Company Quick10K Filing
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United States Cellular
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$48.29 53 $2,580
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-21 Officers, Amend Bylaw, Shareholder Vote, Exhibits
8-K 2019-05-02 Earnings, Exhibits
8-K 2019-04-02 Officers, Exhibits
8-K 2019-03-12 Officers, Exhibits
8-K 2019-03-07 Officers
8-K 2019-02-22 Earnings, Exhibits
8-K 2018-11-02 Earnings, Exhibits
8-K 2018-08-14 Amend Bylaw, Exhibits
8-K 2018-08-03 Earnings, Exhibits
8-K 2018-05-22 Officers, Exhibits
8-K 2018-05-10 Enter Agreement, Leave Agreement, Off-BS Arrangement, Exhibits
8-K 2018-05-01 Earnings, Exhibits
8-K 2018-03-12 Officers, Exhibits
8-K 2018-03-08 Officers
8-K 2018-02-23 Officers
8-K 2018-02-19 Officers, Exhibits
SBUX Starbucks 94,350
ALL Allstate Life Insurance 31,440
GIS General Mills 30,780
PHI PLDT 5,180
SAVE Spirit Airlines 3,380
ASMB Assembly Biosciences 414
IDN Intellicheck 59
YEWB Yew Bio-Pharm 0
SRGZ Star Gold 0
EXE Crexendo 0
USM 2019-03-31
Note 1 Basis of Presentation
Note 2 Revenue Recognition
Note 3 Fair Value Measurements
Note 4 Equipment Installment Plans
Note 5 Earnings per Share
Note 6 Intangible Assets
Note 7 Investments in Unconsolidated Entities
Note 8 Leases
Note 9 Variable Interest Entities
EX-4.1 usm3312019exhibit41.htm
EX-31.1 usm3312019ex311.htm
EX-31.2 usm3312019ex312.htm
EX-32.1 usm3312019ex321.htm
EX-32.2 usm3312019ex322.htm

United States Cellular Earnings 2019-03-31

USM 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 usm331201910q.htm 10-Q Document
 
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 March 31, 2019
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 001-09712
uscelllogoa02.jpg
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
 
 
 
 
Yes
No
Indicate by check mark 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]
[ ]
 
 
 
 
 
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
[x]
[ ]
 
 
 
 
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
[ ]
 
Accelerated filer
 
[x]
Non-accelerated filer
[ ]
 
Smaller reporting company
 
[ ]
 
 
 
Emerging growth company
 
[ ]
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
[ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ]
[x]
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Shares, $1 par value
 
USM
 
New York Stock Exchange
6.95% Senior Notes Due 2060
 
UZA
 
New York Stock Exchange
7.25% Senior Notes Due 2063
 
UZB
 
New York Stock Exchange
7.25% Senior Notes Due 2064
 
UZC
 
New York Stock Exchange

The number of shares outstanding of each of the issuer's classes of common stock, as of March 31, 2019, is 53,348,200 Common Shares, $1 par value, and 33,005,900 Series A Common Shares, $1 par value.
 



United States Cellular Corporation
 
Quarterly Report on Form 10-Q
For the Period Ended March 31, 2019
 
 
Index
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




cacbe9711b2_image2a02.jpg
United States Cellular Corporation
Management’s Discussion and Analysis of
Financial Condition and Results of Operations 
Executive Overview
The following discussion and analysis compares United States Cellular Corporation’s (U.S. Cellular) financial results for the three months ended March 31, 2019, to the three months ended March 31, 2018. It should be read in conjunction with U.S. Cellular’s interim consolidated financial statements and notes included herein, and with the description of U.S. Cellular’s business, its audited consolidated financial statements and Management's Discussion and Analysis (MD&A) of Financial Condition and Results of Operations included in U.S. Cellular’s Annual Report on Form 10-K (Form 10-K) for the year ended December 31, 2018. Certain numbers included herein are rounded to millions for ease of presentation; however, certain calculated amounts and percentages are determined using the unrounded numbers. 
This report contains statements that are not based on historical facts, including the words “believes,” “anticipates,” “estimates,” “expects,” “plans,” “intends,” “projects” and similar expressions. These statements constitute and represent “forward looking statements” as this term is defined in the Private Securities Litigation Reform Act of 1995. Such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward looking statements. See Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement for additional information.
U.S. Cellular uses certain “non-GAAP financial measures” and each such measure is identified in the MD&A. A discussion of the reason U.S. Cellular determines these metrics to be useful and a reconciliation of these measures to their most directly comparable measures determined in accordance with accounting principles generally accepted in the United States of America (GAAP) are included in the Supplemental Information Relating to Non-GAAP Financial Measures section within the MD&A of this Form 10-Q Report.


1


General
U.S. Cellular owns, operates, and invests in wireless markets throughout the United States. U.S. Cellular is an 82%-owned subsidiary of Telephone and Data Systems, Inc. (TDS). U.S. Cellular’s strategy is to attract and retain wireless customers through a value proposition comprised of a high-quality network, outstanding customer service, and competitive devices, plans, and pricing, all provided with a local focus.
 
OPERATIONS
a10kusmholdings1903a02.jpg 

Serves customers with 5.0 million connections including 4.4 million postpaid, 0.5 million prepaid and 0.1 million reseller and other connections
Operates in 21 states
Employs approximately 5,500 associates
6,537 cell sites including 4,106 owned towers in service
 


2


U.S. Cellular Mission and Strategy
U.S. Cellular’s mission is to provide exceptional wireless communication services which enhance consumers’ lives, increase the competitiveness of local businesses, and improve the efficiency of government operations in the mid-sized and rural markets served.
In 2019, U.S. Cellular continues to execute on its strategies to grow and protect its current customer base, grow revenues, drive improvements in the overall cost structure, and invest in its network and system capabilities. Strategic efforts include:
U.S. Cellular continues to offer economical and competitively priced service plans and devices to its customers, and is focused on increasing revenues from sales of related products such as accessories and device protection plans and from new services such as fixed wireless broadband. In addition, U.S. Cellular is focused on expanding its solutions available to business and government customers, including a growing suite of connected machine-to-machine solutions and software applications across various categories.
U.S. Cellular continues to devote efforts to enhance its network capabilities. VoLTE technology has been launched successfully in California, Iowa, Oregon, Washington and Wisconsin, and deployments in several additional operating markets will occur in 2019. VoLTE technology allows customers to utilize a 4G LTE network for both voice and data services, and offers enhanced services such as high definition voice and simultaneous voice and data sessions. In addition, the deployment of VoLTE technology expands U.S. Cellular’s ability to offer roaming services to other wireless carriers. 
U.S. Cellular also is committed to continuous technology innovation and has begun to deploy 5G technology. 5G technology is expected to help address customers’ growing demand for data services as well as create opportunities for new services requiring high speed, reliability and low latency. U.S. Cellular is working with leading companies in the wireless infrastructure and handset ecosystem to provide rich 5G experiences for customers. In addition, in the markets where U.S. Cellular commercially deploys 5G technology, customers using U.S. Cellular’s 4G LTE network will experience increased network speed due to U.S. Cellular's modernization efforts.
U.S. Cellular assesses its existing wireless interests on an ongoing basis with a goal of improving the competitiveness of its operations and maximizing its long-term return on capital. As part of this strategy, U.S. Cellular actively seeks attractive opportunities to acquire wireless spectrum, including pursuant to FCC auctions.

3


Terms Used by U.S. Cellular
The following is a list of definitions of certain industry terms that are used throughout this document:
4G LTEfourth generation Long-Term Evolution, which is a wireless technology that enables more network capacity for more data per user as well as faster access to data compared to third generation (3G) technology.
5Gfifth generation wireless technology that is expected to help address customers’ growing demand for data services as well as create opportunities for new services requiring high speed and reliability as well as low latency.
Account – represents an individual or business financially responsible for one or multiple associated connections. An account may include a variety of types of connections such as handsets and connected devices.
Churn Rate – represents the percentage of the connections that disconnect service each month. These rates represent the average monthly churn rate for each respective period.
Connections – individual lines of service associated with each device activated by a customer. Connections are associated with all types of devices that connect directly to the U.S. Cellular network.
Connected Devices – non-handset devices that connect directly to the U.S. Cellular network. Connected devices include products such as tablets, wearables, modems, and hotspots.
EBITDA – refers to earnings before interest, taxes, depreciation, amortization and accretion and is used in the non-GAAP metric Adjusted EBITDA throughout this document. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information.
Free Cash Flow – non-GAAP metric defined as Cash flows from operating activities less Cash paid for additions to property, plant and equipment. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information.
Gross Additions – represents the total number of new connections added during the period, without regard to connections that were terminated during that period.
Machine-to-Machine (M2M) – technology that involves the transmission of data between networked devices, as well as the performance of actions by devices without human intervention. U.S. Cellular sells and supports M2M solutions to customers, provides connectivity for M2M solutions via the U.S. Cellular network, and has agreements with device manufacturers and software developers which offer M2M solutions.
Net Additions – represents the total number of new connections added during the period, net of connections that were terminated during that period.
OIBDA – refers to operating income before depreciation, amortization and accretion and is used in the non-GAAP metric Adjusted OIBDA throughout this document. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information.
Partial Economic Areas – service areas of certain FCC licenses based on geography.
Postpaid Average Revenue per Account (Postpaid ARPA) – metric which is calculated by dividing total postpaid service revenues by the average number of postpaid accounts and by the number of months in the period.
Postpaid Average Revenue per User (Postpaid ARPU) – metric which is calculated by dividing total postpaid service revenues by the average number of postpaid connections and by the number of months in the period.
Retail Connections – the sum of postpaid connections and prepaid connections.
Tax Act – refers to comprehensive federal tax legislation enacted on December 22, 2017, which made broad changes to the U.S. tax code. Now titled H.R.1, the Tax Act was originally identified as the Tax Cuts and Jobs Act of 2017.
Universal Service Fund (USF) – a system of telecommunications collected fees and support payments managed by the FCC intended to promote universal access to telecommunications services in the United States.
VoLTE – Voice over Long-Term Evolution is a technology specification that defines the standards and procedures for delivering voice communications and related services over 4G LTE networks.

4


Operational Overview
chart-dbef9d72e5285913bc0.jpg
 
 
 
 
 
 
 
 
 
 
 
 
 
As of March 31,
 
2019
 
2018
Retail Connections – End of Period
 
 
 
Postpaid
 
4,440,000
 
4,481,000
 
Prepaid
 
503,000
 
525,000
 
Total
 
4,943,000
 
5,006,000
 
 
 
 
 
 
 
 
 
 
 
 

 
Q1 2019
 
Q1 2018
 
Q1 2019 vs.
Q1 2018
Postpaid Activity and Churn
Gross Additions
 
 
 
 
 
Handsets
102,000

 
96,000

 
6
%
Connected Devices
35,000

 
33,000

 
6
%
Total Gross Additions
137,000

 
129,000

 
6
%
Net (Losses)
 
 
 
 
 
Handsets
(14,000
)
 
(16,000
)
 
13
%
Connected Devices
(18,000
)
 
(21,000
)
 
14
%
Total Net (Losses)
(32,000
)
 
(37,000
)
 
14
%
Churn
 
 
 
 
 
Handsets
0.99
%
 
0.97
%
 
 
Connected Devices
3.08
%
 
2.79
%
 
 
Total Churn
1.26
%
 
1.23
%
 
 
Postpaid gross additions for the three months ended March 31, 2019 were 137,000, an increase of 8,000 when compared to the same period last year. Gross additions of both handsets and connected devices were higher, with the increase in handsets driven by more aggressive promotions offered in the first quarter of 2019 compared to the prior year. The increase in gross additions was partly offset by higher handset disconnects but drove improved net postpaid activity on a year-over-year basis.
Total postpaid churn increased as heavily discounted tablets sold in connection with various past promotions continue to reach the end of their service contracts, as well as aggressive, industry-wide handset promotional activity.
Postpaid Revenue
 
Three Months Ended
March 31,
 
2019
 
2018
Average Revenue Per User (ARPU)
$
45.44

 
$
44.34

Average Revenue Per Account (ARPA)
$
118.84

 
$
118.22

Postpaid ARPU and Postpaid ARPA increased for the three months ended March 31, 2019, when compared to the same period last year, due to several factors including: having proportionately more handset connections, which on a per-unit basis contribute more revenue than connected device connections; a shift in mix to higher-priced service plans; and an increase in device protection plan revenues.



5


Financial Overview
 
Three Months Ended
March 31,
 
2019
 
2018
 
2019 vs. 2018
(Dollars in millions)
 
 
 
 
 
Retail service
$
659

 
$
649

 
2
 %
Inbound roaming
34

 
27

 
22
 %
Other
48

 
48

 
1
 %
Service revenues
741

 
724

 
2
 %
Equipment sales
225

 
218

 
3
 %
Total operating revenues
966

 
942

 
3
 %
 
 
 
 
 
 
System operations (excluding Depreciation, amortization and accretion reported below)
176

 
179

 
(1
)%
Cost of equipment sold
233

 
219

 
7
 %
Selling, general and administrative
326

 
326

 

Depreciation, amortization and accretion
169

 
159

 
6
 %
(Gain) loss on asset disposals, net
2

 
1

 
55
 %
(Gain) loss on sale of business and other exit costs, net
(2
)
 

 
N/M

(Gain) loss on license sales and exchanges, net
(2
)
 
(7
)
 
69
 %
Total operating expenses
902

 
877

 
3
 %
 
 
 
 
 
 
Operating income
$
64

 
$
65

 
(1
)%
 
 
 
 
 
 
Net income
$
58

 
$
55

 
6
 %
Adjusted OIBDA (Non-GAAP)1
$
231

 
$
218

 
6
 %
Adjusted EBITDA (Non-GAAP)1
$
281

 
$
259

 
8
 %
Capital expenditures
$
102

 
$
70

 
46
 %
N/M - Percentage change not meaningful
1
Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.

6


 
Operating Revenues
Three Months Ended March 31, 2019 and 2018
(Dollars in millions)
chart-dda3fff5fe295a75af2.jpg
 
 


Service revenues consist of:
Retail Service - Charges for access, airtime, recovery of regulatory costs and value added services, including data services and products
Inbound Roaming - Charges to other wireless carriers whose customers use U.S. Cellular’s wireless systems when roaming
Other Service - Amounts received from the Federal USF, tower rental revenues, and miscellaneous other service revenues
Equipment revenues consist of:
Sales of wireless devices and related accessories to new and existing customers, agents, and third-party distributors

Key components of changes in the statement of operations line items were as follows:
Total operating revenues
Retail service revenues increased for the three months ended March 31, 2019, primarily as a result of the increase in Postpaid ARPU as previously discussed in the Operational Overview section.
Inbound roaming revenues increased for the three months ended March 31, 2019, primarily driven by higher data usage, partially offset by lower rates.
Equipment sales revenues increased for the three months ended March 31, 2019, due to an increase in the average revenue per device sold, partially offset by a decrease in the number of devices sold.
System operations expenses
System operations expenses decreased for the three months ended March 31, 2019, due to (i) lower customer usage expenses driven primarily by decreased circuit costs and (ii) lower maintenance, utility and cell site rent expenses. Such factors were offset by an increase in roaming expense as a result of higher data roaming usage, partially offset by lower rates.
Cost of equipment sold
Cost of equipment sold increased for the three months ended March 31, 2019, due to a higher average cost per device sold, partially offset by a decrease in the number of devices sold.
Depreciation, amortization and accretion
Depreciation, amortization, and accretion increased for the three months ended March 31, 2019, due to additional network assets being placed into service and acceleration of depreciation of certain assets due to changes in network technology.


7


Components of Other Income (Expense)
 
Three Months Ended
March 31,
 
2019
 
2018
 
2019 vs. 2018
(Dollars in millions)
 
 
 
 
 
Operating income
$
64

 
$
65

 
(1
)%
 
 
 
 
 
 
Equity in earnings of unconsolidated entities
44

 
38

 
16
 %
Interest and dividend income
6

 
4

 
59
 %
Interest expense
(29
)
 
(29
)
 

Other, net

 
(1
)
 
92
 %
Total investment and other income
21

 
12

 
65
 %
 
 
 
 
 
 
Income before income taxes
85

 
77

 
10
 %
Income tax expense
27

 
22

 
20
 %
 
 
 
 
 
 
Net income
58

 
55

 
6
 %
Less: Net income attributable to noncontrolling interests, net of tax
4

 
10

 
(64
)%
Net income attributable to U.S. Cellular shareholders
$
54

 
$
45

 
22
 %
Equity in earnings of unconsolidated entities
Equity in earnings of unconsolidated entities represents U.S. Cellular’s share of net income from entities in which it has a noncontrolling interest and that are accounted for by the equity method. U.S. Cellular’s investment in the Los Angeles SMSA Limited Partnership (LA Partnership) contributed $21 million and $19 million in earnings of unconsolidated entities for the three months ended March 31, 2019 and 2018, respectively. See Note 7Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.
Interest and dividend income
Interest and dividend income increased as a result of an increase in U.S. Cellular's money market investments balance, classified within Cash and cash equivalents, in 2019.
Income tax expense
The effective tax rate on Income before income taxes for the three months ended March 31, 2019 and 2018, was 31.4% and 28.8%, respectively. The higher rate in 2019 as compared to 2018 is due primarily to a discrete benefit recorded in the first quarter of 2018 to adjust a provisional estimate made in conjunction with the Tax Act.
Net income attributable to noncontrolling interests, net of tax
Net income attributable to noncontrolling interests, net of tax decreased during the three months ended March 31, 2019, due primarily to an out-of-period adjustment recorded in the first quarter of 2018. See Note 9Variable Interest Entities in the Notes to Consolidated Financial Statements for additional information.

8


Liquidity and Capital Resources
Sources of Liquidity
U.S. Cellular operates a capital-intensive business. Historically, U.S. Cellular has used internally-generated funds and also has obtained substantial funds from external sources for general corporate purposes. In the past, U.S. Cellular’s existing cash and investment balances, funds available under its revolving credit and receivables securitization agreements, funds from other financing sources, including a term loan and other long-term debt, and cash flows from operating and certain investing and financing activities, including sales of assets or businesses, provided sufficient liquidity and financial flexibility for U.S. Cellular to meet its normal day-to-day operating needs and debt service requirements, to finance the build-out and enhancement of markets and to fund acquisitions, primarily of spectrum licenses. There is no assurance that this will be the case in the future. See Market Risk for additional information regarding maturities of long-term debt.
Although U.S. Cellular currently has a significant cash balance, U.S. Cellular has incurred negative free cash flow at times in the past and this could occur in the future. However, U.S. Cellular believes that existing cash and investment balances, funds available under its revolving credit and receivables securitization agreements, and expected cash flows from operating and investing activities will provide sufficient liquidity for U.S. Cellular to meet its normal day-to-day operating needs and debt service requirements for the coming year. 
U.S. Cellular may require substantial additional capital for, among other uses, funding day-to-day operating needs including working capital, acquisitions of providers of wireless telecommunications services, spectrum license or system acquisitions, capital expenditures, debt service requirements, the repurchase of shares, the payment of dividends, or making additional investments. U.S. Cellular is a qualified bidder for spectrum auctions during 2019 (see Regulatory Matters - Millimeter Wave Spectrum Auctions), and expects capital expenditures in 2019 to be higher than in 2018, due primarily to investments to enhance network speed and capacity and to deploy 5G technology. It may be necessary from time to time to increase the size of the existing revolving credit agreement, to put in place a new credit agreement, or to obtain other forms of financing in order to fund potential expenditures. U.S. Cellular’s liquidity would be adversely affected if, among other things, U.S. Cellular is unable to obtain short- or long-term financing on acceptable terms, U.S. Cellular makes significant spectrum license purchases, the LA Partnership discontinues or significantly reduces distributions compared to historical levels, or Federal USF and/or other regulatory support payments decline. 
U.S. Cellular’s credit rating currently is sub-investment grade. There can be no assurance that sufficient funds will continue to be available to U.S. Cellular or its subsidiaries on terms or at prices acceptable to U.S. Cellular. Insufficient cash flows from operating activities, changes in U.S. Cellular's credit ratings, defaults of the terms of debt or credit agreements, uncertainty of access to capital, deterioration in the capital markets, reduced regulatory capital at banks which in turn limits their ability to borrow and lend, other changes in the performance of U.S. Cellular or in market conditions or other factors could limit or restrict the availability of financing on terms and prices acceptable to U.S. Cellular, which could require U.S. Cellular to reduce its acquisition, capital expenditure and business development programs, reduce the acquisition of spectrum licenses, and/or reduce or cease share repurchases and/or the payment of dividends. Any of the foregoing developments would have an adverse impact on U.S. Cellular’s business, financial condition or results of operations. U.S. Cellular cannot provide assurance that circumstances that could have a material adverse effect on its liquidity or capital resources will not occur.
Cash and Cash Equivalents
Cash and cash equivalents include cash and money market investments. The primary objective of U.S. Cellular’s Cash and cash equivalents is for use in its operations and acquisition, capital expenditure and business development programs.
 
Cash and Cash Equivalents
(Dollars in millions)
chart-43050ccd7181517cb63.jpg
 

At March 31, 2019, U.S. Cellular's cash and cash equivalents totaled $648 million compared to $580 million at December 31, 2018.
The majority of U.S. Cellular’s Cash and cash equivalents is held in bank deposit accounts and in money market funds that purchase only debt issued by the U.S. Treasury or U.S. government agencies across a range of eligible money market investments that may include, but are not limited to, government agency repurchase agreements, government agency debt, U.S. Treasury repurchase agreements, U.S. Treasury debt, and other securities collateralized by U.S. government obligations. U.S. Cellular monitors the financial viability of the money market funds and believes that the credit risk associated with these investments is low.
 

9


Financing
U.S. Cellular has an unsecured revolving credit agreement available for general corporate purposes including spectrum purchases and capital expenditures. This credit agreement matures in May 2023. As of March 31, 2019, there were no outstanding borrowings under the revolving credit agreement, except for letters of credit, and the unused borrowing capacity was $298 million.
In March 2019, U.S. Cellular amended its senior term loan credit agreement in order to reduce the interest rate. There were no significant changes to the maturity date or other key terms of the agreement.
U.S. Cellular believes that it was in compliance with all of the financial covenants and requirements set forth in its revolving credit agreement and the senior term loan credit agreement as of March 31, 2019.
U.S. Cellular, through its subsidiaries, also has a receivables securitization agreement to permit securitized borrowings using its equipment installment plan receivables for general corporate purposes. The unused capacity under this agreement was $200 million as of March 31, 2019, subject to sufficient collateral to satisfy the asset borrowing base provisions of the agreement. As of March 31, 2019, the USCC Master Note Trust (Trust) held $78 million of assets available to be pledged as collateral for the receivables securitization agreement. U.S. Cellular believes that it was in compliance with all of the financial covenants and requirements set forth in its receivables securitization agreement as of that date.
U.S. Cellular has in place an effective shelf registration statement on Form S-3 to issue senior or subordinated debt securities.
Long-term debt payments due for the remainder of 2019 and the next four years are $200 million, which represent 12% of the total gross long-term debt obligation at March 31, 2019.
Capital Expenditures
Capital expenditures (i.e., additions to property, plant and equipment and system development expenditures), which include the effects of accruals and capitalized interest, for the three months ended March 31, 2019 and 2018, were as follows:
 
Capital Expenditures
(Dollars in millions)
chart-676c0d5336685e659ce.jpg
 


U.S. Cellular’s capital expenditures for the three months ended March 31, 2019 and 2018, were $102 million and $70 million, respectively.
Capital expenditures for the full year 2019 are expected to be between $625 million and $725 million. These expenditures are expected to be used principally for the following purposes:
Enhance and maintain U.S. Cellular's network coverage, including continuing to deploy VoLTE technology in certain markets and providing additional speed and capacity to accommodate increased data usage by current customers;
Deploy 5G technology; and
Invest in information technology to support existing and new services and products.
 
U.S. Cellular intends to finance its capital expenditures for 2019 using primarily Cash flows from operating activities, existing cash balances and, if required, its receivables securitization and/or revolving credit agreements.
Acquisitions, Divestitures and Exchanges
U.S. Cellular may be engaged from time to time in negotiations (subject to all applicable regulations) relating to the acquisition, divestiture or exchange of companies, properties or wireless spectrum. In general, U.S. Cellular may not disclose such transactions until there is a definitive agreement. U.S. Cellular assesses its existing wireless interests on an ongoing basis with a goal of improving the competitiveness of its operations and its long-term return on capital. As part of this strategy, U.S. Cellular actively seeks attractive opportunities to acquire wireless spectrum, including pursuant to FCC auctions. U.S. Cellular also may seek to divest outright or include in exchanges for other wireless interests those interests that are not strategic to its long-term success.

10


Variable Interest Entities
U.S. Cellular consolidates certain “variable interest entities” as defined under GAAP. See Note 9Variable Interest Entities in the Notes to Consolidated Financial Statements for additional information related to these variable interest entities. U.S. Cellular may elect to make additional capital contributions and/or advances to these variable interest entities in future periods in order to fund their operations.
Common Share Repurchase Program
U.S. Cellular has repurchased and expects to continue to repurchase its Common Shares, subject to its repurchase program. However, there were no share repurchases made under this program in the three months ended March 31, 2019, or in the year ended December 31, 2018.
As of March 31, 2019, the total cumulative amount of U.S. Cellular Common Shares authorized to be purchased is 5,901,000. For additional information related to the current repurchase authorization, see Unregistered Sales of Equity Securities and Use of Proceeds. 
Contractual and Other Obligations
There were no material changes outside the ordinary course of business between December 31, 2018 and March 31, 2019, to the Contractual and Other Obligations disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in U.S. Cellular’s Form 10-K for the year ended December 31, 2018.
Subsequent to March 31, 2019, U.S. Cellular committed to purchase spectrum licenses in the amount of $120 million, subject to regulatory approval.  This purchase obligation is expected to be paid in 2019.
Off-Balance Sheet Arrangements
U.S. Cellular had no transactions, agreements or other contractual arrangements with unconsolidated entities involving “off-balance sheet arrangements,” as defined by SEC rules, that had or are reasonably likely to have a material current or future effect on its financial condition, results of operations, liquidity, capital expenditures or capital resources.

11


Consolidated Cash Flow Analysis
U.S. Cellular operates a capital- and marketing-intensive business. U.S. Cellular makes substantial investments to acquire wireless licenses and properties and to construct and upgrade wireless telecommunications networks and facilities as a basis for creating long-term value for shareholders. In recent years, rapid changes in technology and new opportunities have required substantial investments in potentially revenue‑enhancing and cost-saving upgrades to U.S. Cellular’s networks. U.S. Cellular utilizes cash on hand, cash from operating activities, cash proceeds from divestitures and dispositions of investments, and short-term and long-term debt financing to fund its acquisitions (including spectrum licenses), construction costs, operating expenses and share repurchases. Cash flows may fluctuate from quarter to quarter and year to year due to seasonality, the timing of acquisitions and divestitures, capital expenditures and other factors. The following discussion summarizes U.S. Cellular's cash flow activities for the three months ended March 31, 2019 and 2018.
2019 Commentary
U.S. Cellular’s Cash, cash equivalents and restricted cash increased $69 million in the first quarter of 2019. Net cash provided by operating activities was $287 million in 2019 due to net income of $58 million plus non-cash items of $174 million, distributions received from unconsolidated entities of $18 million, and changes in working capital items which increased net cash by $37 million. The working capital changes were primarily influenced by timing of vendor payments and collections of customer and agent receivables, partially offset by annual employee bonus payments.
Cash flows used for investing activities were $212 million. Cash paid for additions to property, plant and equipment in 2019 totaled $107 million. Advance payments for license acquisitions were $135 million. These were partially offset by Cash received from divestitures and exchanges of $31 million.
Cash flows used for financing activities were $6 million, reflecting ordinary activity such as the scheduled repayments of debt.
2018 Commentary
U.S. Cellular’s Cash, cash equivalents and restricted cash increased $158 million in the first quarter of 2018. Net cash provided by operating activities was $188 million in 2018 due primarily to net income of $55 million plus non-cash items of $158 million and distributions received from unconsolidated entities of $17 million. This was partially offset by changes in working capital items which decreased net cash by $42 million. The working capital changes were primarily influenced by timing of annual employee bonus, vendor and tax payments, partially offset by collections of customer and agent receivables.
Cash flows used for investing activities were $23 million. Cash paid for additions to property, plant and equipment in 2018 totaled $76 million. This was partially offset by cash received from investments of $50 million, resulting from the redemption of short-term Treasury bills.
Cash flows used for financing activities were $7 million, reflecting ordinary activity such as the scheduled repayments of debt.

12


Consolidated Balance Sheet Analysis
The following discussion addresses certain captions in the consolidated balance sheet and changes therein. This discussion is intended to highlight the significant changes and is not intended to fully reconcile the changes. Changes in financial condition during 2019 were as follows:
Assets held for sale
Assets held for sale decreased $54 million. Certain sale and exchange agreements that U.S. Cellular entered into in 2018 closed in the first quarter of 2019.
Operating lease right-of-use assets
Operating lease right-of-use assets increased $888 million due to the adoption of Accounting Standards Codification (ASC) 842. See Note 8Leases in the Notes to Consolidated Financial Statements for additional information.
Other assets and deferred charges
Other assets and deferred charges increased $105 million due primarily to advance payments for license acquisitions.
Accounts payable — trade
Accounts payable — trade increased $51 million due primarily to the timing of vendor invoice payments.
Accrued compensation
Accrued compensation decreased $36 million due primarily to employee bonus payments in March 2019.
Short-term operating lease liabilities
Short-term operating lease liabilities increased $99 million due to the adoption of ASC 842. See Note 8Leases in the Notes to Consolidated Financial Statements for additional information.
Long-term operating lease liabilities
Long-term operating lease liabilities increased $858 million due to the adoption of ASC 842. See Note 8Leases in the Notes to Consolidated Financial Statements for additional information.
Other deferred liabilities and credits
Other deferred liabilities and credits decreased $93 million due primarily to the adoption of ASC 842. See Note 8Leases in the Notes to Consolidated Financial Statements for additional information.


13


Supplemental Information Relating to Non-GAAP Financial Measures
U.S. Cellular sometimes uses information derived from consolidated financial information but not presented in its financial statements prepared in accordance with U.S. GAAP to evaluate the performance of its business. Certain of these measures are considered “non-GAAP financial measures” under U.S. Securities and Exchange Commission Rules. Specifically, U.S. Cellular has referred to the following measures in this Form 10-Q Report:
EBITDA
Adjusted EBITDA
Adjusted OIBDA
Free cash flow
 
Following are explanations of each of these measures.

EBITDA, Adjusted EBITDA and Adjusted OIBDA
EBITDA, Adjusted EBITDA and Adjusted OIBDA are defined as net income adjusted for the items set forth in the reconciliation below. EBITDA, Adjusted EBITDA and Adjusted OIBDA are not measures of financial performance under GAAP and should not be considered as alternatives to Net income or Cash flows from operating activities, as indicators of cash flows or as measures of liquidity. U.S. Cellular does not intend to imply that any such items set forth in the reconciliation below are non-recurring, infrequent or unusual; such items may occur in the future.
Management uses Adjusted EBITDA and Adjusted OIBDA as measurements of profitability and, therefore, reconciliations to Net income are deemed appropriate. Management believes Adjusted EBITDA and Adjusted OIBDA are useful measures of U.S. Cellular’s operating results before significant recurring non-cash charges, gains and losses, and other items as presented below as they provide additional relevant and useful information to investors and other users of U.S. Cellular’s financial data in evaluating the effectiveness of its operations and underlying business trends in a manner that is consistent with management’s evaluation of business performance. Adjusted EBITDA shows adjusted earnings before interest, taxes, depreciation, amortization and accretion, and gains and losses, while Adjusted OIBDA reduces this measure further to exclude Equity in earnings of unconsolidated entities and Interest and dividend income in order to more effectively show the performance of operating activities excluding investment activities. The following table reconciles EBITDA, Adjusted EBITDA and Adjusted OIBDA to the corresponding GAAP measure, Net income and Operating income.

14


 
Three Months Ended
March 31,
 
2019
 
2018
(Dollars in millions)
 
 
 
Net income (GAAP)
$
58

 
$
55

Add back:

 

Income tax expense
27

 
22

Interest expense
29

 
29

Depreciation, amortization and accretion
169

 
159

EBITDA (Non-GAAP)
283

 
265

Add back or deduct:

 

(Gain) loss on asset disposals, net
2

 
1

(Gain) loss on sale of business and other exit costs, net
(2
)
 

(Gain) loss on license sales and exchanges, net
(2
)
 
(7
)
Adjusted EBITDA (Non-GAAP)
281

 
259

Deduct:

 

Equity in earnings of unconsolidated entities
44

 
38

Interest and dividend income
6

 
4

Other, net

 
(1
)
Adjusted OIBDA (Non-GAAP)
231

 
218

Deduct:

 

Depreciation, amortization and accretion
169

 
159

(Gain) loss on asset disposals, net
2

 
1

(Gain) loss on sale of business and other exit costs, net
(2
)
 

(Gain) loss on license sales and exchanges, net
(2
)
 
(7
)
Operating income (GAAP)
$
64

 
$
65


Free Cash Flow
The following table presents Free cash flow, which is defined as Cash flows from operating activities less Cash paid for additions to property, plant and equipment. Free cash flow is a non-GAAP financial measure which U.S. Cellular believes may be useful to investors and other users of its financial information in evaluating liquidity, specifically, the amount of net cash generated by business operations after deducting Cash paid for additions to property, plant and equipment. 
 
Three Months Ended
March 31,
 
2019
 
2018
(Dollars in millions)
 
 
 
Cash flows from operating activities (GAAP)
$
287

 
$
188

Less: Cash paid for additions to property, plant and equipment
107

 
76

Free cash flow (Non-GAAP)
$
180

 
$
112

 



15


Application of Critical Accounting Policies and Estimates
U.S. Cellular prepares its consolidated financial statements in accordance with GAAP. U.S. Cellular’s significant accounting policies are discussed in detail in Note 1 — Summary of Significant Accounting Policies and Recent Accounting Pronouncements and Note 2 — Revenue Recognition in the Notes to Consolidated Financial Statements and U.S. Cellular’s Application of Critical Accounting Policies and Estimates is discussed in detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are included in U.S. Cellular’s Form 10-K for the year ended December 31, 2018
Recent Accounting Pronouncements
See Note 1Basis of Presentation and Note 8Leases in the Notes to Consolidated Financial Statements for information on recent accounting pronouncements.
Regulatory Matters
Millimeter Wave Spectrum Auctions
At its open meeting on August 2, 2018, the FCC adopted a public notice establishing procedures for two auctions of spectrum licenses in the 28 GHz and 24 GHz bands. The 28 GHz auction (Auction 101) commenced on November 14, 2018 and closed on January 24, 2019. Auction 101 offered two 425 MHz licenses in the 28 GHz band over portions of the United States that do not have incumbent licensees. The 24 GHz auction (Auction 102) commenced on March 14, 2019 and is offering up to seven 100 MHz licenses in the 24 GHz band in Partial Economic Areas covering most of the United States. The initial phase of Auction 102 closed on April 17, 2019, and the FCC has announced that the assignment phase for this auction will commence on May 3, 2019. U.S. Cellular filed applications to participate in both auctions on September 18, 2018, and was announced as a qualified bidder for Auction 101 on October 31, 2018 and as a qualified bidder for Auction 102 on February 27, 2019.
Also, at the open meeting on August 2, 2018, the FCC adopted a Further Notice of Proposed Rulemaking in preparation for an additional Millimeter Wave auction offering licenses in the 37, 39 and 47 GHz bands (Auction 103). On April 12, 2019, the FCC announced that it intends to start Auction 103 on December 10, 2019.


16


Private Securities Litigation Reform Act of 1995
Safe Harbor Cautionary Statement
 
This Form 10-Q, including exhibits, contains statements that are not based on historical facts and represent forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, that address activities, events or developments that U.S. Cellular intends, expects, projects, believes, estimates, plans or anticipates will or may occur in the future are forward-looking statements. The words “believes,” “anticipates,” “estimates,” “expects,” “plans,” “intends,” “projects” and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, but are not limited to, those set forth below, as more fully described under “Risk Factors” in U.S. Cellular’s Form 10-K for the year ended December 31, 2018. Each of the following risks could have a material adverse effect on U.S. Cellular’s business, financial condition or results of operations. However, such factors are not necessarily all of the important factors that could cause actual results, performance or achievements to differ materially from those expressed in, or implied by, the forward-looking statements contained in this document. Other unknown or unpredictable factors also could have material adverse effects on future results, performance or achievements. U.S. Cellular undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. You should carefully consider the Risk Factors in U.S. Cellular’s Form 10-K for the year ended December 31, 2018, the following factors and other information contained in, or incorporated by reference into, this Form 10-Q to understand the material risks relating to U.S. Cellular’s business, financial condition or results of operations.
Intense competition in the markets in which U.S. Cellular operates could adversely affect U.S. Cellular’s revenues or increase its costs to compete.
A failure by U.S. Cellular to successfully execute its business strategy (including planned acquisitions, spectrum acquisitions, divestitures and exchanges) or allocate resources or capital effectively could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
Uncertainty in U.S. Cellular’s future cash flow and liquidity or the inability to access capital, deterioration in the capital markets, other changes in U.S. Cellular’s performance or market conditions, changes in U.S. Cellular’s credit ratings or other factors could limit or restrict the availability of financing on terms and prices acceptable to U.S. Cellular, which could require U.S. Cellular to reduce its construction, development or acquisition programs, reduce the amount of spectrum licenses acquired, and/or reduce or cease share repurchases.
U.S. Cellular has a significant amount of indebtedness which could adversely affect its financial performance and in turn adversely affect its ability to make payments on its indebtedness, comply with terms of debt covenants and incur additional debt.
Changes in roaming practices or other factors could cause U.S. Cellular's roaming revenues to decline from current levels, roaming expenses to increase from current levels and/or impact U.S. Cellular's ability to service its customers in geographic areas where U.S. Cellular does not have its own network, which could have an adverse effect on U.S. Cellular's business, financial condition or results of operations.
A failure by U.S. Cellular to obtain access to adequate radio spectrum to meet current or anticipated future needs and/or to accurately predict future needs for radio spectrum could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
To the extent conducted by the FCC, U.S. Cellular may participate in FCC auctions for additional spectrum or for funding in certain Universal Service programs in the future directly or indirectly and, during certain periods, will be subject to the FCC’s anti-collusion rules, which could have an adverse effect on U.S. Cellular.
Failure by U.S. Cellular to timely or fully comply with any existing applicable legislative and/or regulatory requirements or changes thereto could adversely affect U.S. Cellular’s business, financial condition or results of operations.
An inability to attract people of outstanding talent throughout all levels of the organization, to develop their potential through education and assignments, and to retain them by keeping them engaged, challenged and properly rewarded could have an adverse effect on U.S. Cellular's business, financial condition or results of operations.
U.S. Cellular’s assets and revenue are concentrated in the U.S. wireless telecommunications industry. Consequently, its operating results may fluctuate based on factors related primarily to conditions in this industry.
U.S. Cellular’s smaller scale relative to larger competitors that may have greater financial and other resources than U.S. Cellular could cause U.S. Cellular to be unable to compete successfully, which could adversely affect its business, financial condition or results of operations.

17


Changes in various business factors , including changes in demand, customer preferences and perceptions, price competition, churn from customer switching activity and other factors, could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
Advances or changes in technology could render certain technologies used by U.S. Cellular obsolete, could put U.S. Cellular at a competitive disadvantage, could reduce U.S. Cellular’s revenues or could increase its costs of doing business.
Complexities associated with deploying new technologies present substantial risk and U.S. Cellular investments in unproven technologies may not produce the benefits that U.S. Cellular expects.
U.S. Cellular receives regulatory support and is subject to numerous surcharges and fees from federal, state and local governments, and the applicability and the amount of the support and fees are subject to great uncertainty, which could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
Performance under device purchase agreements could have a material adverse impact on U.S. Cellular's business, financial condition or results of operations.
Changes in U.S. Cellular’s enterprise value, changes in the market supply or demand for wireless licenses, adverse developments in the business or the industry in which U.S. Cellular is involved and/or other factors could require U.S. Cellular to recognize impairments in the carrying value of its licenses and/or physical assets.
Costs, integration problems or other factors associated with acquisitions, divestitures or exchanges of properties or licenses and/or expansion of U.S. Cellular’s business could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
A failure by U.S. Cellular to complete significant network construction and systems implementation activities as part of its plans to improve the quality, coverage, capabilities and capacity of its network, support and other systems and infrastructure could have an adverse effect on its operations.
Difficulties involving third parties with which U.S. Cellular does business, including changes in U.S. Cellular's relationships with or financial or operational difficulties of key suppliers or independent agents and third party national retailers who market U.S. Cellular’s services, could adversely affect U.S. Cellular’s business, financial condition or results of operations.
U.S. Cellular has significant investments in entities that it does not control. Losses in the value of such investments could have an adverse effect on U.S. Cellular’s financial condition or results of operations.
A failure by U.S. Cellular to maintain flexible and capable telecommunication networks or information technology, or a material disruption thereof, could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
U.S. Cellular has experienced and, in the future, expects to experience cyber-attacks or other breaches of network or information technology security of varying degrees on a regular basis, which could have an adverse effect on U.S. Cellular's business, financial condition or results of operations.
Changes in facts or circumstances, including new or additional information, could require U.S. Cellular to record adjustments to amounts reflected in the financial statements, which could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
Disruption in credit or other financial markets, a deterioration of U.S. or global economic conditions or other events could, among other things, impede U.S. Cellular’s access to or increase the cost of financing its operating and investment activities and/or result in reduced revenues and lower operating income and cash flows, which would have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
Settlements, judgments, restraints on its current or future manner of doing business and/or legal costs resulting from pending and future litigation could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
The possible development of adverse precedent in litigation or conclusions in professional studies to the effect that radio frequency emissions from wireless devices and/or cell sites cause harmful health consequences, including cancer or tumors, or may interfere with various electronic medical devices such as pacemakers, could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
Claims of infringement of intellectual property and proprietary rights of others, primarily involving patent infringement claims, could prevent U.S. Cellular from using necessary technology to provide products or services or subject U.S. Cellular to expensive intellectual property litigation or monetary penalties, which could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
There are potential conflicts of interests between TDS and U.S. Cellular.

18


Certain matters, such as control by TDS and provisions in the U.S. Cellular Restated Certificate of Incorporation, may serve to discourage or make more difficult a change in control of U.S. Cellular or have other consequences.
The market price of U.S. Cellular’s Common Shares is subject to fluctuations due to a variety of factors.
Any of the foregoing events or other events could cause revenues, earnings, capital expenditures and/or any other financial or statistical information to vary from U.S. Cellular’s forward-looking estimates by a material amount.
Risk Factors
In addition to the information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in U.S. Cellular’s Annual Report on Form 10-K for the year ended December 31, 2018, which could materially affect U.S. Cellular’s business, financial condition or future results. The risks described in this Form 10-Q and the Form 10-K for the year ended December 31, 2018, may not be the only risks that could affect U.S. Cellular. Additional unidentified or unrecognized risks and uncertainties could materially adversely affect U.S. Cellular’s business, financial condition and/or operating results. Subject to the foregoing, U.S. Cellular has not identified for disclosure any material changes to the risk factors as previously disclosed in U.S. Cellular’s Annual Report on Form 10-K for the year ended December 31, 2018.
Quantitative and Qualitative Disclosures about Market Risk
Market Risk
Refer to the disclosure under Market Risk in U.S. Cellular’s Form 10-K for the year ended December 31, 2018, for additional information, including information regarding required principal payments and the weighted average interest rates related to U.S. Cellular’s Long-term debt. There have been no material changes to such information since December 31, 2018
See Note 3Fair Value Measurements in the Notes to Consolidated Financial Statements for additional information related to the fair value of U.S. Cellular’s Long-term debt as of March 31, 2019.

19


Financial Statements
United States Cellular Corporation
Consolidated Statement of Operations
(Unaudited)
 
 
Three Months Ended
March 31,
 
2019
 
2018
(Dollars and shares in millions, except per share amounts)
 
 
 
Operating revenues
 
 
 
Service
$
741

 
$
724

Equipment sales
225

 
218

Total operating revenues
966

 
942

 
 
 
 
Operating expenses
 
 
 
System operations (excluding Depreciation, amortization and accretion reported below)
176

 
179

Cost of equipment sold
233

 
219

Selling, general and administrative (including charges from affiliates of $20 million and $19 million, respectively)
326

 
326

Depreciation, amortization and accretion
169

 
159

(Gain) loss on asset disposals, net
2

 
1

(Gain) loss on sale of business and other exit costs, net
(2
)
 

(Gain) loss on license sales and exchanges, net
(2
)
 
(7
)
Total operating expenses
902

 
877

 
 
 
 
Operating income
64

 
65

 
 
 
 
Investment and other income (expense)
 
 
 
Equity in earnings of unconsolidated entities
44

 
38

Interest and dividend income
6

 
4

Interest expense
(29
)
 
(29
)
Other, net

 
(1
)
Total investment and other income
21

 
12

 
 
 
 
Income before income taxes
85

 
77

Income tax expense
27

 
22

Net income
58

 
55

Less: Net income attributable to noncontrolling interests, net of tax
4

 
10

Net income attributable to U.S. Cellular shareholders
$
54

 
$
45

 
 
 
 
Basic weighted average shares outstanding
86

 
85

Basic earnings per share attributable to U.S. Cellular shareholders
$
0.63

 
$
0.52




 


Diluted weighted average shares outstanding
88

 
86

Diluted earnings per share attributable to U.S. Cellular shareholders
$
0.62

 
$
0.52

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

20


United States Cellular Corporation
Consolidated Statement of Cash Flows
(Unaudited)
 
Three Months Ended
March 31,
 
2019
 
2018
(Dollars in millions)
 
 
 
Cash flows from operating activities
 
 
 
Net income
$
58

 
$
55

Add (deduct) adjustments to reconcile net income to net cash flows from operating activities
 
 
 
Depreciation, amortization and accretion
169

 
159

Bad debts expense
24

 
19

Stock-based compensation expense
9

 
8

Deferred income taxes, net
17

 
15

Equity in earnings of unconsolidated entities
(44
)
 
(38
)
Distributions from unconsolidated entities
18

 
17

(Gain) loss on asset disposals, net
2

 
1

(Gain) loss on sale of business and other exit costs, net
(2
)
 

(Gain) loss on license sales and exchanges, net
(2
)
 
(7
)
Noncash interest
1

 
1

Changes in assets and liabilities from operations
 
 
 
Accounts receivable
31

 
69

Equipment installment plans receivable
(10
)
 
(17
)
Inventory
(15
)
 
(2
)
Accounts payable
56

 
(30
)
Customer deposits and deferred revenues
7

 
(26
)
Accrued taxes
11

 
5

Accrued interest
9

 
9

Other assets and liabilities
(52
)
 
(50
)
Net cash provided by operating activities
287

 
188

 
 
 
 
Cash flows from investing activities
 
 
 
Cash paid for additions to property, plant and equipment
(107
)
 
(76
)
Cash paid for licenses
(1
)
 
(1
)
Cash received from investments
2

 
50

Cash paid for investments
(1
)
 

Cash received from divestitures and exchanges
31

 
4

Advance payments for license acquisitions
(135
)
 

Other investing activities
(1
)
 

Net cash used in investing activities
(212
)
 
(23
)
 
 
 
 
Cash flows from financing activities
 
 
 
Repayment of long-term debt
(5
)
 
(5
)
Common shares reissued for benefit plans, net of tax payments

 
2

Distributions to noncontrolling interests
(1
)
 

Other financing activities

 
(4
)
Net cash used in financing activities
(6
)
 
(7
)
 
 
 
 
Net increase in cash, cash equivalents and restricted cash
69

 
158

 
 
 
 
Cash, cash equivalents and restricted cash
 
 
 
Beginning of period
583

 
352

End of period
$
652

 
$
510

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

21


United States Cellular Corporation
Consolidated Balance Sheet — Assets
(Unaudited)
 
March 31, 2019
 
December 31, 2018
(Dollars in millions)
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
648

 
$
580

Short-term investments
17

 
17

Accounts receivable
 
 
 
Customers and agents, less allowances of $66 and $66, respectively
882

 
908

Roaming
20

 
20

Affiliated
1

 
2

Other, less allowances of $2 and $2, respectively
38

 
46

Inventory, net
157

 
142

Prepaid expenses
47

 
63

Other current assets
29

 
34

Total current assets
1,839

 
1,812

 
 
 
 
Assets held for sale

 
54

 
 
 
 
Licenses
2,213

 
2,186

 
 
 
 
Investments in unconsolidated entities
468

 
441

 
 
 
 
Property, plant and equipment
 
 
 
In service and under construction
7,867

 
7,778

Less: Accumulated depreciation and amortization
5,730

 
5,576

Property, plant and equipment, net
2,137

 
2,202

 
 
 
 
Operating lease right-of-use assets
888

 

 
 
 
 
Other assets and deferred charges
684

 
579

 
 
 
 
Total assets1
$
8,229

 
$
7,274

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


22


United States Cellular Corporation
Consolidated Balance Sheet — Liabilities and Equity
(Unaudited)
 
March 31, 2019
 
December 31, 2018
(Dollars and shares in millions, except per share amounts)
 
 
 
Current liabilities
 
 
 
Current portion of long-term debt
$
19

 
$
19

Accounts payable
 
 
 
Affiliated
9

 
9

Trade
355

 
304

Customer deposits and deferred revenues
164

 
157

Accrued taxes
34

 
30

Accrued compensation
42

 
78

Short-term operating lease liabilities
99

 

Other current liabilities
80

 
94

Total current liabilities
802

 
691

 
 
 
 
Liabilities held for sale

 
1

 
 
 
 
Deferred liabilities and credits
 
 
 
Deferred income tax liability, net
527

 
510

Long-term operating lease liabilities
858

 

Other deferred liabilities and credits
296

 
389

 
 
 
 
Long-term debt, net
1,601

 
1,605

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Noncontrolling interests with redemption features
11

 
11

 
 
 
 
Equity
 
 
 
U.S. Cellular shareholders’ equity
 
 
 
Series A Common and Common Shares
 
 
 
Authorized 190 shares (50 Series A Common and 140 Common Shares)
 
 
 
Issued 88 shares (33 Series A Common and 55 Common Shares)
 
 
 
Outstanding 86 shares (33 Series A Common and 53 Common Shares)
 
 
 
Par Value ($1.00 per share) ($33 Series A Common and $55 Common Shares)
88

 
88

Additional paid-in capital
1,599

 
1,590

Treasury shares, at cost, 2 Common Shares
(63
)
 
(65
)
Retained earnings
2,497

 
2,444

Total U.S. Cellular shareholders' equity
4,121

 
4,057

 
 
 
 
Noncontrolling interests
13

 
10

 
 
 
 
Total equity
4,134

 
4,067

 
 
 
 
Total liabilities and equity1
$
8,229

 
$
7,274


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

1
The consolidated total assets as of March 31, 2019 and December 31, 2018, include assets held by consolidated variable interest entities (VIEs) of $911 million and $868 million, respectively, which are not available to be used to settle the obligations of U.S. Cellular. The consolidated total liabilities as of March 31, 2019 and December 31, 2018, include certain liabilities of consolidated VIEs of $21 million and $23 million, respectively, for which the creditors of the VIEs have no recourse to the general credit of U.S. Cellular. See Note 9Variable Interest Entities for additional information.

23


United States Cellular Corporation
Consolidated Statement of Changes in Equity
(Unaudited)
 
U.S. Cellular Shareholders
 
 
 
 
 
Series A
Common and
Common
shares
 
Additional
paid-in
capital
 
Treasury
shares
 
Retained
earnings
 
Total
U.S. Cellular
shareholders'
equity
 
Noncontrolling
interests
 
Total equity
(Dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
$
88

 
$
1,590

 
$
(65
)
 
$
2,444

 
$
4,057

 
$
10

 
$
4,067

Net income attributable to U.S. Cellular shareholders

 

 

 
54

 
54

 

 
54

Net income attributable to noncontrolling interests classified as equity

 

 

 

 

 
4

 
4

Incentive and compensation plans

 

 
2

 
(1
)
 
1

 

 
1

Stock-based compensation awards

 
9

 

 

 
9

 

 
9

Distributions to noncontrolling interests

 

 

 

 

 
(1
)
 
(1
)
March 31, 2019
$
88

 
$
1,599

 
$
(63
)
 
$
2,497

 
$
4,121

 
$
13

 
$
4,134

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

24


United States Cellular Corporation
Consolidated Statement of Changes in Equity
(Unaudited)
 
U.S. Cellular Shareholders
 
 
 
 
 
Series A
Common and
Common
shares
 
Additional
paid-in
capital
 
Treasury
shares
 
Retained
earnings
 
Total
U.S. Cellular
shareholders'
equity
 
Noncontrolling
interests
 
Total equity
(Dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
$
88

 
$
1,552

 
$
(120
)
 
$
2,157

 
$
3,677

 
$
10

 
$
3,687

Cumulative effect of accounting change

 

 

 
175

 
175

 
1

 
176

Net income attributable to U.S. Cellular shareholders

 

 

 
45

 
45

 

 
45

Incentive and compensation plans

 

 
4

 
(2
)
 
2

 

 
2

Stock-based compensation awards

 
8

 

 

 
8

 

 
8

March 31, 2018
$
88

 
$
1,560

 
$
(116
)
 
$
2,375

 
$
3,907

 
$
11

 
$
3,918

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


25


United States Cellular Corporation
Notes to Consolidated Financial Statements

Note 1 Basis of Presentation
United States Cellular Corporation (U.S. Cellular), a Delaware Corporation, is an 82%-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). Unless otherwise specified, references to accounting provisions and GAAP in these notes refer to the requirements of the FASB 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.
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 annual 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. Certain numbers included herein are rounded to millions for ease of presentation; however, certain calculated amounts and percentages are determined using the unrounded numbers. 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, 2018.
The accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring items, unless otherwise disclosed) necessary for the fair statement of U.S. Cellular’s financial position as of March 31, 2019 and December 31, 2018 and its results of operations, cash flows and changes in equity for the three months ended March 31, 2019 and 2018. The Consolidated Statement of Comprehensive Income was not included because comprehensive income for the three months ended March 31, 2019 and 2018, equaled net income. These results are not necessarily indicative of the results to be expected for the full year. U.S. Cellular has not changed its significant accounting and reporting policies from those disclosed in its Form 10-K for the year ended December 31, 2018, except as disclosed in Note 8Leases.
Restricted Cash
U.S. Cellular presents restricted cash with cash and cash equivalents in the Consolidated Statement of Cash Flows. The following table provides a reconciliation of Cash and cash equivalents and restricted cash reported in the Consolidated Balance Sheet to the total of the amounts in the Consolidated Statement of Cash Flows as of March 31, 2019 and December 31, 2018.
 
March 31, 2019
 
December 31, 2018
(Dollars in millions)
 
 
 
Cash and cash equivalents
$
648

 
$
580

Restricted cash included in Other current assets
4

 
3

Cash, cash equivalents and restricted cash in the statement of cash flows
$
652

 
$
583

Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 requires entities to use a new forward-looking, expected loss model to estimate credit losses. It also requires additional disclosure relating to the credit quality of trade and other receivables, including information relating to management’s estimate of credit allowances. U.S. Cellular is required to adopt ASU 2016-13 on January 1, 2020, using the modified retrospective approach. Early adoption is permitted; however, U.S. Cellular does not intend to adopt early. U.S. Cellular is evaluating the effects that adoption of ASU 2016-13 will have on its financial position, results of operations and disclosures.

26


Note 2 Revenue Recognition
Disaggregation of Revenue
In the following table, revenue is disaggregated by type of service and timing of revenue recognition. Service revenues are recognized over time and Equipment sales are point in time.  
 
Three Months Ended
March 31,
 
2019
 
2018
(Dollars in millions)
 
 
 
Revenues from contracts with customers:
 
 
 
Retail service
$
659

 
$
649

Inbound roaming
34

 
27

Other service
32

 
32

Service revenues from contracts with customers
725

 
708

Equipment sales
225

 
218

Total revenues from contracts with customers1
$
950

 
$
926

1  
Revenue line items in this table will not agree to amounts presented in the Consolidated Statement of Operations as the balances do not include all sources of revenues.
Contract Balances
The accounts receivable balance related to amounts billed and not paid on contracts with customers, net of allowances, is shown in the table below.
 
March 31, 2019
 
December 31, 2018
(Dollars in millions)
 
 
 
Accounts receivable
 
 
 
Customer and agents
$
882

 
$
908

Roaming
20

 
20

Other
32

 
32

Total1
$
934

 
$
960

1
Accounts receivable line items presented in this table will not agree to amounts presented in the Consolidated Balance Sheet as certain receivables are excluded from these balances. 
The following table provides a rollforward of contract assets from contracts with customers, which are recorded in Other current assets and Other assets and deferred charges in the Consolidated Balance Sheet.
 
Contract Assets
(Dollars in millions)
 
Balance at December 31, 2018
$
9

Contract additions
4

Reclassified to receivables
(5
)
Balance at March 31, 2019
$
8

The following table provides a rollforward of contract liabilities from contracts with customers, which are recorded in Customer deposits and deferred revenues and Other deferred liabilities and credits in the Consolidated Balance Sheet.
 
Contract Liabilities
(Dollars in millions)
 
Balance at December 31, 2018
$
163

Contract additions
45

Terminated contracts
(2
)
Revenue recognized
(37
)
Balance at March 31, 2019
$
169


27


Transaction price allocated to the remaining performance obligations
The following table includes estimated service revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period. These estimates represent service revenue to be recognized when wireless services are delivered to customers pursuant to service plan contracts and under certain roaming agreements with other carriers. These estimates are based on contracts in place as of March 31, 2019, and may vary from actual results due to future contract modifications. As a practical expedient, revenue related to contracts of less than one year, generally month-to-month contracts, are excluded from these estimates. 
 
Service Revenue
(Dollars in millions)
 
Remainder of 2019
$
198

2020
61

Thereafter
16

Total
$
275

U.S. Cellular has certain contracts in which it bills an amount equal to a fixed per-unit price multiplied by a variable quantity (e.g., certain roaming agreements with other carriers). Because U.S. Cellular invoices for such items in an amount that corresponds directly with the value of the performance completed to date, U.S. Cellular may recognize revenue in that amount. As a practical expedient, these contracts are excluded from the estimate of future revenues expected to be recognized related to performance obligations that are unsatisfied as of the end of a reporting period. 
Amounts Collected from Customers and Remitted to Governmental Authorities
U.S. Cellular records amounts collected from customers and remitted to governmental authorities on a net basis within a liability account if the amount is assessed upon the customer and U.S. Cellular merely acts as an agent in collecting the amount on behalf of the imposing governmental authority. If the amount is assessed upon U.S. Cellular, then amounts collected from customers 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 $11 million and $17 million for the three months ended March 31, 2019 and 2018, respectively.


28


Note 3 Fair Value Measurements
As of March 31, 2019 and December 31, 2018, U.S. Cellular did not have any material 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 assets 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.
 
 
 
March 31, 2019
 
December 31, 2018
 
Level within the Fair Value Hierarchy
 
Book Value
 
Fair Value
 
Book Value
 
Fair Value
(Dollars in millions)
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
1
 
$
648

 
$
648

 
$
580

 
$
580

Short-term investments
1
 
17

 
17

 
17

 
17

Long-term debt
 
 
 
 
 
 
 
 
 
Retail
2
 
917

 
951

 
917

 
850

Institutional
2
 
534

 
585

 
534

 
531

Other
2
 
177

 
177

 
180

 
180

The fair values of Cash and cash equivalents and Short-term investments approximate their book values due to the short-term nature of these financial instruments. Long-term debt excludes lease obligations, other installment arrangements, the current portion of Long-term debt and debt financing costs. The fair value of “Retail” Long-term debt was estimated using market prices for the 7.25% 2063 Senior Notes, 7.25% 2064 Senior Notes and 6.95% 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 agreement. 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 4.25% to 5.93% and 5.03% to 6.97% at March 31, 2019 and December 31, 2018, respectively.

29


Note 4 Equipment Installment Plans
U.S. Cellular sells devices to customers under equipment installment plans over a specified time period. For certain equipment installment plans, after a specified period of time or amount of payments, the customer may have the right to upgrade to a new device 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. When a customer exercises the trade-in option, both the outstanding receivable and guarantee liability balances related to the respective device are reduced to zero, and the value of the used device that is received in the transaction is recognized as inventory. If the customer does not exercise the trade-in option at the time of eligibility, U.S. Cellular begins amortizing the liability and records this amortization as additional equipment revenue. As of March 31, 2019 and December 31, 2018, the guarantee liability related to these plans was $11 million and is reflected in Customer deposits and deferred revenues in the Consolidated Balance Sheet.
The following table summarizes equipment installment plan receivables as of March 31, 2019 and December 31, 2018.
 
March 31, 2019
 
December 31, 2018
(Dollars in millions)
 
 
 
Equipment installment plan receivables, gross
$
975

 
$
974

Allowance for credit losses
(77
)
 
(77
)
Equipment installment plan receivables, net
$
898

 
$
897

 
 
 
 
Net balance presented in the Consolidated Balance Sheet as:
 
 
 
Accounts receivable — Customers and agents (Current portion)
$
571

 
$
560

Other assets and deferred charges (Non-current portion)
327

 
337

Equipment installment plan receivables, net
$
898

 
$
897

U.S. Cellular uses various inputs, including internal data, information from credit bureaus and other sources, to evaluate the credit profiles of its customers. From this evaluation, a credit class is assigned to the customer that determines the number of eligible lines, the amount of credit available, and the down payment requirement, if any. Customers assigned to credit classes requiring no down payment represent a lower risk category, whereas those assigned to credit classes requiring a down payment represent a higher risk category. The balance and aging of the equipment installment plan receivables on a gross basis by credit category were as follows:
 
March 31, 2019
 
December 31, 2018
 
Lower Risk
 
Higher Risk
 
Total
 
Lower Risk
 
Higher Risk
 
Total
(Dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
Unbilled
$
901

 
$
13

 
$
914

 
$
904

 
$
17

 
$
921

Billed — current
41

 
1

 
42

 
35

 
1

 
36

Billed — past due
17

 
2

 
19

 
15

 
2

 
17

Equipment installment plan receivables, gross
$
959

 
$
16

 
$
975

 
$
954

 
$
20

 
$
974

Activity for the three months ended March 31, 2019 and 2018, in the allowance for credit losses for equipment installment plan receivables was as follows:
 
March 31, 2019
 
March 31, 2018
(Dollars in millions)
 
 
 
Allowance for credit losses, beginning of period
$
77

 
$
65

Bad debts expense
18

 
14

Write-offs, net of recoveries
(18
)
 
(13
)
Allowance for credit losses, end of period
$
77

 
$
66


30


Note 5 Earnings Per Share
Basic earnings per share attributable to U.S. Cellular shareholders is computed by dividing Net income attributable to U.S. Cellular shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share attributable to U.S. Cellular shareholders is computed by dividing Net income 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 the exercise of outstanding stock options and the vesting of performance and restricted stock units.
The amounts used in computing earnings per common share and the effects of potentially dilutive securities on the weighted average number of common shares were as follows:
 
Three Months Ended
March 31,
 
2019
 
2018
(Dollars and shares in millions, except per share amounts)
 
 
 
Net income attributable to U.S. Cellular shareholders
$
54

 
$
45

 
 
 
 
Weighted average number of shares used in basic earnings per share
86

 
85

Effects of dilutive securities
2

 
1

Weighted average number of shares used in diluted earnings per share
88

 
86

 
 
 
 
Basic earnings per share attributable to U.S. Cellular shareholders
$
0.63

 
$
0.52

 
 
 
 
Diluted earnings per share attributable to U.S. Cellular shareholders
$
0.62

 
$
0.52

Certain Common Shares issuable upon the exercise of stock options or vesting of performance and restricted stock units were not included in average diluted shares outstanding for the calculation of Diluted earnings per share attributable to U.S. Cellular shareholders because their effects were antidilutive. The number of such Common Shares excluded was less than 1 million and 2 million for the three months ended March 31, 2019 and 2018, respectively.

31


Note 6 Intangible Assets
Activity related to Licenses for the three months ended March 31, 2019, is presented below:
 
Licenses
(Dollars in millions)
 
Balance at December 31, 2018
$
2,186

Acquisitions
1

Exchanges - Licenses received
26

Balance at March 31, 2019
$
2,213

During 2019, U.S. Cellular committed to purchase spectrum licenses in the amount of $249 million, subject to regulatory approval. U.S. Cellular paid $135 million of this amount in the three months ended March 31, 2019, and expects to pay substantially all of the remainder in 2019. This advance payment is included in Other assets and deferred charges in the March 31, 2019 Consolidated Balance Sheet.
Note 7 Investments in Unconsolidated Entities
Investments in unconsolidated entities consist of amounts invested in entities in which U.S. Cellular holds a noncontrolling interest. 
U.S. Cellular’s Investments in unconsolidated entities are accounted for using either the equity method or measurement alternative method as shown in the table below. The measurement alternative method was elected for investments without readily determinable fair values formerly accounted for under the cost method. The measurement alternative fair value represents cost minus any impairments plus or minus any observable price changes. U.S. Cellular did not have an impairment or observable price change related to these investments for the three months ended March 31, 2019.
 
March 31, 2019
 
December 31, 2018
(Dollars in millions)
 
 
 
Equity method investments
$
460

 
$
434

Measurement alternative method investments
8

 
7

Total investments in unconsolidated entities
$
468

 
$
441

The following table, which is based in part on information provided by third parties, summarizes the combined results of operations of U.S. Cellular’s equity method investments.
 
Three Months Ended
March 31,
 
2019
 
2018
(Dollars in millions)
 
 
 
Revenues
$
1,689

 
$
1,657

Operating expenses
1,215

 
1,208

Operating income
474

 
449

Other income (expense), net
(5
)
 
(1
)
Net income
$
469

 
$
448


32


Note 8 Leases
Change in Accounting Policy
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases and has since amended the standard with Accounting Standards Updates 2018-01, Leases: Land Easement Practical Expedient for Transition to Topic 842, Accounting Standards Update 2018-10, Codification Improvements to Topic 842, Leases, Accounting Standards Update 2018-11, Leases: Targeted Improvements, and Accounting Standards Update 2018-20, Leases: Narrow-Scope Improvements for Lessors, collectively referred to as ASC 842. This standard replaces the previous lease accounting standard under ASC 840 - Leases and requires lessees to record a right-of-use (ROU) asset and lease liability for the majority of leases. U.S. Cellular adopted the provisions of ASC 842 on January 1, 2019, using a modified retrospective method. Under this method, U.S. Cellular elected to apply the new accounting standard only to the most recent period presented, recognizing the cumulative effect of the accounting change, if any, as an adjustment to the beginning balance of retained earnings. Accordingly, prior periods have not been recast to reflect the new accounting standard. The cumulative effect of applying the provisions of ASC 842 had no impact on retained earnings as of January 1, 2019.
U.S. Cellular elected transitional practical expedients for existing leases which eliminated the requirements to reassess existing lease classification, initial direct costs, and whether contracts contain leases. U.S. Cellular also elected the practical expedient related to land easements that allows it to carry forward the accounting treatment for pre-existing land easement agreements.
The cumulative effect of the adoption of ASC 842 on U.S. Cellular’s Consolidated Balance Sheet is presented below.
 
December 31, 2018
ASC 842 Adjustment
January 1, 2019
(Dollars in millions)
 
 
 
Prepaid expenses
$
63

$
(13
)
$
50

Operating lease right-of-use assets

899

899

Other assets and deferred charges
579

(12
)
567

Short-term operating lease liabilities

101

101

Other current liabilities
94

(8
)
86

Long-term operating lease liabilities

878

878

Other deferred liabilities and credits
389

(97
)
292

As a result of the adoption of ASC 842, U.S. Cellular recorded ROU assets and lease liabilities for its operating leases in its Consolidated Balance Sheet as of January 1, 2019. The lease liabilities are calculated as the discounted value of future lease payments. The difference between the lease liabilities and the corresponding ROU assets is a result of various lease prepayments and straight-line expense recognition deferral balances as of December 31, 2018, which were offset against the ROU assets as of January 1, 2019. Finance leases are included in Property, plant and equipment and Long-term debt, net consistent with presentation under prior accounting standards.
Lessee Agreements
A lease is generally present in a contract if the lessee controls the use of identified property, plant or equipment for a period of time in exchange for consideration. Nearly all of U.S. Cellular’s leases are classified as operating leases, although it does have a small number of finance leases. U.S. Cellular’s most significant leases are for land and tower spaces, network facilities, retail spaces, and offices.
U.S. Cellular has agreements with both lease and nonlease components, which are accounted for separately. As part of the present value calculation for the lease liabilities, U.S. Cellular uses an incremental borrowing rate as the rates implicit in the leases are not readily determinable. The incremental borrowing rates used for lease accounting are based on U.S. Cellular's unsecured rates, adjusted to approximate what U.S. Cellular would have to borrow on a collateralized basis over a similar period of time as the recognized lease term. U.S. Cellular applies the incremental borrowing rates to lease components using a portfolio approach based upon the length of the lease term. The cost of nonlease components in U.S. Cellular’s lease portfolio (e.g., utilities and common area maintenance) are not typically predetermined at lease commencement and are expensed as incurred at their relative standalone price.
Variable lease expense occurs when, subsequent to the lease commencement, lease payments are made that were not originally included in the lease liability calculation. U.S. Cellular’s variable lease payments are primarily a result of leases with escalations that are tied to an index. The incremental changes due to the index changes are recorded as variable lease expense and are not included in the ROU assets or lease liabilities.
Lease term recognition determines the periods to allocate expense and also has a significant impact on the lease liability and ROU asset calculations. Many of U.S. Cellular’s leases include renewal and early termination options. At lease commencement, the lease terms include options to extend the lease when U.S. Cellular is reasonably certain that it will exercise the options. The lease terms do not include early termination options unless U.S. Cellular is reasonably certain to exercise the options. Certain asset classes have similar lease characteristics; therefore, U.S. Cellular has applied the portfolio approach for lease term recognition for its tower space, retail, and certain ground lease asset classes.

33


The following table shows the components of lease cost included in the Consolidated Statement of Operations:
 
Three Months Ended
March 31, 2019
(Dollars in millions)
 
Operating lease cost
$
40

Variable lease cost
2

Total lease cost
$
42

The following table shows supplemental cash flow information related to lease activities:
 
Three Months Ended
March 31, 2019
(Dollars in millions)
 
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
37

ROU assets obtained in exchange for lease obligations:
 
Operating leases
$
20

The following table shows the classification of U.S. Cellular’s operating and finance leases in its Consolidated Balance Sheet:
 
March 31, 2019
(Dollars in millions)
 
Operating Leases
 

Operating lease right-of-use assets
$
888

 
 
Short-term operating lease liabilities
$
99

Long-term operating lease liabilities
858

Total operating lease liabilities
$
957

 
 
Finance Leases
 
Property, plant and equipment
$
7

Less: Accumulated depreciation and amortization
3

Property, plant and equipment, net
$
4

Current portion of long-term debt 
$
1

Long-term debt, net
3

Total finance lease liabilities
$
4

The table below shows a weighted-average analysis for lease term and discount rate for all leases: