UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[x]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the quarterly period ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OR

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the transition period from                                    to                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commission file number 1-9712

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

UNITED STATES CELLULAR CORPORATION

(Exact name of Registrant as specified in its charter)

Delaware

 

 

62-1147325

(State or other jurisdiction of incorporation or organization)

 

 

(IRS Employer Identification No.)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8410 West Bryn Mawr, Chicago, Illinois 60631

(Address of principal executive offices) (Zip code)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Registrant’s telephone number, including area code: (773) 399-8900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indicate by check mark

Yes

No

•  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.

[x]

[ ]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

•  whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

[x]

[ ]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

•  whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

[ ]

Accelerated filer

[x]

Non-accelerated filer

[ ]

Smaller reporting company

[ ]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

•  whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[ ]

[x]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class

 

 

Outstanding at September 30, 2015

Common Shares, $1 par value

 

 

51,281,644 Shares

Series A Common Shares, $1 par value

 

 

33,005,877 Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

United States Cellular Corporation

 

Quarterly Report on Form 10-Q

For the Quarterly Period Ended September 30, 2015

 

Index

 

 

 

 

Page No.

Part I.

Financial Information

 

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

1

 

 

 

 

 

 

 

Consolidated Statement of Operations

1

 

 

 

Three and Nine Months Ended September 30, 2015 and 2014

 

 

 

 

 

 

 

 

Consolidated Statement of Cash Flows

2

 

 

 

Nine Months Ended September 30, 2015 and 2014

 

 

 

 

 

 

 

 

Consolidated Balance Sheet

3

 

 

 

September 30, 2015 and December 31, 2014

 

 

 

 

 

 

 

 

Consolidated Statement of Changes in Equity

5

 

 

 

Nine Months Ended September 30, 2015 and 2014

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

15

 

 

 

 

 

 

 

Overview

15

 

 

 

 

 

 

 

Regulatory Matters

17

 

 

 

 

 

 

 

Results of Operations

18

 

 

 

 

 

 

 

Recent Accounting Pronouncements

26

 

 

 

 

 

 

 

Liquidity and Capital Resources

26

 

 

 

 

 

 

 

Application of Critical Accounting Policies and Estimates

30

 

 

 

 

 

 

 

Certain Relationships and Related Transactions

30

 

 

 

 

 

 

 

Safe Harbor Cautionary Statement

31

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

 

 

 

 

 

 

Item 4.

Controls and Procedures

33

 

 

 

 

 

Part II.

Other Information

33

 

 

 

 

 

 

Item 1.

Legal Proceedings

33

 

 

 

 

 

 

Item1A.

Risk Factors

33

 

 

 

 

 


 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

 

 

 

 

 

 

Item 5.

Other Information

34

 

 

 

 

 

 

Item 6.

Exhibits

35

 

 

 

 

 

Signatures

 


Part I.  Financial Information

Item 1.  Financial Statements

United States Cellular Corporation

Consolidated Statement of Operations

(Unaudited)

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

September 30,

 

September 30,

(Dollars and shares in thousands, except per share amounts)

2015

 

2014

 

2015

 

2014

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

Service

$

895,960 

 

$

851,063 

 

$

2,548,544 

 

$

2,548,149 

 

Equipment sales

 

172,946 

 

 

149,356 

 

 

461,274 

 

 

335,854 

 

 

Total operating revenues

 

1,068,906 

 

 

1,000,419 

 

 

3,009,818 

 

 

2,884,003 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

System operations (excluding Depreciation,

  amortization and accretion reported below)

 

198,982 

 

 

199,750 

 

 

585,935 

 

 

567,488 

 

Cost of equipment sold

 

287,256 

 

 

307,862 

 

 

779,228 

 

 

850,314 

 

Selling, general and administrative (including charges

  from affiliates of $22.0 million and $21.5 million,

  respectively, for the three months, and $65.7 million and

  $65.6 million, respectively, for the nine months)

 

374,585 

 

 

397,545 

 

 

1,106,524 

 

 

1,197,361 

 

Depreciation, amortization and accretion

 

152,369 

 

 

148,952 

 

 

450,035 

 

 

465,042 

 

(Gain) loss on asset disposals, net

 

2,618 

 

 

7,947 

 

 

12,268 

 

 

16,774 

 

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

 

(643)

 

 

(10,283)

 

 

(113,825)

 

 

(27,694)

 

(Gain) loss on license sales and exchanges, net

 

(23,986)

 

 

 

 

 

(146,884)

 

 

(91,446)

 

 

Total operating expenses

 

991,181 

 

 

1,051,773 

 

 

2,673,281 

 

 

2,977,839 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

77,725 

 

 

(51,354)

 

 

336,537 

 

 

(93,836)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment and other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated entities

 

39,674 

 

 

35,971 

 

 

109,729 

 

 

106,166 

 

Interest and dividend income

 

9,299 

 

 

3,572 

 

 

25,834 

 

 

6,029 

 

Interest expense

 

(21,121)

 

 

(13,514)

 

 

(61,239)

 

 

(42,712)

 

Other, net

 

78 

 

 

95 

 

 

274 

 

 

281 

 

 

Total investment and other income

 

27,930 

 

 

26,124 

 

 

74,598 

 

 

69,764 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

105,655 

 

 

(25,230)

 

 

411,135 

 

 

(24,072)

 

Income tax expense (benefit)

 

40,634 

 

 

(1,459)

 

 

161,214 

 

 

746 

Net income (loss)

 

65,021 

 

 

(23,771)

 

 

249,921 

 

 

(24,818)

Less: Net income (loss) attributable to noncontrolling

  interests, net of tax

 

1,427 

 

 

(1,606)

 

 

6,911 

 

 

(3,346)

Net income (loss) attributable to U.S. Cellular

  shareholders

$

63,594 

 

$

(22,165)

 

$

243,010 

 

$

(21,472)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

84,333 

 

 

84,233 

 

 

84,224 

 

 

84,262 

Basic earnings (loss) per share attributable to

  U.S. Cellular shareholders

$

0.75 

 

$

(0.26)

 

$

2.89 

 

$

(0.25)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

84,947 

 

 

84,233 

 

 

84,869 

 

 

84,262 

Diluted earnings (loss) per share attributable to

  U.S. Cellular shareholders

$

0.75 

 

$

(0.26)

 

$

2.86 

 

$

(0.25)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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


 

United States Cellular Corporation

Consolidated Statement of Cash Flows

(Unaudited)

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

(Dollars in thousands)

2015

 

2014

Cash flows from operating activities

 

 

 

 

 

 

Net income (loss)

$

249,921 

 

$

(24,818)

 

Add (deduct) adjustments to reconcile net income (loss) to cash flows

 

 

 

 

 

 

 

from operating activities

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

450,035 

 

 

465,042 

 

 

 

Bad debts expense

 

78,370 

 

 

74,357 

 

 

 

Stock-based compensation expense

 

18,161 

 

 

16,502 

 

 

 

Deferred income taxes, net

 

(20,075)

 

 

(14,124)

 

 

 

Equity in earnings of unconsolidated entities

 

(109,729)

 

 

(106,166)

 

 

 

Distributions from unconsolidated entities

 

45,035 

 

 

74,853 

 

 

 

(Gain) loss on asset disposals, net

 

12,268 

 

 

16,774 

 

 

 

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

 

(113,825)

 

 

(27,694)

 

 

 

(Gain) loss on license sales and exchanges, net

 

(146,884)

 

 

(91,446)

 

 

 

Noncash interest expense

 

1,206 

 

 

845 

 

 

 

Other operating activities

 

(391)

 

 

66 

 

Changes in assets and liabilities from operations

 

 

 

 

 

 

 

 

Accounts receivable

 

(54,437)

 

 

73,741 

 

 

 

Equipment installment plans receivable

 

(95,799)

 

 

(131,520)

 

 

 

Inventory

 

90,811 

 

 

53,367 

 

 

 

Accounts payable

 

116,740 

 

 

21,677 

 

 

 

Customer deposits and deferred revenues

 

(51,026)

 

 

28,486 

 

 

 

Accrued taxes

 

161,237 

 

 

(18,453)

 

 

 

Accrued interest

 

10,814 

 

 

9,140 

 

 

 

Other assets and liabilities

 

(86,977)

 

 

(89,998)

 

 

 

 

 

555,455 

 

 

330,631 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

Cash used for additions to property, plant and equipment

 

(406,596)

 

 

(424,774)

 

Cash paid for acquisitions and licenses

 

(285,656)

 

 

(37,978)

 

Cash received from divestitures and exchanges

 

314,352 

 

 

143,801 

 

Cash received for investments

 

 

 

 

10,000 

 

Other investing activities

 

990 

 

 

804 

 

 

 

 

 

(376,910)

 

 

(308,147)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

Issuance of long-term debt

 

225,000 

 

 

 

 

Common shares reissued for benefit plans, net of tax payments

 

(868)

 

 

1,150 

 

Common shares repurchased

 

(4,070)

 

 

(14,698)

 

Payment of debt issuance costs

 

(3,080)

 

 

(448)

 

Acquisition of assets in common control transaction

 

(2,437)

 

 

(76,298)

 

Distributions to noncontrolling interests

 

(6,097)

 

 

(439)

 

Other financing activities

 

(1,740)

 

 

(18)

 

 

 

 

 

206,708 

 

 

(90,751)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

385,253 

 

 

(68,267)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

Beginning of period

 

211,513 

 

 

342,065 

 

End of period

$

596,766 

 

$

273,798 

 

 

 

 

 

 

 

 

 

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


 

United States Cellular Corporation

Consolidated Balance Sheet — Assets

 (Unaudited)

  

 

 

September 30,

 

December 31,

(Dollars in thousands)

2015

 

2014

Current assets

 

 

 

 

 

 

Cash and cash equivalents

$

596,766 

 

$

211,513 

 

Accounts receivable

 

 

 

 

 

 

 

Customers and agents, less allowances of $41,364 and $37,654, respectively

 

561,676 

 

 

466,048 

 

 

Roaming

 

27,419 

 

 

23,865 

 

 

Affiliated

 

516 

 

 

994 

 

 

Other, less allowances of $741 and $859, respectively

 

39,185 

 

 

66,051 

 

Inventory, net

 

176,259 

 

 

267,068 

 

Prepaid expenses

 

88,041 

 

 

59,744 

 

Net deferred income tax asset

 

82,719 

 

 

93,058 

 

Other current assets

 

18,730 

 

 

90,834 

 

 

 

 

 

1,591,311 

 

 

1,279,175 

 

 

 

 

 

 

 

 

 

Assets held for sale

 

 

 

 

107,055 

 

 

 

 

 

 

 

 

 

Investments

 

 

 

 

 

 

Licenses

 

1,834,061 

 

 

1,443,438 

 

Goodwill

 

369,596 

 

 

370,151 

 

Investments in unconsolidated entities

 

347,710 

 

 

283,014 

 

 

 

 

 

2,551,367 

 

 

2,096,603 

Property, plant and equipment

 

 

 

 

 

 

In service and under construction

 

7,511,997 

 

 

7,458,740 

 

Less: Accumulated depreciation

 

4,903,559 

 

 

4,730,523 

 

 

 

 

 

2,608,438 

 

 

2,728,217 

 

 

 

 

 

 

 

 

 

Other assets and deferred charges

 

187,268 

 

 

276,218 

 

 

 

 

 

 

 

 

 

Total assets

$

6,938,384 

 

$

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)

  

 

September 30,

 

December 31,

(Dollars and shares in thousands)

2015

 

2014

Current liabilities

 

 

 

 

 

 

Current portion of long-term debt

$

8,501 

 

$

46 

 

Accounts payable

 

 

 

 

 

 

 

Affiliated

 

7,874 

 

 

9,774 

 

 

Trade

 

362,268 

 

 

306,845 

 

Customer deposits and deferred revenues

 

236,568 

 

 

287,562 

 

Accrued taxes

 

121,177 

 

 

36,652 

 

Accrued compensation

 

57,547 

 

 

66,162 

 

Other current liabilities

 

92,617 

 

 

149,853 

 

 

 

 

 

886,552 

 

 

856,894 

 

 

 

 

 

 

 

 

 

Liabilities held for sale

 

 

 

 

20,934 

 

 

 

 

 

 

 

 

 

Deferred liabilities and credits

 

 

 

 

 

 

Net deferred income tax liability

 

828,563 

 

 

859,867 

 

Other deferred liabilities and credits

 

287,873 

 

 

284,002 

 

 

 

 

 

 

 

 

 

Long-term debt

 

1,368,656 

 

 

1,151,819 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interests with redemption features

 

910 

 

 

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 84,288 shares (33,006 Series A Common and 51,282 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

 

1,490,651 

 

 

1,472,558 

 

 

Treasury shares, at cost, 3,786 and 3,994 Common Shares, respectively

 

(159,705)

 

 

(169,139)

 

 

Retained earnings

 

2,135,145 

 

 

1,910,498 

 

 

 

Total U.S. Cellular shareholders' equity

 

3,554,165 

 

 

3,301,991 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interests

 

11,665 

 

 

10,611 

 

 

 

 

 

 

 

 

 

 

 

Total equity

 

3,565,830 

 

 

3,312,602 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

$

6,938,384 

 

$

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

 

 

 

 

 

 

 

 

Series A

 

 

 

 

 

 

 

 

 

Total U.S.

 

 

 

 

 

 

 

 

Common and

 

 

 

 

 

 

 

 

 

Cellular

 

 

 

 

 

 

 

 

Common

 

Additional

 

Treasury

 

Retained

 

shareholders'

 

Noncontrolling

 

 

(Dollars in thousands)

shares

 

paid-in capital

 

shares

 

earnings

 

equity

 

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

 

 

 

 

 

 

 

 

 

 

243,010 

 

 

243,010 

 

 

 

 

 

243,010 

Net income attributable to noncontrolling interests

  classified as equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,491 

 

 

1,491 

Repurchase of Common shares

 

 

 

 

 

 

 

(5,362)

 

 

 

 

 

(5,362)

 

 

 

 

 

(5,362)

Incentive and compensation plans

 

 

 

 

186 

 

 

14,796 

 

 

(15,926)

 

 

(944)

 

 

 

 

 

(944)

Stock-based compensation awards

 

 

 

 

17,472 

 

 

 

 

 

 

 

 

17,472 

 

 

 

 

 

17,472 

Tax windfall (shortfall) from stock awards

 

 

 

 

(445)

 

 

 

 

 

 

 

 

(445)

 

 

 

 

 

(445)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(437)

 

 

(437)

Acquisition of assets in common control transaction

 

 

 

 

885 

 

 

 

 

 

(2,437)

 

 

(1,552)

 

 

 

 

 

(1,552)

Adjust investment in subsidiaries for noncontrolling

  interest purchases

 

 

 

 

(5)

 

 

 

 

 

 

 

 

(5)

 

 

 

 

 

(5)

Balance, September 30, 2015

$

88,074 

 

$

1,490,651 

 

$

(159,705)

 

$

2,135,145 

 

$

3,554,165 

 

$

11,665 

 

$

3,565,830 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 


United States Cellular Corporation

Consolidated Statement of Changes in Equity

(Unaudited)

 

 

 

 

U.S. Cellular Shareholders

 

 

 

 

 

 

 

 

Series A

 

 

 

 

 

 

 

 

 

 

Total U.S.

 

 

 

 

 

 

 

 

Common and

 

 

 

 

 

 

 

 

 

 

Cellular

 

 

 

 

 

 

 

 

Common

 

Additional

 

Treasury

 

Retained

 

shareholders'

 

Noncontrolling

 

 

(Dollars in thousands)

 

shares

 

paid-in capital

 

shares

 

earnings

 

equity

 

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 loss attributable to U.S. Cellular shareholders

 

 

 

 

 

 

 

 

 

 

(21,472)

 

 

(21,472)

 

 

 

 

 

(21,472)

Net loss attributable to noncontrolling interests

  classified as equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,738)

 

 

(3,738)

Repurchase of Common shares

 

 

 

 

 

 

 

(15,124)

 

 

 

 

 

(15,124)

 

 

 

 

 

(15,124)

Incentive and compensation plans

 

 

 

 

 

 

 

12,755 

 

 

(11,715)

 

 

1,040 

 

 

 

 

 

1,040 

Stock-based compensation awards

 

 

 

 

15,474 

 

 

 

 

 

 

 

 

15,474 

 

 

 

 

 

15,474 

Tax windfall (shortfall) from stock awards

 

 

 

 

(563)

 

 

 

 

 

 

 

 

(563)

 

 

 

 

 

(563)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(517)

 

 

(517)

Acquisition of assets in common control transaction

 

 

 

 

29,141 

 

 

 

 

 

(76,267)

 

 

(47,126)

 

 

 

 

 

(47,126)

Balance, September 30, 2014

$

88,074 

 

$

1,468,781 

 

$

(167,061)

 

$

1,933,641 

 

$

3,323,435 

 

$

14,136 

 

$

3,337,571 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.  Certain prior year amounts have been reclassified to conform to the 2015 presentation.

The unaudited consolidated financial statements included herein have been prepared by U.S. Cellular pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in 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 unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in U.S. Cellular’s Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2014.

The accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring items, unless otherwise disclosed) necessary for a fair statement of the financial position as of September 30, 2015 and December 31, 2014, the results of operations for the three and nine months ended September 30, 2015 and 2014, and cash flows and changes in equity for the nine months ended September 30, 2015 and 2014. The Consolidated Statement of Comprehensive Income was not included because comprehensive income for the three and nine months ended September 30, 2015 and 2014 equaled net income for these periods.  These results are not necessarily indicative of the results to be expected for the full year.

Recently Issued Accounting Pronouncements

In May 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. In August 2015, the FASB issued Accounting Standards Update 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, requiring the adoption of ASU 2014-09 on January 1, 2018.  Early adoption as of January 1, 2017 is permitted; however, U.S. Cellular does not intend to adopt early.  U.S. Cellular is evaluating the effects that adoption of ASU 2014-09 will have on its financial position, results of operations and disclosures.

In August 2014, the FASB issued Accounting Standards Update 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 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. Cellular is required to adopt the provisions of ASU 2014-15 for the annual period ending December 31, 2016, but early adoption is permitted.  The adoption of ASU 2014-15 will not impact U.S. Cellular’s financial position or results of operations but may impact future disclosures.

In February 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 expects that certain consolidated subsidiaries that are not defined as variable interest entities under current accounting guidance will be defined as variable interest entities under the provisions of ASU 2015-02.  However, U.S. Cellular does not expect the adoption of ASU 2015-02 to change the group of entities which U.S. Cellular is required to consolidate in its financial statements.  Accordingly, U.S. Cellular does not expect the adoption of ASU 2015-02 to impact its financial position or results of operations.  However, additional disclosures are expected.


In April 2015, the FASB issued Accounting Standards Update 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which requires certain 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 provisions of this update effective January 1, 2016 on a retrospective basis. Early adoption is permitted.  In August 2015, the FASB issued Accounting Standards Update 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, excluding debt issuance costs related to line-of-credit arrangements from the scope of ASU 2015-03.  As of September 30, 2015, U.S. Cellular had $27.2 million in debt issuance costs classified as Other assets and deferred charges that, upon adoption of ASU 2015-03, would be reclassified as an offset to Long-term debt. 

In July 2015, the FASB issued Accounting Standards Update 2015-11, Inventory: Simplifying the Measurement of Inventory (“ASU 2015-11), which requires inventory to be measured at the lower of cost or net realizable value.  U.S. Cellular is required to adopt ASU 2015-11 on January 1, 2017.  Early adoption is permitted.  U.S. Cellular is evaluating the effects that adoption of ASU 2015-11 will have on its financial position and results of operations.

In September 2015, the FASB issued Accounting Standards Update 2015-16, Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”).  ASU 2015-16 simplifies how adjustments are made to provisional amounts recognized in a business combination during the measurement period.  U.S. Cellular is required to adopt ASU 2015-16 on January 1, 2016.  U.S. Cellular is evaluating the effects that adoption of ASU 2015-16 will have on its financial position, results of operations, and disclosures.

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 $18.6 million and $59.8 million for the three and nine months ended September 30, 2015, respectively, and $23.1 million and $74.8 million for the three and nine months ended September 30, 2014, respectively.

 

 

2.    Fair Value Measurements

As of September 30, 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 or Level 1 assets.

U.S. Cellular has applied the provisions of fair value accounting for purposes of computing the fair value of financial instruments for disclosure purposes as displayed below.

 

 

 

Level within the Fair Value Hierarchy

 

September 30, 2015

 

December 31, 2014

 

 

 

 

Book Value

 

Fair Value

 

Book Value

 

Fair Value

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

1

 

$

596,766 

 

$

596,766 

 

$

211,513 

 

$

211,513 

Long-term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

2

 

 

617,000 

 

 

624,267 

 

 

617,000 

 

 

608,462 

 

Institutional

2

 

 

532,940 

 

 

489,375 

 

 

532,722 

 

 

513,647 

 

Other

2

 

 

216,562 

 

 

217,371 

 

 

 

 

 

 

 

The fair value of Cash and cash equivalents approximates the book value due to the short-term nature of these financial instruments.  Long-term debt excludes capital lease obligations and the current portion of Long-term debt.  The fair value of “Retail” 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’s “Other” debt consists of a senior term loan credit facility. U.S. Cellular estimated the fair value of its Institutional and Other debt through a discounted cash flow analysis using the interest rates or estimated yield to maturity for each borrowing, which ranged from 2.88% to 7.73% at September 30, 2015. An estimated yield to maturity of 7.25% was used to estimate fair value of Institutional debt at December 31, 2014.

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.  Under certain equipment installment plans, the customer has the right to upgrade to a new device after a specified period of time 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 September 30, 2015 and December 31, 2014, the guarantee liability related to these plans was $91.3 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 September 30, 2015 and December 31, 2014.  Such amounts are included in the Consolidated Balance Sheet as Accounts receivable – customers and agents (short-term portion) and Other assets and deferred charges (long-term portion).

(Dollars in thousands)

September 30, 2015

 

December 31, 2014

Short-term portion of unbilled equipment installment plan receivables, gross

$

245,218 

 

$

127,400 

Short-term portion of unbilled deferred interest

 

(18,504)

 

 

(16,365)

Short-term portion of unbilled allowance for credit losses

 

(9,326)

 

 

(3,686)

      Short-term portion of unbilled equipment installment plan receivables, net

$

217,388 

 

$

107,349 

 

 

 

 

 

 

 

Long-term portion of unbilled equipment installment plan receivables, gross

$

66,512 

 

$

89,435 

Long-term portion of unbilled deferred interest

 

(819)

 

 

(2,791)

Long-term portion of unbilled allowance for credit losses

 

(4,740)

 

 

(6,065)

      Long-term portion of unbilled equipment installment plan receivables, net  

$

60,953 

 

$

80,579 

 

U.S. Cellular assesses the collectability of equipment installment plan receivables based on historical payment experience, account aging and other qualitative factors.  To mitigate credit risk, U.S. Cellular requires certain customers who desire to purchase equipment under an installment plan to make a down payment.

U.S. Cellular recorded out-of-period adjustments during the nine months ended September 30, 2015 due to errors related to equipment installment plan transactions that were attributable to 2014.  U.S. Cellular has determined that these adjustments were not material to the prior quarterly or annual periods, and also were not material to the current period or anticipated full year 2015 results.  These equipment installment plan adjustments had the impact of reducing Equipment sales revenues by $6.2 million and Income before income taxes by $5.8 million for the nine months ended September 30, 2015. These adjustments were made in the first six months of 2015.

 

 

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 (loss) before income taxes for the three and nine months ended September 30, 2015 were 38.5% and 39.2%, respectively.  The effective tax rates for the three and nine months ended September 30, 2014 were not meaningful due to the relatively low amount of Income (loss) before income taxes and the impact of a $6.4 million tax expense related to a valuation allowance recorded against certain state deferred tax assets.  U.S. Cellular determined that such deferred tax assets were not realizable, on a more likely than not basis.

 

 

5.    Earnings Per Share

Basic earnings (loss) per share attributable to U.S. Cellular shareholders is computed by dividing Net income (loss) attributable to U.S. Cellular shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share attributable to U.S. Cellular shareholders is computed by dividing Net income (loss) 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 (loss) per common share and the effects of potentially dilutive securities on the weighted average number of common shares were as follows:

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,