U.S. Cellular(USM) - 2024 Q1 - Quarterly Report

Part I Management's Discussion and Analysis of Financial Condition and Results of Operations In Q1 2024, UScellular reported a 4% decrease in total operating revenues to $950 million, but operating income surged 94% to $51 million and net income grew 64% to $24 million, driven by a 6% reduction in total operating expenses Executive Overview UScellular, an 83%-owned TDS subsidiary serving 4.5 million retail connections, is undergoing a strategic alternatives review that incurred $7 million in Q1 2024, while focusing on 5G network enhancement and revenue diversification - On August 4, 2023, TDS and UScellular initiated a process to explore strategic alternatives for UScellular, incurring $7 million in third-party expenses in Q1 2024[14] - UScellular's strategy focuses on providing a high-quality network, outstanding customer service, and competitive plans, including increasing revenue from device protection, fixed wireless internet, tower rent, and business solutions[15] - The company continues its multi-year deployment of 5G mid-band spectrum in 2024 to enhance network speed and capacity for mobility and fixed wireless services[15] Operational Overview UScellular's Q1 2024 operational performance saw total retail connections decline to 4.487 million, with worsening postpaid net losses due to intense competition, yet Postpaid ARPU increased by 3% to $51.96 Retail Connections (End of Period) | As of March 31, | 2024 | 2023 | | :--- | :--- | :--- | | Retail Connections – End of Period | | | | Postpaid | 4,051,000 | 4,223,000 | | Prepaid | 436,000 | 470,000 | | Total | 4,487,000 | 4,693,000 | Postpaid Activity and Churn (Q1 2024 vs. Q1 2023) | | Q1 2024 | Q1 2023 | Change | | :--- | :--- | :--- | :--- | | Total Gross Additions | 106,000 | 137,000 | (23)% | | Total Net Additions (Losses) | (44,000) | (24,000) | (83)% | | Total Churn | 1.22 % | 1.27 % | -0.05 p.p. | - Postpaid handset net losses increased year-over-year due to lower gross additions resulting from aggressive industry-wide competition[19] Postpaid Revenue Metrics (Q1 2024 vs. Q1 2023) | | Q1 2024 | Q1 2023 | Change | | :--- | :--- | :--- | :--- | | Average Revenue Per User (ARPU) | $51.96 | $50.66 | 3% | | Average Revenue Per Account (ARPA) | $132.00 | $130.77 | 1% | Financial Overview For Q1 2024, total operating revenues decreased by 4% to $950 million, while total operating expenses fell 6% to $899 million, leading to a 94% increase in operating income to $51 million and a 64% rise in net income to $24 million Financial Highlights (Q1 2024 vs. Q1 2023) | (Dollars in millions) | Q1 2024 | Q1 2023 | Change | | :--- | :--- | :--- | :--- | | Total operating revenues | $950 | $986 | (4)% | | Total operating expenses | $899 | $960 | (6)% | | Operating income | $51 | $26 | 94% | | Net income | $24 | $14 | 64% | | Adjusted EBITDA (Non-GAAP) | $272 | $252 | 8% | | Capital expenditures | $131 | $208 | (37)% | - Retail service revenues decreased due to a smaller base of postpaid and prepaid connections, partially offset by higher Postpaid ARPU[30] - Equipment sales revenues declined due to fewer smartphones sold from lower gross additions and upgrades, partly offset by a higher average price for new smartphones[31] - Selling, general and administrative (SG&A) expenses decreased due to lower employee-related costs, commissions, and advertising, partially offset by a $7 million increase for strategic alternatives review expenses[36] Liquidity and Capital Resources UScellular maintains liquidity through cash, operating cash flows, and financing agreements, with $610 million in available undrawn borrowing capacity as of March 31, 2024, and projected 2024 capital expenditures between $550 million and $650 million - UScellular believes existing cash, available financing, and operating cash flows will provide sufficient liquidity for day-to-day needs, but may require substantial additional funding for capital expenditures, acquisitions, or spectrum purchases[43] Available Undrawn Borrowing Capacity (as of March 31, 2024) | (Dollars in millions) | Capacity | | :--- | :--- | | Revolving Credit Agreement | $300 | | Receivables Securitization Agreement | $310 | | Total available undrawn borrowing capacity | $610 | - Capital expenditures for the full year 2024 are expected to be between $550 million and $650 million, primarily for network enhancement and 5G mid-band deployment[55] - The company is required to maintain a Consolidated Leverage Ratio not to exceed 4.00 to 1.00 from April 1, 2024, and an Interest Coverage Ratio not lower than 3.00 to 1.00, with UScellular in compliance with all covenants as of March 31, 2024[51] Consolidated Cash Flow Analysis In Q1 2024, cash and cash equivalents increased by $31 million, driven by $203 million in operating cash flow and a positive free cash flow of $61 million, reversing a negative trend from the prior year Consolidated Cash Flow Summary (Q1 2024 vs. Q1 2023) | (Dollars in millions) | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $203 | $41 | | Net cash used in investing activities | ($144) | ($192) | | Net cash provided by (used in) financing activities | ($28) | $43 | | Net increase (decrease) in cash | $31 | ($108) | - The increase in operating cash flow in Q1 2024 was primarily due to net income of $24 million, non-cash adjustments of $175 million, and distributions from unconsolidated entities of $22 million, partially offset by an $18 million decrease from working capital changes[61] Free Cash Flow (Non-GAAP) | (Dollars in millions) | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Cash flows from operating activities (GAAP) | $203 | $41 | | Cash paid for additions to property, plant and equipment | ($133) | ($196) | | Cash paid for software license agreements | ($9) | ($7) | | Free cash flow (Non-GAAP) | $61 | ($162) | Consolidated Balance Sheet Analysis The balance sheet saw Property, plant and equipment (gross) decrease by $1.24 billion and accumulated depreciation by $1.20 billion due to CDMA network decommissioning, while accrued compensation decreased by $51 million from bonus payments - The gross basis of Property, plant and equipment decreased by $1,239 million, and Accumulated depreciation decreased by $1,203 million, mainly because of the decommissioning of fully depreciated assets from the CDMA network shutdown[66] - Accrued compensation decreased by $51 million, primarily due to the payment of associate bonuses in March 2024[67] Supplemental Information Relating to Non-GAAP Financial Measures This section defines and reconciles non-GAAP financial measures, with Q1 2024 Adjusted EBITDA at $272 million and Adjusted OIBDA at $228 million, both showing growth, and Free Cash Flow turning positive at $61 million Reconciliation of Net Income to Adjusted EBITDA and Adjusted OIBDA (Q1 2024) | (Dollars in millions) | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Net income (GAAP) | $24 | $14 | | Add back: Income tax, Interest, D&A | $236 | $228 | | EBITDA (Non-GAAP) | $260 | $242 | | Add back/deduct: Other adjustments | $12 | $10 | | Adjusted EBITDA (Non-GAAP) | $272 | $252 | | Deduct: Equity earnings, Interest income | $44 | $46 | | Adjusted OIBDA (Non-GAAP) | $228 | $206 | Free Cash Flow Reconciliation (Q1 2024) | (Dollars in millions) | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Cash flows from operating activities (GAAP) | $203 | $41 | | Less: Cash paid for PP&E | ($133) | ($196) | | Less: Cash paid for software licenses | ($9) | ($7) | | Free cash flow (Non-GAAP) | $61 | ($162) | Financial Statements (Unaudited) The unaudited Q1 2024 financial statements show total operating revenues of $950 million, net income of $18 million, total assets of $10.70 billion, and operating cash flow of $203 million, with accompanying notes detailing accounting policies and the strategic review impact Consolidated Statement of Operations For Q1 2024, UScellular reported $950 million in total operating revenues, with operating income increasing to $51 million and net income attributable to shareholders rising to $18 million, resulting in basic earnings per share of $0.21 Consolidated Statement of Operations Summary | (Dollars in millions) | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Total operating revenues | $950 | $986 | | Operating income | $51 | $26 | | Net income attributable to UScellular shareholders | $18 | $13 | | Basic earnings per share | $0.21 | $0.15 | | Diluted earnings per share | $0.20 | $0.15 | Consolidated Statement of Cash Flows In Q1 2024, net cash from operating activities was $203 million, investing activities used $144 million, and financing activities used $28 million, leading to a net increase in cash of $31 million and an end-of-period balance of $210 million Consolidated Statement of Cash Flows Summary | (Dollars in millions) | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $203 | $41 | | Net cash used in investing activities | ($144) | ($192) | | Net cash provided by (used in) financing activities | ($28) | $43 | | Net increase (decrease) in cash | $31 | ($108) | | Cash, cash equivalents and restricted cash, end of period | $210 | $200 | Consolidated Balance Sheet As of March 31, 2024, UScellular reported total assets of $10.70 billion, total liabilities of $5.03 billion, and total equity of $4.67 billion, with Licenses and net Property, plant and equipment as key assets Consolidated Balance Sheet Summary | (Dollars in millions) | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total current assets | $1,395 | $1,400 | | Total assets | $10,704 | $10,750 | | Total current liabilities | $837 | $901 | | Total liabilities | $5,031 | $5,101 | | Total equity | $4,673 | $4,642 | | Total liabilities and equity | $10,704 | $10,750 | Notes to Consolidated Financial Statements The notes detail accounting policies, revenue recognition, and debt, disclosing $7 million in strategic review expenses, $1.03 billion in net equipment installment plan receivables, compliance with debt covenants, and consolidation of Variable Interest Entities - The company incurred $7 million in third-party expenses related to the strategic alternatives review during Q1 2024, included in Selling, general and administrative expenses[112] - Net equipment installment plan receivables totaled $1,032 million as of March 31, 2024, down from $1,061 million at the end of 2023[127] - As of March 31, 2024, UScellular was in compliance with all financial covenants for its debt agreements, including leverage and interest coverage ratios[136] - UScellular consolidates several Variable Interest Entities (VIEs), including special purpose entities created to facilitate its receivables securitization program[137][138] Quantitative and Qualitative Disclosures About Market Risk UScellular is exposed to interest rate risk, with approximately 70% of its $2.975 billion long-term debt being fixed-rate and a weighted average interest rate of 6.4% as of March 31, 2024 - As of March 31, 2024, approximately 70% of UScellular's long-term debt was fixed-rate, with the remaining 30% being variable-rate debt, exposing the company to interest rate risk[86] Principal Payments Due on Long-Term Debt (as of March 31, 2024) | (Dollars in millions) | Long-Term Debt Obligations | Weighted-Avg. Interest Rate | | :--- | :--- | :--- | | Remainder of 2024 | $20 | 7.1% | | 2025 | $20 | 7.1% | | 2026 | $265 | 6.9% | | 2027 | $158 | 7.0% | | 2028 | $286 | 7.4% | | Thereafter | $2,226 | 6.2% | | Total | $2,975 | 6.4% | Controls and Procedures UScellular's management concluded that disclosure controls and procedures were effective as of March 31, 2024, with no material changes to internal control over financial reporting during Q1 2024 - UScellular's principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2024, at a reasonable assurance level[149] - No changes in internal controls over financial reporting occurred during Q1 2024 that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[150] Part II Risk Factors The company identifies no material changes to its 2023 Form 10-K risk factors, which include intense industry competition, uncertainty from the strategic alternatives review, spectrum acquisition challenges, and cyber-attack threats - The company faces intense competition in products, services, pricing, and network technology, which could adversely affect revenues or increase costs[80] - The ongoing process to explore strategic alternatives for UScellular creates uncertainty, with no assurance of successful completion or additional value, and could adversely impact the business[82] - UScellular has experienced and expects to continue experiencing cyber-attacks or other security breaches, which could have an adverse effect on its business and financial results[84] - The report states there are no material changes to the risk factors previously disclosed in the Form 10-K for the year ended December 31, 2023[85] Legal Proceedings The company reports no material changes to its legal proceedings since the end of the fiscal year 2023 - There have been no material changes to the legal proceedings information disclosed in the Form 10-K for the year ended December 31, 2023[151] Unregistered Sales of Equity Securities and Use of Proceeds UScellular has an authorized share repurchase program with 1,927,000 shares remaining for purchase as of March 31, 2024, but no repurchases were made during Q1 2024 - No purchases of UScellular Common Shares were made by or on behalf of the company during the first quarter of 2024[153] - The maximum number of shares remaining for purchase under the company's repurchase program was 1,927,000 as of March 31, 2024[153] Other Information During Q1 2024, no UScellular directors or officers adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements - No directors or officers adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the three months ended March 31, 2024[154] Exhibits This section lists exhibits filed with the Form 10-Q, including officer incentive plans, award agreements, officer certifications, and XBRL data files