U.S. Cellular(USM) - 2023 Q3 - Quarterly Report

Part I. Financial Information Management's Discussion and Analysis of Financial Condition and Results of Operations UScellular's Q3 2023 operating income improved to $57 million from a loss, despite an 11% revenue drop, due to a 17% expense reduction, as it explores strategic alternatives Executive Overview UScellular, serving 4.6 million connections, focuses on 5G network enhancement and customer service, while exploring strategic alternatives incurring $3 million in Q3 2023 expenses - On August 4, 2023, TDS and UScellular announced the initiation of a process to explore strategic alternatives for UScellular, incurring third-party expenses of $3 million in Q3 2023 related to this review[15] - The company's core strategy involves attracting and retaining customers through a high-quality network, customer service, and competitive pricing. Key strategic efforts include[16] - Increasing revenues from device protection plans, fixed wireless, prepaid plans, and tower rentals - Continuing to invest in 5G, with a focus on deploying mid-band spectrum to enhance speed and capacity for mobility and fixed wireless services Company Operations Snapshot | Metric | Value | | :--- | :--- | | Retail Connections | 4.6 million | | Postpaid Connections | ~4.2 million | | Prepaid Connections | ~0.5 million | | States of Operation | 21 | | Employees | ~4,500 | | Owned Towers | 4,356 | | Cell Sites in Service | 6,973 | Operational Overview Retail connections decreased to 4.62 million, with postpaid net losses of 35,000, though connected device additions improved and postpaid ARPU grew 2% to $51.11 Retail Connections (End of Period) | Category | Sep 30, 2023 | Sep 30, 2022 | | :--- | :--- | :--- | | Postpaid | 4,159,000 | 4,264,000 | | Prepaid | 462,000 | 493,000 | | Total | 4,621,000 | 4,757,000 | Postpaid Activity (Q3 2023 vs Q3 2022) | Metric | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | Total Gross Additions | 128,000 | 151,000 | (15)% | | Handset Net Losses | (38,000) | (22,000) | (73)% | | Connected Device Net Additions | 3,000 | (9,000) | N/M | | Total Net Losses | (35,000) | (31,000) | (13)% | | Total Churn | 1.30% | 1.42% | - | - Postpaid handset net losses increased due to aggressive industry-wide competition, while connected device net additions improved due to higher demand for fixed wireless home internet and lower churn for tablets and hotspots[19][20] Postpaid Revenue Metrics (Q3 2023 vs Q3 2022) | Metric | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | ARPU | $51.11 | $50.21 | 2% | | ARPA | $130.91 | $130.27 | — | Financial Overview Q3 2023 revenues decreased 11% to $963 million, but expenses fell 17% to $906 million, leading to $57 million operating income and $23 million net income Financial Highlights (Three Months Ended Sep 30) | (In millions) | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Total operating revenues | $963 | $1,083 | (11)% | | Total operating expenses | $906 | $1,098 | (17)% | | Operating income (loss) | $57 | ($15) | N/M | | Net income (loss) | $23 | ($12) | N/M | | Adjusted OIBDA (Non-GAAP) | $220 | $163 | 35% | | Adjusted EBITDA (Non-GAAP) | $263 | $205 | 28% | - The decrease in total operating revenues was primarily driven by a decline in smartphone upgrades and gross additions, leading to lower equipment sales. Service revenues also fell due to a smaller subscriber base and lower inbound roaming rates[28][29] - The decrease in total operating expenses was mainly due to a corresponding decline in the cost of equipment sold, as well as lower bad debts expense, employee-related costs, commissions, and advertising[33][34] - Interest expense increased by 16% in Q3 2023 compared to Q3 2022, primarily due to higher interest rates on variable-rate debt[36][38] Liquidity and Capital Resources UScellular maintains $745 million in undrawn borrowing capacity, with 9-month capital expenditures of $462 million for 5G, and S&P placed its credit rating on CreditWatch developing Available Undrawn Borrowing Capacity (Sep 30, 2023) | Facility | Capacity (in millions) | | :--- | :--- | | Revolving Credit Agreement | $300 | | Receivables Securitization Agreement | $445 | | Total Available | $745 | - In September 2023, the company amended its receivables securitization agreement to extend the maturity date to September 2025[48] - Following the August 4, 2023 announcement of a strategic alternatives review, S&P placed UScellular's 'BB' issuer credit rating on CreditWatch with developing implications. In October 2023, Moody's re-affirmed its 'Ba1' rating and stable outlook[54][55] - Full-year 2023 capital expenditures are expected to be between $600 million and $700 million, focused on 5G deployment, network capacity and coverage enhancement with mid-band spectrum, and IT investments[58][62] Consolidated Cash Flow Analysis Cash, cash equivalents, and restricted cash decreased by $123 million, with $719 million from operations, $464 million used in investing, and $378 million used in financing activities Cash Flow Summary (Nine Months Ended Sep 30, 2023) | (In millions) | Amount | | :--- | :--- | | Net cash provided by operating activities | $719 | | Net cash used in investing activities | ($464) | | Net cash used in financing activities | ($378) | | Net decrease in cash | ($123) | - Operating cash flow of $719 million was supported by net income of $43 million, non-cash adjustments of $514 million, and positive working capital changes of $65 million[64] - Financing activities included $385 million in repayments on the receivables securitization agreement and a $60 million repayment on the EIP receivables repurchase agreement, partially offset by $115 million borrowed under the securitization agreement[65] Consolidated Balance Sheet Analysis Inventory decreased by $86 million, accounts payable increased by $62 million due to Auction 107 fees, and other current liabilities decreased by $187 million - Inventory, net decreased by $86 million due to efforts to reduce inventory on hand that was previously elevated for holiday promotions[70] - Accounts payable — Trade increased by $62 million, primarily due to Auction 107 relocation fees invoiced during Q3 2023[71] - Other current liabilities decreased by $187 million, mainly due to a decrease in the short-term accrual for Auction 107 relocation fees and repayments on the EIP receivables repurchase agreement[72] Supplemental Information Relating to Non-GAAP Financial Measures UScellular uses non-GAAP measures like EBITDA, Adjusted EBITDA, Adjusted OIBDA, and Free Cash Flow, providing reconciliations to GAAP for performance evaluation Reconciliation of Net Income (Loss) to Adjusted EBITDA and Adjusted OIBDA (Q3 2023) | (In millions) | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Net income (loss) (GAAP) | $23 | ($12) | | Income tax expense (benefit) | $27 | ($3) | | Interest expense | $50 | $42 | | Depreciation, amortization and accretion | $159 | $177 | | EBITDA (Non-GAAP) | $259 | $204 | | Adjustments | $4 | $1 | | Adjusted EBITDA (Non-GAAP) | $263 | $205 | | Equity in earnings & Interest/dividend income | ($43) | ($42) | | Adjusted OIBDA (Non-GAAP) | $220 | $163 | Free Cash Flow Reconciliation (Nine Months Ended Sep 30) | (In millions) | 2023 | 2022 | | :--- | :--- | :--- | | Cash flows from operating activities (GAAP) | $719 | $652 | | Cash paid for additions to property, plant and equipment | ($454) | ($409) | | Cash paid for software license agreements | ($28) | ($5) | | Free cash flow (Non-GAAP) | $237 | $238 | Regulatory Matters UScellular acquired 254 spectrum licenses for $1.283 billion in FCC Auction 107, incurring $179 million in relocation costs, with the $9 billion 5G Fund's impact uncertain - In FCC Auction 107, UScellular was the winning bidder for 254 wireless spectrum licenses for $1.283 billion. The company received full access to this spectrum in Q3 2023[82] - Associated with Auction 107, UScellular is obligated to pay approximately $179 million in total relocation costs and incentive payments between 2021 and 2025. In October 2023, the company paid invoices totaling $105 million for these costs[82] - The FCC is proceeding with the 5G Fund for Rural America, which will provide up to $9 billion over ten years for 5G deployment. UScellular cannot predict when the auction will occur or how it will impact its existing legacy support from the Federal USF[83][84] Financial Statements (Unaudited) Unaudited consolidated financial statements for Q3 2023, including operations, cash flows, balance sheets, and equity, reflect performance trends and key financial positions Consolidated Statement of Operations Q3 2023 saw $963 million in operating revenues, $57 million operating income, and $23 million net income, a turnaround from a $12 million net loss in Q3 2022 Consolidated Statement of Operations (Three Months Ended Sep 30) | (In millions, except per share) | 2023 | 2022 | | :--- | :--- | :--- | | Total operating revenues | $963 | $1,083 | | Total operating expenses | $906 | $1,098 | | Operating income (loss) | $57 | ($15) | | Income (loss) before income taxes | $50 | ($15) | | Net income (loss) | $23 | ($12) | | Diluted earnings (loss) per share | $0.26 | ($0.15) | Consolidated Statement of Cash Flows Nine months ended September 30, 2023, showed $719 million operating cash flow, $464 million used in investing, $378 million used in financing, resulting in a $123 million net cash decrease Consolidated Statement of Cash Flows (Nine Months Ended Sep 30) | (In millions) | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $719 | $652 | | Net cash used in investing activities | ($464) | ($976) | | Net cash provided by (used in) financing activities | ($378) | $414 | | Net increase (decrease) in cash | ($123) | $90 | | Cash, cash equivalents and restricted cash, end of period | $185 | $289 | Consolidated Balance Sheet As of September 30, 2023, total assets were $10.75 billion, liabilities $6.12 billion (including $2.90 billion long-term debt), and equity $4.62 billion Consolidated Balance Sheet Highlights | (In millions) | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total current assets | $1,393 | $1,723 | | Licenses | $4,690 | $4,690 | | Property, plant and equipment, net | $2,593 | $2,624 | | Total assets | $10,749 | $11,119 | | Total current liabilities | $1,031 | $1,195 | | Long-term debt, net | $2,903 | $3,187 | | Total liabilities | $6,118 | $6,549 | | Total equity | $4,619 | $4,570 | Notes to Consolidated Financial Statements Notes detail financial statement support, including revenue, debt, and intangible assets, notably disclosing $3 million in strategic review expenses in Q3 2023 - Note 1: The company incurred $3 million in third-party expenses during Q3 2023 related to the strategic alternatives review initiated on August 4, 2023[129] - Note 4: Net equipment installment plan receivables were $1.04 billion as of September 30, 2023, down from $1.12 billion at year-end 2022[145] - Note 9: The receivables securitization agreement was extended to September 2025. As of September 30, 2023, outstanding borrowings were $5 million with $445 million of unused capacity. Subsequent to the quarter-end, the company borrowed an additional $150 million under this facility[155][156] Quantitative and Qualitative Disclosures About Market Risk UScellular faces interest rate risk, with 70% of its $3.0 billion long-term debt fixed-rate and 30% variable-rate, at a 6.4% weighted average interest rate - As of September 30, 2023, approximately 70% of the company's long-term debt was fixed-rate, mitigating interest rate risk on that portion, while 30% was variable-rate, exposing the company to fluctuations in market interest rates[97] Long-Term Debt Principal Payments by Period (as of Sep 30, 2023) | Period | Principal Payments (in millions) | Weighted-Avg. Interest Rate | | :--- | :--- | :--- | | Remainder of 2023 | $3 | 7.2% | | 2024 | $20 | 7.1% | | 2025 | $20 | 7.1% | | 2026 | $268 | 6.9% | | 2027 | $158 | 7.0% | | Thereafter | $2,514 | 6.3% | | Total | $2,983 | 6.4% | Part II. Other Information Legal Proceedings UScellular faces an appeal regarding past FCC spectrum auctions and a putative stockholder class action alleging 2022 public statement violations, which it intends to vigorously contest - A case related to UScellular's participation in FCC spectrum auctions 58, 66, 73, and 97, brought by private parties under the False Claims Act, was dismissed in March 2023. The plaintiffs are now appealing this decision[173] - On May 2, 2023, a putative stockholder class action was filed against TDS and UScellular, alleging that public statements made between May and November 2022 regarding business strategies were in violation of the Securities Exchange Act of 1934[174] Risk Factors A new risk factor addresses the strategic alternatives review, highlighting potential impacts like management distraction, expenses, personnel loss, and stock price volatility - A new risk factor has been added to address the process of exploring strategic alternatives for UScellular, which was announced on August 4, 2023[94] - Potential adverse impacts from the strategic review process include: diversion of management's attention, significant expenses, failure to retain key personnel and customers, and stock price volatility[95] Unregistered Sales of Equity Securities and Use of Proceeds UScellular made no common share repurchases in Q3 2023, retaining authorization for 1,926,941 additional shares under its ongoing program - No Common Shares were repurchased by or on behalf of UScellular during the third quarter of 2023[177] - As of September 30, 2023, the maximum number of shares that may still be purchased under the company's repurchase program is 1,926,941[177] Controls and Procedures As of September 30, 2023, UScellular's disclosure controls and procedures were deemed effective, with no material changes to internal control over financial reporting - The company's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2023[171] - No changes occurred during the three months ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[172]