it was the provisional winning
bidder. See Note 6 — Acquisitions, Divestitures and Exchanges and Note 9 —
Variable Interest Entities (VIEs) in the Notes to Consolidated Financial
Statements for additional information.
Cash received from divestitures and exchanges in 2015 and 2014
was as follows.
|
|
|
|
|
|
|
|
Cash Received from Divestitures and Exchanges
|
2015
|
|
2014
|
(Dollars in thousands)
|
|
|
|
|
|
Licenses
|
$
|
117,000
|
|
$
|
91,789
|
Businesses (1)
|
|
157,111
|
|
|
11,253
|
Total
|
$
|
274,111
|
|
$
|
103,042
|
|
|
|
|
|
|
|
(1)
|
Amount includes cash proceeds received from the sale of 359
towers and reimbursements related to the Divestiture Transaction.
|
See
Note 6 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated
Financial Statements for additional information related to these divestitures.
In 2014, U.S. Cellular
realized proceeds of $10.0 million related to the maturities of certain of its
investments in U.S. Treasury Notes.
Cash Flows from Financing
Activities
Cash flows from financing
activities include distributions to noncontrolling interests, cash used to
repurchase Common Shares and cash proceeds from reissuance of Common Shares
pursuant to stock-based compensation plans. Additionally, during 2015, cash
flows from financing activities include $3.0 million in cash paid for issuance
costs related to the Term Loan. See “Financing” section below for additional
discussion.
Adjusted Free Cash Flow
The following table presents Adjusted
free cash flow. Adjusted free cash flow is defined as Cash flows from operating
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 used for additions to property, plant and equipment.
Adjusted free cash flow is a non-GAAP financial measure which U.S. Cellular
believes may be useful to investors and other users of its financial
information in evaluating the amount of cash generated by business operations
(including cash proceeds from the Sprint Cost Reimbursement), after Cash used
for additions to property, plant and equipment.
Three
Months Ended March 31,
|
2015
|
|
2014
|
(Dollars in
thousands)
|
|
|
|
|
|
Cash flows from operating
activities
|
$
|
255,478
|
|
$
|
63,536
|
Add: Sprint Cost
Reimbursement (1)
|
|
15,712
|
|
|
11,254
|
Less: Cash used for
additions to property, plant and equipment
|
|
116,079
|
|
|
109,498
|
|
Adjusted free cash
flow
|
$
|
155,111
|
|
$
|
(34,708)
|
|
|
|
|
|
|
|
(1)
|
See Note 6 —
Acquisitions, Divestitures and Exchanges in the Notes to Consolidated
Financial Statements for additional information related to the Sprint Cost
Reimbursement.
|
|
|
|
|
|
|
|
See Cash Flows from
Operating Activities and Cash Flows from Investing Activities for additional
information related to the components of Adjusted free cash flow.
|
LIQUIDITY
U.S. Cellular believes that existing cash and investment
balances, funds available under its revolving credit facility and term loan, and
expected cash flows from operating and investing activities provide substantial
liquidity and financial flexibility for U.S. Cellular to meet its normal day-to-day
operating needs. However, these resources may not be adequate to fund all future
expenditures that the company could potentially elect to make such as
acquisitions of spectrum licenses in FCC auctions and other acquisition,
construction and development programs. It may be necessary from time to time to
increase the size of the existing revolving credit facility, to put in place
new facilities, or to obtain other forms of financing in order to fund these
potential expenditures. To the extent that sufficient funds are not available
to U.S. Cellular or its subsidiaries on terms or at prices acceptable to U.S.
Cellular, it could require U.S. Cellular to reduce its acquisition, construction
and development programs.
U.S. Cellular cannot provide assurances that circumstances
that could have a material adverse effect on its liquidity or capital resources
will not occur. Economic conditions, changes in financial markets, U.S.
Cellular financial performance and/or prospects or other factors could restrict
U.S. Cellular’s liquidity and availability of financing on terms and
prices acceptable to U.S. Cellular, which could require U.S. Cellular
to reduce its capital expenditure, acquisition or share repurchase programs.
Such reductions could have a material adverse effect on U.S. Cellular’s
business, financial condition or results of operations.
Cash and Cash Equivalents
Cash and cash equivalents
include cash and short-term, highly liquid investments with original maturities
of three months or less. The primary objective of U.S. Cellular’s Cash and
cash equivalents investment activities is to preserve principal. At March 31,
2015, the majority of U.S. Cellular’s Cash and cash equivalents was 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
obligations. U.S. Cellular monitors the financial viability of the money
market funds and direct investments in which it invests and believes that the
credit risk associated with these investments is low.
Financing
As of March 31, 2015, U.S. Cellular’s unused capacity under their
revolving credit facility was $282.5 million. This agreement matures in
December 2017. Additionally, U.S. Cellular had $225.0 million in unused
capacity under its term loan. This term loan must be drawn in one or more
advances by July 2015; amounts not drawn by that time will cease to be
available. This agreement matures in January 2022. U.S. Cellular believes it
was in compliance with all of the financial covenants and requirements set
forth in its revolving credit facility and term loan.
U.S. Cellular also is in the process of renewing its $500
million shelf registration statement on Form S-3 to issue senior or
subordinated debt securities.
The proceeds from any of the aforementioned financing
facilities are available for general corporate purposes, including spectrum
purchases and capital expenditures.
The long-term debt payments due for the remainder of 2015 and
the next four years represent less than 1% of the total long-term debt
obligation at March 31, 2015.
Capital Expenditures
U.S. Cellular’s capital expenditures for
2015 are expected to be approximately $600 million. These expenditures are
expected to be for the following general purposes:
·
Expand
and enhance network coverage, including providing additional capacity to
accommodate increased network usage, principally data usage, by current
customers;
·
Continue
to deploy 4G LTE technology in certain markets;
·
Expand
and enhance the retail store network; and
·
Develop
and enhance office systems.
U.S.
Cellular plans to finance its capital expenditures program for 2015 using
primarily Cash flows from operating activities and, as necessary, existing cash
balances and borrowings under its revolving credit agreements, term loan, and/or
other long-term debt.
Acquisitions, Divestitures and
Exchanges
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
investment. As part of this strategy, U.S. Cellular reviews attractive
opportunities to acquire additional wireless operating markets and wireless
spectrum. In addition, U.S. Cellular may seek to divest outright or
include in exchanges for other wireless interests those interests that are not
strategic to its long-term success. As a result, 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 disclose such transactions until there is a
definitive agreement. See Note 6 — Acquisitions, Divestitures and Exchanges in
the Notes to Consolidated Financial Statements for additional information
related to significant transactions, including expected pre-tax cash proceeds
from such transactions in 2015.
Variable
Interest Entities
U.S. Cellular
consolidates certain entities because they are “variable interest entities”
under accounting principles generally accepted in the United States of America
(“GAAP”). See Note 9 — Variable Interest Entities (VIEs) in the Notes to
Consolidated Financial Statements for additional information related to these
variable interest entities. U.S. Cellular may elect to make additional
capital contributions and/or advances to these variable interest entities in
future periods in order to fund their operations.
Common Share
Repurchase Program
In the past year, U.S. Cellular has
repurchased and expects to continue to repurchase its Common Shares, subject to
its repurchase program. For additional information related to the current
repurchase authorization and repurchases made during 2015 and 2014, see
Note 10 — Common Share Repurchases in the Notes to Consolidated Financial
Statements and Part II, Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds.
Contractual and Other Obligations
There were no material changes outside
the ordinary course of business between December 31, 2014 and March 31, 2015 to
the Contractual and Other Obligations disclosed in Management’s Discussion and
Analysis of Financial Condition and Results of Operations included in U.S.
Cellular’s Form 10-K for the year ended December 31, 2014.
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.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
AND ESTIMATES
U.S. Cellular prepares its
consolidated financial statements in accordance with GAAP. U.S. Cellular’s
significant accounting policies are discussed in detail in Note 1 — Summary of
Significant Accounting Policies and Recent Accounting Pronouncements in the
Notes to Consolidated Financial Statements and U.S. Cellular’s Application of
Critical Accounting Policies and Estimates is discussed in detail in Management’s
Discussion and Analysis of Financial Condition and Results of Operations, both
of which are included in U.S. Cellular’s Form 10-K for the year ended December
31, 2014. There were no material changes to U.S. Cellular’s application of
critical accounting policies and estimates during the three months ended March
31, 2015.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The
closing of the sale of 359 towers in January 2015 as discussed in Note 6 — Acquisitions, Divestitures and Exchanges to the
Consolidated Financial Statements included a related party transaction with
Airadigm Communications, Inc., a subsidiary of TDS. The information relating
to this related party transaction was disclosed in Note 6 to the Consolidated
Financial Statements of U.S. Cellular’s Annual Report on Form 10-K for the year
ended December 31, 2014 and is incorporated by reference herein.
PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR CAUTIONARY STATEMENT
This
Form 10-Q, including exhibits, contains statements that are not based on
historical facts and represent forward-looking statements, as this term is
defined in the Private Securities Litigation Reform Act of 1995. All
statements, other than statements of historical facts, that address activities,
events or developments that U.S. Cellular intends, expects, projects, believes,
estimates, plans or anticipates will or may occur in the future are
forward-looking statements. The words “believes,” “anticipates,” “estimates,”
“expects,” “plans,” “intends,” “projects” and similar expressions are intended
to identify these forward-looking statements, but are not the exclusive means
of identifying them. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause actual results, events or
developments to be significantly different from any future results, events or
developments expressed or implied by such forward-looking statements. Such
risks, uncertainties and other factors include 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, 2014. 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, 2014, the following
factors and other information contained in, or incorporated by reference into,
this Form 10-Q to understand the material risks relating to U.S. Cellular’s
business.
·
Intense competition in the markets in which U.S. Cellular
operates could adversely affect U.S. Cellular’s revenues or increase its costs
to compete.
·
A failure by U.S. Cellular to successfully execute its
business strategy (including planned acquisitions, divestitures and exchanges)
or allocate resources or capital could have an adverse effect on U.S.
Cellular’s business, financial condition or results of operations.
·
U.S. Cellular offers customers the option to purchase
certain devices under installment contracts, which creates certain risks and
uncertainties which could have an adverse impact on U.S. Cellular's financial
condition or results of operations.
·
Changes in roaming practices or other factors could cause
U.S. Cellular's roaming revenues to decline from current levels and/or impact
U.S. Cellular's ability to service its customers in geographic areas where U.S.
Cellular does not have its own network, which could have an adverse effect on
U.S. Cellular's business, financial condition or results of operations.
·
A failure by U.S. Cellular to obtain access to adequate
radio spectrum to meet current or anticipated future needs and/or to accurately
predict future needs for radio spectrum could have an adverse effect on U.S.
Cellular’s business, financial condition or results of operations.
·
To the extent conducted by the Federal Communications
Commission (“FCC”), U.S. Cellular is likely to participate in FCC auctions of
additional spectrum in the future as an applicant or as a noncontrolling
partner in another auction applicant 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. As a result, its results of
operations may fluctuate based on factors related primarily to conditions in
this industry.
·
U.S. Cellular’s lower scale relative to larger
competitors could adversely affect its business, financial condition or results
of operations.
·
Changes in various business factors could have an adverse
effect on U.S. Cellular’s business, financial condition or results of
operations.
·
Advances or changes in technology could render certain
technologies used by U.S. Cellular obsolete, could put U.S. Cellular at a
competitive disadvantage, could reduce U.S. Cellular’s revenues or could
increase its costs of doing business.
·
Complexities associated with deploying new technologies
present substantial risk.
·
U.S. Cellular is subject to numerous surcharges and fees
from federal, state and local governments, and the applicability and the amount
of these fees are subject to great uncertainty.
·
Performance under device purchase agreements could have a
material adverse impact on U.S. Cellular's business, financial condition or
results of operations.
·
Changes in U.S. Cellular’s enterprise value, changes
in the market supply or demand for wireless licenses, adverse developments in
the business or the industry in which U.S. Cellular is involved and/or
other factors could require U.S. Cellular to recognize impairments in the
carrying value of its licenses, goodwill and/or physical assets.
·
Costs, integration problems or other factors associated
with acquisitions, divestitures or exchanges of properties or licenses and/or
expansion of U.S. Cellular’s business could have an adverse effect on
U.S. Cellular’s business, financial condition or results of operations.
·
U.S. Cellular’s investments in unproven technologies
may not produce the benefits that U.S. Cellular expects.
·
A failure by U.S. Cellular to complete significant
network construction and systems implementation activities as part of its plans
to improve the quality, coverage, capabilities and capacity of its network,
support and other systems and infrastructure could have an adverse effect on
its operations.
·
Difficulties involving third parties with which U.S.
Cellular does business, including changes in U.S. Cellular's relationships with
or financial or operational difficulties of key suppliers or independent agents
and third party national retailers who market U.S. Cellular services, could
adversely affect U.S. Cellular’s business, financial condition or results
of operations.
·
U.S. Cellular has significant investments in
entities that it does not control. Losses in the value of such investments
could have an adverse effect on U.S. Cellular’s financial condition or
results of operations.
·
A failure by U.S. Cellular to maintain flexible and
capable telecommunication networks or information technology, or a material
disruption thereof, could have an adverse effect on U.S. Cellular’s business,
financial condition or results of operations.
·
Cyber-attacks or other breaches of network or information
technology security could have an adverse effect on U.S. Cellular's business,
financial condition or results of operations.
·
The market price of U.S. Cellular’s Common Shares is
subject to fluctuations due to a variety of factors.
·
Changes in facts or circumstances, including new or
additional information, could require U.S. Cellular to record charges in
excess of amounts accrued in the financial statements, which could have an
adverse effect on U.S. Cellular’s business, financial condition or results
of operations.
·
Disruption in credit or other financial markets, a
deterioration of U.S. or global economic conditions or other events could,
among other things, impede U.S. Cellular’s access to or increase the cost of
financing its operating and investment activities and/or result in reduced
revenues and lower operating income and cash flows, which would have an adverse
effect on U.S. Cellular’s business, financial condition or results of
operations.
·
Uncertainty of U.S. Cellular’s ability to access capital,
deterioration in the capital markets, other changes in 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.
·
Settlements, judgments, restraints on its current or
future manner of doing business and/or legal costs resulting from pending and
future litigation could have an adverse effect on U.S. Cellular’s
business, financial condition or results of operations.
·
The possible development of adverse precedent in
litigation or conclusions in professional studies to the effect that radio
frequency emissions from wireless devices and/or cell sites cause harmful
health consequences, including cancer or tumors, or may interfere with various
electronic medical devices such as pacemakers, could have an adverse effect on
U.S. Cellular’s business, financial condition or results of operations.
·
Claims of infringement of intellectual property and
proprietary rights of others, primarily involving patent infringement claims,
could prevent U.S. Cellular from using necessary
technology to provide products or services or subject U.S. Cellular to
expensive intellectual property litigation or monetary penalties, which could
have an adverse effect on U.S. Cellular’s business, financial condition or
results of operations.
·
There are potential conflicts of interests between TDS
and U.S. Cellular.
·
Certain matters, such as control by TDS and provisions in
the U.S. Cellular Restated Certificate of Incorporation, may serve to
discourage or make more difficult a change in control of U.S. Cellular.
·
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.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
MARKET RISK
Refer to the disclosure under Market Risk in U.S.
Cellular’s Form 10-K for the year ended December 31, 2014 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, 2014.
See Note 2 — Fair Value
Measurements in the Notes to Consolidated Financial Statements for additional information
related to the fair value of U.S. Cellular’s Long-term debt as of March 31,
2015.
Item
4. Controls 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 Securities and Exchange
Commission’s (“SEC”) 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 procedures, 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 evaluation, 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 March 31, 2015, at the reasonable
assurance level.
Changes in Internal Control Over Financial Reporting
Internal controls over financial reporting continue to be
updated as necessary to accommodate modifications to our business processes and
accounting procedures. As previously disclosed in U.S. Cellular’s Form 10-K
for the year ended December 31, 2014, U.S. Cellular entered into certain
arrangements in the latter part of the fourth quarter of 2014 pursuant to which
U.S. Cellular now outsources certain support functions for its Billing and
Operational Support System (“B/OSS”) to a third-party vendor. In accordance
with this change and effective January 1, 2015, U.S. Cellular is placing
reliance on certain third-party controls with respect to the B/OSS
environment. There have been no other changes in internal controls over
financial reporting that have occurred during the quarter ended March 31, 2015
that have materially affected, or are reasonably likely to materially affect,
U.S. Cellular’s internal control over financial reporting.
Part
II. Other Information
Item 1.
Legal Proceedings.
Refer to the disclosure under Legal Proceedings in U.S.
Cellular’s Form 10-K for the year ended December 31, 2014. There have been no material
changes to such information since December 31, 2014.
Item 1A.
Risk Factors.
In addition to the information
set forth in this Form 10-Q, you should carefully consider the factors
discussed in Part I, “Item 1A. Risk Factors” in U.S. Cellular’s Annual Report
on Form 10-K for the year ended December 31, 2014, which could materially
affect U.S. Cellular’s business, financial condition or future results. The
risks described in this Form 10-Q and the Form 10-K for the year ended December
31, 2014, may not be the only risks that could affect U.S. Cellular.
Additional unidentified or unrecognized risks and uncertainties could
materially adversely affect U.S. Cellular’s business, financial condition
and/or operating results. Subject to the foregoing, U.S. Cellular has not
identified for disclosure any material changes to the risk factors as
previously disclosed in U.S. Cellular’s Annual Report on Form 10-K for the year
ended December 31, 2014.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
On
November 17, 2009, the Board of Directors of U.S. Cellular authorized the repurchase
of up to 1,300,000 Common Shares on an annual basis beginning in 2009 and
continuing each year thereafter, on a cumulative basis. Depending on market
conditions, such shares may be repurchased in compliance with Rule 10b-18 of
the Securities Exchange Act of 1934, as amended ("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.
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.
Cellular 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
|
January 1 – 31, 2015
|
|
64,508
|
|
$
|
34.76
|
|
64,508
|
|
4,868,298
|
February 1 – 28, 2015
|
|
1,701
|
|
|
34.94
|
|
1,701
|
|
4,866,597
|
March 1 – 31, 2015
|
|
-
|
|
|
-
|
|
-
|
|
4,866,597
|
|
Total for or as of the end of the quarter ended March 31, 2015
|
|
66,209
|
|
$
|
34.77
|
|
66,209
|
|
4,866,597
|
|
|
|
|
|
|
|
|
|
|
|
The
following is additional information with respect to the foregoing
authorization:
i.
The
date the program was announced was November 20, 2009 by Form 8-K.
ii.
The
amount approved was up to 1,300,000 U.S. Cellular Common Shares on an annual
basis in 2009 and continuing each year thereafter on a cumulative basis.
iii. There is no
expiration date for the program.
iv. The
authorization did not expire during the first quarter of 2015.
v. U.S. Cellular
did not determine to terminate the foregoing Common Share repurchase program,
or cease making further purchases thereunder, during the first quarter of 2015.
Item 5. 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.
U.S. Cellular did not borrow or repay any amounts under its
revolving credit facility in the first quarter of 2015 or through the filing
date of this Form 10-Q. U.S. Cellular had no borrowings outstanding under its
revolving credit facility as of March 31, 2015 or as of the filing date of this
Form 10-Q.
A description of U.S. Cellular’s revolving credit facility
is included under Item 1.01 in U.S. Cellular’s Current Report on Form 8-K dated
December 17, 2010, as such description is amended by Item 1.01 in U.S. Cellular’s
Current Report on Form 8-K dated July 24, 2014, and is incorporated by
reference herein.
U.S.
Cellular has not borrowed any amounts under its term loan facility in the first
quarter of 2015 or through the filing date of this Form 10-Q, and had no
borrowings outstanding under its term loan facility as of March 31, 2015 or as
of the filing date of this Form 10-Q.
A
description of U.S. Cellular’s term loan facility is included under Item 1.01
in U.S. Cellular’s Current Report on Form 8-K dated January 21, 2015, and
is incorporated by reference herein.
Item 6. Exhibits.
Exhibit 4.1 — Term Loan Credit Agreement dated as of January
21, 2015 between U.S. Cellular and CoBank ACB, including exhibits, is hereby
incorporated by reference to Exhibit 4.1 to U.S. Cellular’s Current Report on
Form 8-K dated January 21, 2015.
Exhibit 10.1 — Form of 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 February 26, 2015.
Exhibit 10.2 — Form of 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 February 26, 2015.
Exhibit 10.3 — Form of 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
February 26, 2015.
Exhibit 10.4 — Form of 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 February 26, 2015.
Exhibit 10.5 — United States Cellular Corporation 2015
Officer Annual Incentive Plan effective January 1, 2015, is hereby incorporated
by reference to Exhibit 10.1 to U.S. Cellular’s Current Report on Form 8-K
dated April 17, 2015.
Exhibit 11 — Statement regarding computation of per
share earnings is included herein as Note 5 — 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, 2014. Reference is made to U.S.
Cellular’s Form 10-K for the year ended December 31, 2014 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.
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UNITED
STATES CELLULAR CORPORATION
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(Registrant)
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Date:
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May 1, 2015
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/s/ Kenneth R. Meyers
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Kenneth R. Meyers
President and Chief Executive Officer
(principal executive officer)
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Date:
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May 1, 2015
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/s/ Steven T. Campbell
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Steven T. Campbell
Executive Vice President-Finance,
Chief Financial Officer and Treasurer
(principal financial officer)
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Date:
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May 1, 2015
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/s/ Douglas D. Shuma
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Douglas D. Shuma
Chief Accounting Officer
(principal accounting officer)
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Date:
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May 1, 2015
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/s/ Kristin A. MacCarthy
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Kristin A. MacCarthy
Vice President and Controller
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Exhibit 12
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UNITED STATES CELLULAR CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES (1)
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Three Months Ended
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March 31,
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2015
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2014
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(Dollars in
thousands)
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EARNINGS:
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Income before
income taxes (2)
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$
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272,491
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$
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31,008
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Add (deduct):
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Equity in
earnings of unconsolidated entities
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(34,471)
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(37,075)
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Distributions
from unconsolidated entities
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12,985
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12,818
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Amortization of
capitalized interest
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1,483
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1,788
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Income
attributable to noncontrolling interests in subsidiaries
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that do not
have fixed charges
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(5,611)
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(329)
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$
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246,877
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$
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8,210
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Add fixed
charges:
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Consolidated
interest expense (3)
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19,964
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14,862
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Interest
portion (1/3) of consolidated rent expense
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12,504
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12,365
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$
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279,345
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$
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35,437
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FIXED CHARGES:
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Consolidated
interest expense (3)
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$
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19,964
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$
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14,862
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Capitalized
interest
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847
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906
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Interest
portion (1/3) of consolidated rent expense
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12,504
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12,365
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$
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33,315
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$
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28,133
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RATIO OF
EARNINGS TO FIXED CHARGES
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8.38
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1.26
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(1)
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Considering,
among other things, recent significant divestitures and an increasing amount
of rental income in proportion to gross rent expense, U.S. Cellular revised
its approach in the fourth quarter of 2014 in calculating the above ratios to
use gross rent expense, rather than net rent expense, for estimating the
interest portion of rent expense. Prior periods have been revised to conform
to this presentation.
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(2)
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Includes Gain
on sale of business and other exit costs, net of $111.5 million and $6.9
million in 2015 and 2014, respectively. Additionally, includes Gain on
license sales and exchanges, net of $122.9 million and $91.4 million in 2015
and 2014, respectively.
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(3)
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Interest
expense on income tax contingencies is not included in fixed charges.
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Exhibit 31.1
Certification of principal executive officer
I, Kenneth
R. Meyers, certify that:
1.
I have reviewed this quarterly
report on Form 10-Q of United States Cellular Corporation;
2.
Based on my knowledge, this report
does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3.
Based on my knowledge, the
financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant’s other certifying
officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls
and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this
report is being prepared;
b)
designed such internal control
over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
accepted accounting principles;
c)
evaluated the effectiveness of the
registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation;
and
d)
disclosed in this report any
change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5.
The registrant’s other certifying
officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the
audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
a)
all significant deficiencies and
material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial
information; and
b)
any fraud, whether or not
material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: May 1, 2015
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/s/ Kenneth R.
Meyers
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Kenneth R.
Meyers
President and
Chief Executive Officer
(principal
executive officer)
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Exhibit 31.2
Certification of principal
financial officer
I, Steven T. Campbell, certify that:
1.
I have reviewed this quarterly
report on Form 10-Q of United States Cellular Corporation;
2.
Based on my knowledge, this report
does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3.
Based on my knowledge, the
financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant’s other certifying
officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls
and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this
report is being prepared;
b)
designed such internal control
over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
accepted accounting principles;
c)
evaluated the effectiveness of the
registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation;
and
d)
disclosed in this report any
change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5.
The registrant’s other certifying
officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the
audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
a)
all significant deficiencies and
material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial
information; and
b)
any fraud, whether or not
material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date:
May 1, 2015
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/s/ Steven T.
Campbell
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Steven T.
Campbell
Executive Vice
President-Finance,
Chief Financial
Officer and Treasurer
(principal
financial officer)
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Exhibit 32.1
Certification Pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code
I, Kenneth
R. Meyers, the principal executive officer of United States Cellular
Corporation, certify that (i) the quarterly report on Form 10-Q for the first
quarter of 2015 fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934 and (ii) the information contained in
the Form 10-Q fairly presents, in all material respects, the financial
condition and results of operations of United States Cellular Corporation.
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/s/ Kenneth R.
Meyers
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Kenneth R.
Meyers
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May 1, 2015
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A signed original of this
written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has
been provided to United States Cellular Corporation and will be retained by United
States Cellular Corporation and furnished to the Securities and Exchange
Commission or its staff upon request.
Exhibit 32.2
Certification Pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code
I, Steven T. Campbell, the principal
financial officer of United States Cellular Corporation, certify that (i) the
quarterly report on Form 10-Q for the first quarter of 2015 fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 and (ii) the information contained in the Form 10-Q fairly presents, in
all material respects, the financial condition and results of operations of
United States Cellular Corporation.
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/s/ Steven T.
Campbell
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Steven T.
Campbell
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May 1, 2015
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A signed original of this
written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has
been provided to United States Cellular Corporation and will be retained by United
States Cellular Corporation and furnished to the Securities and Exchange
Commission or its staff upon request.
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