U.S. Cellular(USM) - 2019 Q2 - Quarterly Report

Part I. Financial Information Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on U.S. Cellular's financial results for the three and six months ended June 30, 2019, covering operational and financial performance, liquidity, capital resources, and strategic initiatives Executive Overview U.S. Cellular, an 82%-owned TDS subsidiary, serves 5.0 million connections, focusing on network quality, customer service, and strategic 5G spectrum acquisitions - U.S. Cellular serves 5.0 million connections across 21 states, including 4.4 million postpaid and 0.5 million prepaid customers[12] - The company's strategy is to provide a high-quality network, excellent customer service, and competitive offerings with a local focus[10] - Strategic efforts in 2019 include expanding services for business/government customers, deploying VoLTE technology, and beginning 5G deployment[14] - U.S. Cellular was the provisional winning bidder for 408 licenses in the 28 GHz auction and 282 licenses in the 24 GHz auction for a total of $256 million to support 5G expansion[14] Operational Overview Retail connections decreased to 4.914 million, with increased postpaid net losses and churn in Q2 2019, despite rising ARPU and ARPA from higher-priced plans Postpaid Customer Metrics (Q2 2019 vs. Q2 2018) | Metric | Q2 2019 | Q2 2018 | Change | YTD 2019 | YTD 2018 | Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Gross Additions | 137,000 | 146,000 | (6)% | 273,000 | 275,000 | (1)% | | Total Net (Losses) | (26,000) | (13,000) | (100)% | (58,000) | (50,000) | (16)% | | Total Churn | 1.23% | 1.19% | +0.04 p.p. | 1.24% | 1.21% | +0.03 p.p. | Postpaid Revenue Metrics | Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | ARPU | $45.90 | $44.74 | $45.66 | $44.54 | | ARPA | $119.46 | $118.57 | $119.15 | $118.38 | - The increase in postpaid churn and decrease in gross additions were attributed to aggressive industry-wide handset promotional activity[17][18] Financial Overview Q2 2019 operating revenues remained flat at $973 million, while operating income decreased 45% to $30 million due to higher expenses, despite modest growth in Adjusted OIBDA and EBITDA Financial Highlights (in millions) | Metric | Q2 2019 | Q2 2018 | % Change | YTD 2019 | YTD 2018 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total operating revenues | $973 | $974 | 0% | $1,939 | $1,915 | 1% | | Operating income | $30 | $56 | (45)% | $95 | $121 | (21)% | | Net income | $32 | $52 | (38)% | $90 | $107 | (15)% | | Adjusted OIBDA (Non-GAAP) | $212 | $205 | 4% | $443 | $423 | 5% | | Adjusted EBITDA (Non-GAAP) | $257 | $248 | 3% | $537 | $507 | 6% | | Capital expenditures | $195 | $86 | 127% | $297 | $155 | 91% | - Service revenues increased 2% in Q2 2019, driven by higher Postpaid ARPU and a 13% increase in inbound roaming revenue[20][25] - Equipment sales revenue decreased 7% in Q2 2019 due to fewer devices sold, partially offset by a higher average revenue per device[26] - Depreciation, amortization, and accretion increased 11% in Q2 2019 due to new network assets and accelerated depreciation from technology changes[29] Liquidity and Capital Resources U.S. Cellular maintains liquidity with $528 million cash and $498 million unused credit, projecting $625-725 million in 2019 capital expenditures for network and 5G deployment and spectrum acquisitions - Cash and cash equivalents totaled $528 million at June 30, 2019, down from $580 million at December 31, 2018[40] - As of June 30, 2019, the company had $298 million of unused capacity under its revolving credit agreement and $200 million under its receivables securitization agreement[42][44] - Full-year 2019 capital expenditures are expected to be between $625 million and $725 million, primarily for network enhancement, VoLTE, and 5G deployment[48][50] - The company paid $256 million for spectrum licenses acquired in FCC Auctions 101 and 102 during the first half of 2019[51] - No share repurchases were made in the six months ended June 30, 2019, with the remaining authorization for 5,901,000 Common Shares[53][54] Consolidated Cash Flow Analysis For the six months ended June 30, 2019, net cash from operating activities was $476 million, offset by $506 million used in investing activities for capital expenditures and license acquisitions, resulting in a $51 million net cash decrease Cash Flow Summary (Six Months Ended June 30, in millions) | (in millions) | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $476 | $365 | | Net cash used in investing activities | ($506) | ($101) | | Net cash used in financing activities | ($21) | ($19) | | Net (decrease) increase in cash | ($51) | $245 | Consolidated Balance Sheet Analysis Balance sheet changes from December 2018 to June 2019 were driven by ASC 842 adoption, adding $888 million in lease assets and liabilities, and a $283 million increase in licenses from spectrum - The adoption of ASC 842 on January 1, 2019, resulted in the recognition of $888 million in Operating lease right-of-use assets, $101 million in Short-term operating lease liabilities, and $858 million in Long-term operating lease liabilities[65][67][69] - The Licenses intangible asset increased by $283 million due to rights acquired through FCC auctions[64] - Accrued compensation decreased by $33 million due to employee bonus payments made in March 2019[66] Supplemental Information Relating to Non-GAAP Financial Measures This section defines and reconciles non-GAAP financial measures, showing Q2 2019 Adjusted EBITDA increased 3% to $257 million, Adjusted OIBDA rose 4% to $212 million, and YTD Free Cash Flow was $194 million Reconciliation of Net Income to Adjusted OIBDA (in millions) | | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Net income (GAAP) | $32 | $52 | $90 | $107 | | Add: Income tax, Interest, D&A | $220 | $206 | $444 | $415 | | EBITDA (Non-GAAP) | $252 | $258 | $534 | $522 | | Add/Deduct: (Gains)/losses | $5 | ($10) | $3 | ($15) | | Adjusted EBITDA (Non-GAAP) | $257 | $248 | $537 | $507 | | Deduct: Equity earnings, Interest income | $45 | $43 | $94 | $84 | | Adjusted OIBDA (Non-GAAP) | $212 | $205 | $443 | $423 | Free Cash Flow (in millions) | | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | | Cash flows from operating activities (GAAP) | $476 | $365 | | Less: Cash paid for additions to PP&E | $282 | $173 | | Free cash flow (Non-GAAP) | $194 | $192 | Regulatory Matters U.S. Cellular was the provisional winning bidder for 690 spectrum licenses in the 28 GHz and 24 GHz auctions for $256 million, with FCC Auction 103 for 37, 39, and 47 GHz bands scheduled for December 2019 - U.S. Cellular was the provisional winning bidder for 408 licenses in Auction 101 (28 GHz) and 282 licenses in Auction 102 (24 GHz)[79] - The aggregate purchase price for the licenses from Auctions 101 and 102 was $256 million[79] - The FCC has established procedures for Auction 103 (37, 39, and 47 GHz bands), with bidding scheduled to begin on December 10, 2019[80] Financial Statements (Unaudited) The unaudited financial statements show U.S. Cellular's June 30, 2019, financial position, with YTD net income of $90 million on $1.939 billion revenue, and total assets increasing to $8.223 billion due to lease accounting and spectrum Consolidated Statement of Operations Q2 2019 total operating revenues were $973 million, with operating income at $30 million and net income attributable to shareholders at $31 million, or $0.35 per diluted share Consolidated Statement of Operations Summary (in millions, except per share data) | Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Total operating revenues | $973 | $974 | $1,939 | $1,915 | | Operating income | $30 | $56 | $95 | $121 | | Net income attributable to U.S. Cellular shareholders | $31 | $49 | $86 | $93 | | Diluted earnings per share | $0.35 | $0.56 | $0.97 | $1.08 | Consolidated Statement of Cash Flows For the six months ended June 30, 2019, net cash from operating activities was $476 million, offset by $506 million used in investing activities for capital expenditures and license acquisitions, resulting in a $51 million net cash decrease Consolidated Statement of Cash Flows Summary (Six Months Ended June 30, in millions) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $476 | $365 | | Net cash used in investing activities | $(506) | $(101) | | Net cash used in financing activities | $(21) | $(19) | | Net (decrease) increase in cash | $(51) | $245 | Consolidated Balance Sheet As of June 30, 2019, total assets increased to $8.223 billion from $7.274 billion due to $888 million in operating lease assets and $283 million in licenses, while total liabilities rose to $4.048 billion from $3.207 billion due to lease liabilities Consolidated Balance Sheet Summary (in millions) | Metric | June 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $528 | $580 | | Licenses | $2,469 | $2,186 | | Property, plant and equipment, net | $2,154 | $2,202 | | Operating lease right-of-use assets | $888 | $0 | | Total assets | $8,223 | $7,274 | | Liabilities and Equity | | | | Total current liabilities | $747 | $691 | | Long-term debt, net | $1,596 | $1,605 | | Long-term operating lease liabilities | $858 | $0 | | Total liabilities | $4,048 | $3,207 | | Total U.S. Cellular shareholders' equity | $4,162 | $4,057 | Notes to Consolidated Financial Statements Notes detail accounting policies, including ASC 842 adoption materially increasing assets and liabilities, revenue recognition, intangible asset growth from spectrum, and disclosures on consolidated Variable Interest Entities - Note 2 (Revenue Recognition): Total revenues from contracts with customers were $957 million for Q2 2019, with $502 million in future service revenue expected from remaining performance obligations on contracts longer than one year as of June 30, 2019[124][131] - Note 6 (Intangible Assets): The license balance increased by $283 million in the first half of 2019, primarily due to a $257 million acquisition of spectrum licenses from FCC auctions[145] - Note 8 (Leases): The company adopted ASC 842 on Jan 1, 2019, recognizing $899 million of Operating lease right-of-use assets and $979 million of corresponding lease liabilities on its balance sheet[150][153] - Note 9 (Variable Interest Entities): U.S. Cellular consolidates several VIEs, which held total assets of $1.757 billion and total liabilities of $85 million as of June 30, 2019[165][170] Quantitative and Qualitative Disclosures About Market Risk No material changes to market risk information have occurred since the 2018 Form 10-K, with long-term debt fair value disclosed in Note 3 to the financial statements - There have been no material changes to market risk disclosures since the 2018 Form 10-K[88] Controls and Procedures Management concluded disclosure controls and procedures were effective as of June 30, 2019, with the only material change to internal control over financial reporting being the implementation of controls for ASC 842 - The principal executive and financial officers concluded that disclosure controls and procedures were effective as of June 30, 2019[178] - A change in internal control over financial reporting occurred due to the implementation of controls for the new lease accounting standard, ASC 842[179] Part II. Other Information Legal Proceedings The DOJ is investigating U.S. Cellular's participation in FCC spectrum auctions under the False Claims Act regarding bidding credits, with the company cooperating and believing its actions complied with the law - The Department of Justice is investigating U.S. Cellular's participation in FCC spectrum auctions 58, 66, 73, and 97 under the False Claims Act[180] - The company believes its arrangements with limited partnerships that received bidding credits complied with applicable laws and FCC rules[180] Risk Factors No material changes to 2018 Form 10-K risk factors were identified, with key forward-looking risks including intense competition, strategy execution, liquidity, technology reliance, and regulatory uncertainties - No material changes to the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018, were identified[87] - Key risks include intense competition, failure to execute strategy, inability to access capital, changes in roaming practices, and failure to obtain adequate radio spectrum[83] Unregistered Sales of Equity Securities and Use of Proceeds No U.S. Cellular Common Shares were repurchased in Q2 2019, with 5,901,000 shares remaining authorized under the share repurchase program as of June 30, 2019 - No U.S. Cellular Common Shares were repurchased during the quarter ended June 30, 2019[183] - The remaining authorization under the share repurchase program is for 5,901,000 Common Shares as of June 30, 2019[183] Other Information No cash borrowings or repayments occurred under U.S. Cellular's revolving credit or receivables securitization agreements in Q2 2019, with no outstanding borrowings as of June 30, 2019 - U.S. Cellular had no cash borrowings outstanding under its revolving credit agreement or its receivables securitization agreement as of June 30, 2019[185][186]