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U.S. Cellular(USM) - 2025 Q1 - Quarterly Report

Part I. Financial Information Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) UScellular's Q1 2025 financial performance declined due to wireless segment pressures, while the company undergoes a major strategic transformation with pending sales of its wireless operations to T-Mobile for $4.4 billion and spectrum to Verizon and AT&T Executive Overview UScellular is undergoing a major strategic shift, highlighted by the announced sale of its wireless operations and select spectrum to T-Mobile for $4.4 billion, alongside separate spectrum sales to Verizon for $1 billion and AT&T for $1.018 billion, all expected to close mid-2025 - UScellular has agreed to sell its wireless operations and select spectrum assets to T-Mobile for $4.4 billion, which includes a combination of cash and the assumption of up to approximately $2.0 billion in debt. The transaction is expected to close in mid-202515 - Separate agreements have been made to sell spectrum licenses to Verizon for $1.0 billion and to AT&T for $1.018 billion. These sales are contingent on the closing of the T-Mobile transaction1718 - Upon closing the T-Mobile transaction, UScellular expects to incur significant one-time costs, including advisory fees, employee compensation and severance, debt extinguishment, and tower decommissioning costs16 | Description | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Third-party expenses related to strategic review | $10 million | $7 million | Overall Financial Performance UScellular's Q1 2025 total operating revenues decreased 6% to $891 million, with operating income falling 19% to $41 million, while capital expenditures were significantly reduced by 60% to $53 million | Financial Metric (in millions) | Q1 2025 | Q1 2024 | Change | | :--- | :--- | :--- | :--- | | Total Operating Revenues | $891 | $950 | (6)% | | Operating Income | $41 | $51 | (19)% | | Net Income (to shareholders) | $18 | $18 | 3% | | Adjusted OIBDA (Non-GAAP) | $215 | $228 | (6)% | | Adjusted EBITDA (Non-GAAP) | $254 | $272 | (7)% | | Capital Expenditures | $53 | $131 | (60)% | - Equity in earnings of unconsolidated entities, primarily from the LA Partnership, contributed $15 million in pre-tax income for Q1 2025, down from $16 million in Q1 202426 - Interest expense decreased due to a lower average principal balance on receivables securitization and term loan agreements27 Wireless Operations The Wireless segment's operating revenue declined 7% to $864 million in Q1 2025, driven by a 24% drop in equipment sales and fewer connections, despite improved postpaid net losses amidst intense competition | Wireless Financials (in millions) | Q1 2025 | Q1 2024 | Change | | :--- | :--- | :--- | :--- | | Total Operating Revenues | $864 | $925 | (7)% | | - Retail Service Revenues | $660 | $678 | (3)% | | - Equipment Sales | $150 | $196 | (24)% | | Operating Income | $20 | $29 | (30)% | | Adjusted EBITDA (Non-GAAP) | $182 | $195 | (7)% | | Postpaid Customer Activity | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Total Net Losses | (39,000) | (44,000) | | - Handset Net Losses | (38,000) | (47,000) | | - Connected Device Net Losses | (1,000) | 3,000 (gain) | | Total Churn | 1.21% | 1.22% | - The decrease in retail service revenue was driven by a decline in average postpaid and prepaid connections. The drop in equipment sales revenue was due to fewer smartphone upgrades and a lower average sales price37 - System operations expenses decreased due to the shutdown of the 3G CDMA network in Q1 202439 Towers Operations The Towers segment's total revenue increased 5% to $61 million in Q1 2025, driven by third-party revenues, though operating income dipped 5% to $21 million due to higher expenses, with significant revenue composition changes expected post-T-Mobile transaction | Tower Operations Metrics | As of Mar 31, 2025 | As of Mar 31, 2024 | Change | | :--- | :--- | :--- | :--- | | Owned towers | 4,413 | 4,382 | 1% | | Number of colocations | 2,469 | 2,397 | 3% | | Tower tenancy rate | 1.56 | 1.55 | 1% | | Towers Financials (in millions) | Q1 2025 | Q1 2024 | Change | | :--- | :--- | :--- | :--- | | Total Tower Revenues | $61 | $58 | 5% | | - Third-party revenues | $27 | $25 | 6% | | Operating Income | $21 | $22 | (5)% | | Adjusted EBITDA (Non-GAAP) | $33 | $33 | (1)% | - Following the T-Mobile transaction, intra-company revenues will cease, but third-party revenues are expected to increase under a new Master License Agreement, leading to significantly lower total tower revenues47 Liquidity and Capital Resources As of March 31, 2025, UScellular maintained $748 million in available borrowing capacity, significantly reduced capital expenditures by 60% to $53 million, and anticipates declaring special dividends to shareholders upon closing the T-Mobile transaction - As of March 31, 2025, UScellular had $748 million in total available undrawn borrowing capacity from its Revolving Credit and Receivables Securitization Agreements5657 - In April 2025, UScellular amended its revolving credit and a term loan agreement to extend maturities to July 2027 and modify covenants, anticipating the proceeds from asset sales596163 | Item | Q1 2025 | Q1 2024 | Change | | :--- | :--- | :--- | :--- | | Capital Expenditures | $53 million | $131 million | (60)% | - During Q1 2025, UScellular repurchased 328,835 Common Shares for $21 million71 - Upon closing the T-Mobile transaction, the Board of Directors is expected to declare the first of potentially several special dividends to shareholders72 Consolidated Cash Flow Analysis In Q1 2025, cash and cash equivalents increased by $42 million, with net cash from operating activities at $160 million, while investing activities used $74 million and financing activities used $44 million | Cash Flow Activity (in millions) | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $160 | $203 | | Net cash used in investing activities | ($74) | ($144) | | Net cash used in financing activities | ($44) | ($28) | | Net increase in cash | $42 | $31 | - The decrease in operating cash flow in Q1 2025 was primarily driven by working capital changes, including payments for associate bonuses and other benefits75 - Financing activities in Q1 2025 included $21 million for share repurchases, $9 million for software licenses, and $5 million in term loan repayments76 Non-GAAP Financial Measures UScellular utilizes non-GAAP measures like Adjusted EBITDA ($254 million) and Adjusted OIBDA ($215 million) for performance evaluation, with Free Cash Flow increasing to $79 million in Q1 2025 primarily due to lower capital expenditures | UScellular Reconciliation (in millions) | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Net income (GAAP) | $20 | $24 | | EBITDA (Non-GAAP) | $243 | $260 | | Adjusted EBITDA (Non-GAAP) | $254 | $272 | | Adjusted OIBDA (Non-GAAP) | $215 | $228 | | Operating income (GAAP) | $41 | $51 | | Free Cash Flow (Non-GAAP, in millions) | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Cash flows from operating activities (GAAP) | $160 | $203 | | Less: Cash paid for additions to PP&E | ($72) | ($133) | | Less: Cash paid for software license agreements | ($9) | ($9) | | Free cash flow (Non-GAAP) | $79 | $61 | Financial Statements (Unaudited) The unaudited consolidated financial statements for Q1 2025 report total operating revenues of $891 million and net income of $20 million, with total assets at $10.365 billion, reflecting ongoing operations before major divestitures Consolidated Statement of Operations For Q1 2025, UScellular reported total operating revenues of $891 million, operating income of $41 million, and net income attributable to shareholders of $18 million, with basic and diluted EPS at $0.21 | (in millions, except per share) | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Total operating revenues | $891 | $950 | | Operating income | $41 | $51 | | Net income attributable to UScellular shareholders | $18 | $18 | | Basic EPS | $0.21 | $0.21 | | Diluted EPS | $0.21 | $0.20 | Consolidated Statement of Cash Flows In Q1 2025, net cash from operating activities was $160 million, investing activities used $74 million, and financing activities used $44 million, leading to a $42 million net increase in cash and equivalents | (in millions) | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $160 | $203 | | Net cash used in investing activities | ($72) | ($133) | | Net cash used in financing activities | ($44) | ($28) | | Net increase in cash, cash equivalents and restricted cash | $42 | $31 | | Cash, cash equivalents and restricted cash, end of period | $201 | $210 | Consolidated Balance Sheet As of March 31, 2025, UScellular's total assets were $10.365 billion, total liabilities $5.766 billion, and total shareholders' equity $4.585 billion, with significant assets in licenses and property, plant, and equipment | (in millions) | March 31, 2025 | Dec 31, 2024 | | :--- | :--- | :--- | | Assets | | | | Total current assets | $1,373 | $1,345 | | Licenses | $4,581 | $4,579 | | Property, plant and equipment, net | $2,394 | $2,502 | | Total Assets | $10,365 | $10,449 | | Liabilities & Equity | | | | Total current liabilities | $807 | $884 | | Long-term debt, net | $2,829 | $2,837 | | Total UScellular shareholders' equity | $4,585 | $4,577 | | Total Liabilities & Equity | $10,365 | $10,449 | Note 6: Divestitures Note 6 details UScellular's pending divestitures, including the sale of wireless operations and select spectrum to T-Mobile for $4.4 billion, and separate spectrum sales to Verizon for $1 billion and AT&T for $1.018 billion, all expected to close mid-2025 - Agreement to sell wireless operations and select spectrum assets to T-Mobile for $4.4 billion, consisting of cash and assumption of up to ~$2 billion in debt151 - Agreement to sell certain spectrum licenses to Verizon for $1.0 billion (book value $586 million)152 - Agreement to sell certain spectrum licenses to AT&T for $1.018 billion (book value $859 million)153 - Third-party expenses related to these transactions were $10 million for Q1 2025155 Note 10: Business Segment Information Note 10 outlines UScellular's Wireless and Towers segments, with Q1 2025 external revenues of $864 million and $27 million respectively, contributing to a total Segment Adjusted EBITDA of $215 million | Q1 2025 Segment Performance (in millions) | Wireless | Towers | Total | | :--- | :--- | :--- | :--- | | Revenues from external customers | $864 | $27 | $891 | | Intersegment revenues | $0 | $34 | $34 | | Segment Adjusted EBITDA (Non-GAAP) | $182 | $33 | $215 | | Q1 2024 Segment Performance (in millions) | Wireless | Towers | Total | | :--- | :--- | :--- | :--- | | Revenues from external customers | $925 | $25 | $950 | | Intersegment revenues | $0 | $33 | $33 | | Segment Adjusted EBITDA (Non-GAAP) | $195 | $33 | $228 | Quantitative and Qualitative Disclosures About Market Risk As of March 31, 2025, UScellular's $2.918 billion long-term debt is approximately 70% fixed-rate and 30% variable-rate, exposing the company to interest rate risk with significant principal payments due in 2026 and 2028 - As of March 31, 2025, approximately 70% of long-term debt was fixed-rate and 30% was variable-rate105 | Principal Payments Due by Period (in millions) | Long-Term Debt Obligations | Weighted-Avg. Interest Rate | | :--- | :--- | :--- | | Remainder of 2025 | $17 | 6.1% | | 2026 | $228 | 5.9% | | 2027 | $158 | 6.0% | | 2028 | $286 | 6.4% | | Thereafter | $2,224 | 6.1% | | Total | $2,918 | 6.1% | Part II. Other Information Risk Factors The company faces significant risks related to the potential non-consummation or costs of its announced T-Mobile, Verizon, and AT&T transactions, alongside operational challenges from intense competition, lack of scale, and regulatory uncertainties - Transaction Risks: There is no guarantee the T-Mobile, Verizon, or AT&T transactions will be consummated. Failure to close or costs associated with closing could have adverse effects on financial condition97 - Operational Risks: Intense competition, lack of scale relative to larger competitors, and reliance on third parties for network construction and equipment supply pose significant risks to operations and profitability97 - Financial Risks: A significant amount of indebtedness could affect financial performance. The company's concentration in the U.S. wireless industry makes it vulnerable to industry-specific downturns100 - Regulatory & Legal Risks: The company faces risks from potential non-compliance with regulations, changes in regulatory support like the USF, and various legal proceedings, including patent infringement claims and shareholder lawsuits100 Legal Proceedings UScellular is involved in several legal proceedings, including a False Claims Act case, a settled stockholder class action, and three pending stockholder derivative lawsuits alleging breach of fiduciary duty - A False Claims Act lawsuit related to FCC auction bidding credits remains pending before an appellate court after one of two related matters was dismissed188 - A settlement in principle was reached on February 28, 2025, for a putative stockholder class action lawsuit filed in May 2023189 - Three separate stockholder derivative lawsuits have been filed making similar claims related to breach of fiduciary duty. The company is unable to determine the potential impact but will contest the claims190191192 Share Repurchases During Q1 2025, UScellular repurchased 328,835 Common Shares for approximately $21 million, with 658,107 shares remaining authorized for repurchase under its ongoing program | Period | Shares Purchased | Average Price Paid | Total Cost (approx.) | | :--- | :--- | :--- | :--- | | Q1 2025 | 328,835 | $63.49 | $21 million | - As of March 31, 2025, the maximum number of shares that may yet be purchased under the company's plan is 658,107197