Edgar Filing: UNITED STATES CELLULAR CORP

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

¨ 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 1-9712

UNITED STATES CELLULAR CORPORATION
(Exact name of registrant as specified in its charter)

Delaware		62-1147325
(State or other jurisdiction of incorporation or organization)		(I.R.S. 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

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. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b‑2 of the Exchange Act.

Large accelerated filer x

Accelerated filer ¨

Non-accelerated filer ¨

(Do not check if a smaller reporting company)

Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class		Outstanding at September 30, 2012
Common Shares, $1 par value		51,728,824 Shares
Series A Common Shares, $1 par value		33,005,877 Shares

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United States Cellular Corporation

Quarterly Report on Form 10-Q
For the Quarterly Period Ended September 30, 2012

Index

				Page No.
Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited)

		Consolidated Statement of Operations
			Three and Nine Months Ended September 30, 2012 and 2011	3

		Consolidated Statement of Cash Flows
			Nine Months Ended September 30, 2012 and 2011	4

		Consolidated Balance Sheet
			September 30, 2012 and December 31, 2011	5

		Consolidated Statement of Changes in Equity
			Nine Months Ended September 30, 2012 and 2011	7

		Notes to Consolidated Financial Statements		9

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		19

		Overview		22
		Results of Operations		26
		Recent Accounting Pronouncements		33
		Financial Resources		33
		Liquidity and Capital Resources		36
		Application of Critical Accounting Policies and Estimates		39
		Certain Relationships and Related Transactions		40
		Safe Harbor Cautionary Statement		41

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		44

	Item 4.	Controls and Procedures		45

Part II.	Other Information

	Item 1.	Legal Proceedings		46

	Item 1A.	Risk Factors		46

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		47

	Item 5.	Other Information		47

	Item 6.	Exhibits		48

Signatures

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Part I. Financial Information
Item 1. Financial Statements

United States Cellular Corporation

Consolidated Statement of Operations (Unaudited)

			Three Months Ended				Nine Months Ended
			September 30,				September 30,
(Dollars and shares in thousands, except per share amounts)			2012		2011		2012		2011

Operating revenues
	Service		$	1,036,370	$	1,036,609	$	3,089,932	$	3,023,752
	Equipment sales			103,987		73,830		246,946		219,961
		Total operating revenues		1,140,357		1,110,439		3,336,878		3,243,713

Operating expenses
	System operations (excluding Depreciation, amortization and accretion reported below)			249,245		241,852		725,636		687,256
	Cost of equipment sold			248,029		196,229		626,765		563,717
	Selling, general and administrative (including charges from affiliates of $25.6 million and $23.8 million, respectively, for the three months, and $77.6 million and $75.7 million, respectively, for the nine months)			438,526		438,774		1,315,823		1,302,436
	Depreciation, amortization and accretion			145,151		141,664		439,391		431,581
	(Gain) loss on asset disposals and exchanges, net			11,327		(9,700)		11,819		(5,741)
		Total operating expenses		1,092,278		1,008,819		3,119,434		2,979,249

Operating income				48,079		101,620		217,444		264,464

Investment and other income (expense)
	Equity in earnings of unconsolidated entities			24,816		21,929		71,584		65,289
	Interest and dividend income			935		869		2,823		2,466
	Gain (loss) on investment			-		-		(3,728)		13,373
	Interest expense			(9,501)		(11,522)		(35,272)		(51,905)
	Other, net			200		(97)		173		(47)
		Total investment and other income (expense)		16,450		11,179		35,580		29,176

Income before income taxes				64,529		112,799		253,024		293,640
	Income tax expense			22,389		43,292		82,624		102,771

Net income				42,140		69,507		170,400		190,869
	Less: Net income attributable to noncontrolling interests, net of tax			(6,689)		(7,367)		(19,772)		(18,629)
Net income attributable to U.S. Cellular shareholders			$	35,451	$	62,140	$	150,628	$	172,240

Basic weighted average shares outstanding				84,737		84,547		84,671		84,984
Basic earnings per share attributable to U.S. Cellular shareholders			$	0.42	$	0.73	$	1.78	$	2.03

Diluted weighted average shares outstanding				85,152		84,940		85,090		85,448
Diluted earnings per share attributable to U.S. Cellular shareholders			$	0.42	$	0.73	$	1.77	$	2.02

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

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United States Cellular Corporation

Consolidated Statement of Cash Flows
(Unaudited)
			Nine Months Ended
			September 30,
(Dollars in thousands)			2012		2011

Cash flows from operating activities
	Net income		$	170,400	$	190,869
	Add (deduct) adjustments to reconcile net income to net cash flows from operating activities
		Depreciation, amortization and accretion		439,391		431,581
		Bad debts expense		51,293		44,718
		Stock-based compensation expense		15,924		15,475
		Deferred income taxes, net		52,865		145,687
		Equity in earnings of unconsolidated entities		(71,584)		(65,289)
		Distributions from unconsolidated entities		45,211		52,037
		(Gain) loss on asset disposals and exchanges, net		11,819		(5,741)
		(Gain) loss on investment		3,728		(13,373)
		Noncash interest expense		1,331		9,582
		Other operating activities		863		1,143
	Changes in assets and liabilities from operations
		Accounts receivable		(67,302)		(57,564)
		Inventory		(69,423)		(36,326)
		Accounts payable - trade		(28,902)		41,733
		Accounts payable - affiliate		(4,785)		1,185
		Customer deposits and deferred revenues		26,687		30,695
		Accrued taxes		99,556		9,679
		Accrued interest		9,508		9,283
		Other assets and liabilities		(77,821)		(66,553)
				608,759		738,821

Cash flows from investing activities
	Cash used for additions to property, plant and equipment			(611,431)		(462,327)
	Cash paid for acquisitions and licenses			(57,957)		(23,773)
	Cash received from divestitures			49,932		-
	Cash paid for investments			(45,000)		(50,000)
	Cash received for investments			50,000		85,250
	Other investing activities			(5,030)		(210)
				(619,486)		(451,060)

Cash flows from financing activities
	Repayment of long-term debt			(343)		(330,106)
	Issuance of long-term debt			-		342,000
	Common shares reissued for benefit plans, net of tax payments			(2,299)		1,755
	Common shares repurchased			-		(62,294)
	Payment of debt issuance costs			-		(11,394)
	Distributions to noncontrolling interests			(1,491)		(1,176)
	Other financing activities			284		169
				(3,849)		(61,046)

Cash classified as held for sale				-		(11,237)

Net increase (decrease) in cash and cash equivalents				(14,576)		215,478

Cash and cash equivalents
	Beginning of period			424,155		276,915
	End of period		$	409,579	$	492,393

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

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United States Cellular Corporation

Consolidated Balance Sheet — Assets
(Unaudited)
			September 30,		December 31,
(Dollars in thousands)			2012		2011

Current assets
	Cash and cash equivalents		$	409,579	$	424,155
	Short-term investments			140,494		127,039
	Accounts receivable
		Customers and agents, less allowances of $24,784 and $21,337, respectively		332,318		341,439
		Roaming		47,216		36,557
		Affiliated		119		621
		Other, less allowances of $3,127 and $2,200, respectively		84,132		63,204
	Inventory			196,523		127,056
	Income taxes receivable			2,280		74,791
	Prepaid expenses			60,631		55,980
	Net deferred income tax asset			37,868		31,905
	Other current assets			15,993		10,096
				1,327,153		1,292,843

Assets held for sale				-		49,647

Investments
	Licenses			1,531,873		1,470,769
	Goodwill			494,737		494,737
	Customer lists, net of accumulated amortization of $96,776 and $96,597, respectively			135		314
	Investments in unconsolidated entities			162,012		138,096
	Notes and interest receivable — long-term			-		1,921
	Long-term investments			10,171		30,057
				2,198,928		2,135,894
Property, plant and equipment
	In service and under construction			7,341,632		7,008,449
	Less: Accumulated depreciation			4,406,847		4,218,147
				2,934,785		2,790,302

Other assets and deferred charges				75,482		59,290

Total assets			$	6,536,348	$	6,327,976

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

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United States Cellular Corporation

Consolidated Balance Sheet — Liabilities and Equity
(Unaudited)
				September 30,		December 31,
(Dollars and shares in thousands)				2012		2011

Current liabilities
	Current portion of long-term debt			$	127	$	127
	Accounts payable
		Affiliated			7,398		12,183
		Trade			250,681		303,779
	Customer deposits and deferred revenues				208,042		181,355
	Accrued taxes				60,695		34,095
	Accrued compensation				52,200		69,551
	Other current liabilities				92,957		121,190
					672,100		722,280

Liabilities held for sale					-		1,051

Deferred liabilities and credits
	Net deferred income tax liability				861,709		799,190
	Other deferred liabilities and credits				259,499		248,213

Long-term debt					880,486		880,320

Commitments and contingencies					-		-

Noncontrolling interests with redemption features					759		1,005

Equity
	U.S. Cellular shareholders' equity
		Series A Common and Common Shares
			Authorized 190,000 shares (50,000 Series A Common and 140,000 Common Shares)
			Issued 88,074 shares (33,006 Series A Common and 55,068 Common Shares)
			Outstanding 84,735 shares (33,006 Series A Common and 51,729 Common Shares) and 84,557 shares (33,006 Series A Common and 51,551 Common Shares), respectively
			Par Value ($1 per share) ($33,006 Series A Common and $55,068 Common Shares)		88,074		88,074
		Additional paid-in capital			1,406,617		1,387,341
		Treasury shares, at cost, 3,339 and 3,517 Common Shares, respectively			(145,859)		(152,817)
		Retained earnings			2,438,760		2,297,363
			Total U.S. Cellular shareholders' equity		3,787,592		3,619,961

	Noncontrolling interests				74,203		55,956

			Total equity		3,861,795		3,675,917

Total liabilities and equity				$	6,536,348	$	6,327,976

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

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United States Cellular Corporation

Consolidated Statement of Changes in Equity
(Unaudited)
	U.S. Cellular Shareholders
(Dollars in thousands)	Series A Common and Common Shares		Additional Paid-In Capital		Treasury Shares		Retained Earnings		Total U.S. Cellular Shareholders' Equity		Noncontrolling Interests		Total Equity
Balance, December 31, 2011	$	88,074	$	1,387,341	$	(152,817)	$	2,297,363	$	3,619,961	$	55,956	$	3,675,917
Add (Deduct)
Net income attributable to U.S. Cellular shareholders		-		-		-		150,628		150,628		-		150,628
Net income attributable to noncontrolling interests classified as equity		-		-		-		-		-		19,766		19,766
Incentive and compensation plans		-		137		6,958		(9,231)		(2,136)		-		(2,136)
Stock-based compensation awards		-		15,761		-		-		15,761		-		15,761
Tax windfall (shortfall) from stock awards		-		471		-		-		471		-		471
Distributions to noncontrolling interests		-		-		-		-		-		(1,491)		(1,491)
Adjust investment in subsidiaries for noncontrolling interest purchases		-		2,907		-		-		2,907		-		2,907
Other		-		-		-		-		-		(28)		(28)
Balance, September 30, 2012	$	88,074	$	1,406,617	$	(145,859)	$	2,438,760	$	3,787,592	$	74,203	$	3,861,795

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

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United States Cellular Corporation

Consolidated Statement of Changes in Equity
(Unaudited)
	U.S. Cellular Shareholders
(Dollars in thousands)	Series A Common and Common Shares		Additional Paid-In Capital		Treasury Shares		Retained Earnings		Total U.S. Cellular Shareholders' Equity		Noncontrolling Interests		Total Equity
Balance, December 31, 2010	$	88,074	$	1,368,487	$	(105,616)	$	2,135,507	$	3,486,452	$	53,518	$	3,539,970
Add (Deduct)
Net income attributable to U.S. Cellular shareholders		-		-		-		172,240		172,240		-		172,240
Net income attributable to noncontrolling interests classified as equity		-		-		-		-		-		18,561		18,561
Repurchase of Common Shares		-		-		(62,294)		-		(62,294)		-		(62,294)
Incentive and compensation plans		-		72		14,899		(13,185)		1,786		-		1,786
Stock-based compensation awards		-		15,475		-		-		15,475		-		15,475
Tax windfall (shortfall) from stock awards		-		(1,208)		-		-		(1,208)		-		(1,208)
Distributions to noncontrolling interests		-		-		-		-		-		(1,176)		(1,176)
Balance, September 30, 2011	$	88,074	$	1,382,826	$	(153,011)	$	2,294,562	$	3,612,451	$	70,903	$	3,683,354

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

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United States Cellular Corporation

Notes to Consolidated Financial Statements

1. Basis of Presentation

United States Cellular Corporation (“U.S. Cellular”), a Delaware Corporation, is an 84%-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”). The consolidated financial statements include the accounts of U.S. Cellular, its majority-owned subsidiaries, 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. Certain prior year amounts have been reclassified to conform to the 2012 presentation.

The consolidated financial statements included herein have been prepared by U.S. Cellular, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in 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. These 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, 2011.

The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items, unless otherwise disclosed) necessary for a fair statement of the financial position as of September 30, 2012 and December 31, 2011, and the results of operations for the three and nine months ended September 30, 2012 and 2011 and cash flows and changes in equity for the nine months ended September 30, 2012 and 2011. The Consolidated Statement of Comprehensive Income was not included because comprehensive income for the three and nine months ended September 30, 2012 and 2011 equaled net income. The results of operations for the three and nine months ended September 30, 2012 and 2011 and cash flows and changes in equity for the nine months ended September 30, 2012 and 2011 are not necessarily indicative of the results to be expected for the full year.

Recent Accounting Pronouncements

On July 27, 2012, the FASB issued Accounting Standards Update 2012-02, Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). ASU 2012-02 is intended to reduce the cost and complexity of the annual indefinite-lived intangible assets impairment testing by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. As such, there is the possibility that quantitative assessments would not need to be performed if it is more likely than not that no impairment exists. U.S. Cellular is required to adopt the provisions of ASU 2012-02, which is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of ASU 2012-02 is not expected to have a significant impact on U.S. Cellular’s financial position or results of operations.

Agent Liabilities

U.S. Cellular has relationships with agents, which are independent businesses that obtain customers for U.S. Cellular. At September 30, 2012 and December 31, 2011, U.S. Cellular had accrued $48.4 million and $75.3 million, respectively, for amounts due to agents, including rebates and commissions. These amounts are included in Other current liabilities in the Consolidated Balance Sheet.

Amounts Collected from Customers and Remitted to Governmental Authorities

If a tax is assessed upon the customer and U.S. Cellular merely acts as an agent in collecting the tax on behalf of the imposing governmental authority, then amounts collected from customers and remitted to governmental authorities are recorded on a net basis within a tax liability account in the Consolidated Balance Sheet. If the tax is assessed upon U.S. Cellular, then amounts collected from customers as recovery of the tax 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 $32.3 million and $102.2 million for the three and nine months ended September 30, 2012, respectively, and $30.3 million and $92.7 million for the three and nine months ended September 30, 2011, respectively.

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2. Revision of Prior Period Amounts

In preparing its Consolidated Statement of Cash Flows for the year ended December 31, 2011, U.S. Cellular discovered certain errors related to the classification of outstanding checks with the right of offset and the classification of Accounts payable-trade for Additions to property, plant and equipment. These errors resulted in the misstatement of Cash and cash equivalents and Accounts payable-trade as of December 31, 2010 and each quarterly period in 2011, and the misstatement of Cash flows from operating activities and Cash flows from investing activities for the years ended December 31, 2010 and 2009 and each of the quarterly periods in 2011 and 2010. In accordance with SEC Staff Accounting Bulletin Nos. 99 and 108 ("SAB 99" and "SAB 108"), U.S. Cellular evaluated these errors and determined that they were immaterial to each of the reporting periods affected and, therefore, amendment of previously filed reports was not required. However, in order to provide consistency in the Consolidated Statement of Cash Flows and as permitted by SAB 108, revisions for these immaterial amounts to previously reported amounts were reflected in the financial information as of and for the periods ended December 31, 2011, and are reflected in the financial information herein.

In accordance with SAB 108, the effects of the foregoing revision to the Consolidated Statement of Cash Flows were as follows:

Consolidated Statement of Cash Flows — Nine Months Ended September 30, 2011

		As previously
	(Dollars in thousands)	reported (1)			Adjustment		Revised
	Change in Accounts payable-trade	$	79,031	$	(37,298)	$	41,733
	Change in Other assets and liabilities		(65,048)		(1,505)		(66,553)
	Cash flows from operating activities		777,624		(38,803)		738,821
	Cash used for additions to property, plant and equipment		(506,082)		43,755		(462,327)
	Cash flows from investing activities		(494,815)		43,755		(451,060)
	Net increase (decrease) in cash and cash equivalents		210,526		4,952		215,478

(1) In Quarterly Report on Form 10-Q for the period ended September 30, 2011, filed on November 9, 2011.

3. Fair Value Measurements

As of September 30, 2012 and December 31, 2011, U.S. Cellular did not have any financial assets or liabilities that were required to be recorded at fair value in its Consolidated Balance Sheet in accordance with GAAP. However, 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.

Under the provisions of GAAP, fair value is a market-based measurement and not an entity-specific measurement, based on an exchange transaction in which the entity sells an asset or transfers a liability (exit price). The provisions also 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.

		Level within	September 30,				December 31,
		the Fair Value	2012				2011
		Hierarchy	Book Value			Fair Value	Book Value		Fair Value
(Dollars in thousands)
Cash and cash equivalents		1	$	409,579	$	409,579	$	424,155	$	424,155
Short-term investments (1)(2)
	Government-backed securities (3)	1		140,494		140,494		127,039		127,039
Long-term investments (1)(4)
	Government-backed securities (3)	1		10,171		10,190		30,057		30,140
Long-term debt (5)
	6.95% Senior Notes	1		342,000		374,422		342,000		364,162
	6.7% Senior Notes	2		534,439		564,939		534,111		534,860

(1) Designated as held-to-maturity investments and recorded at amortized cost in the Consolidated Balance Sheet.

(2) Maturities are less than twelve months from the respective balance sheet dates.

(3) Includes U.S. treasuries and corporate notes guaranteed under the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program.

(4) At September 30, 2012, maturities range between 17 and 18 months.

(5) Excludes capital lease obligations and current portion of Long-term debt.

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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. The fair values of Long-term investments were estimated using quoted market prices for the individual issuances. The fair value of Long-term debt, excluding capital lease obligations and the current portion of such Long-term debt, was estimated using market prices for the 6.95% Senior Notes, which are publicly traded, and discounted cash flow analysis using an estimated yield to maturity of 6.37% for the 6.7% Senior Notes, which are not publicly traded.

As of September 30, 2012 and December 31, 2011, U.S. Cellular did not have nonfinancial assets or liabilities that required the application of fair value accounting for purposes of reporting such amounts in the Consolidated Balance Sheet.

4. Income Taxes

U.S. Cellular is included in a consolidated federal income tax return and in certain state income tax returns with other members of the TDS consolidated group. For financial statement purposes, U.S. Cellular and its subsidiaries compute their income tax expense as if they comprised a separate affiliated group and were not included in the TDS consolidated group.

U.S. Cellular’s overall effective tax rate on Income before income taxes for the three and nine months ended September 30, 2012 was 34.7% and 32.7%, respectively, and for the three and nine months ended September 30, 2011 was 38.4% and 35.0%, respectively.

The effective tax rate for the three months ended September 30, 2012 was lower than the rate for the three months ended September 30, 2011 primarily as a result of a $1.6 million tax benefit related to a correction of state deferred taxes in 2012. The correction related to a prior year and was recorded as an out-of-period adjustment in the quarter ended September 30, 2012. This benefit, along with other discrete items, decreased income tax expense for the three months ended September 30, 2012 by $1.2 million; absent these benefits, the effective tax rate for such period would have been higher by 1.8 percentage points.

The effective tax rate for the nine months ended September 30, 2012 was lower than the rate for the nine months ended September 30, 2011 primarily as a result of tax benefits related to the expiration of the statutes of limitation for certain tax years and the correction of state deferred taxes in 2012. The benefits from these changes, along with other discrete items, decreased income tax expense for the nine months ended September 30, 2012 by $9.6 million; absent these benefits, the effective tax rate for such period would have been higher by 3.8 percentage points.

U.S. Cellular incurred a federal net operating loss in 2011 largely attributable to 100% bonus depreciation applicable to qualified capital expenditures. U.S. Cellular carried back this federal net operating loss to prior tax years, and received a $66.8 million federal income tax refund in 2012 for carrybacks to 2009 and 2010 tax years. U.S. Cellular’s future federal income tax liabilities associated with the benefits realized from bonus depreciation are accrued as a component of Net deferred income tax liability (noncurrent) in the Consolidated Balance Sheet. The bonus depreciation rate for federal income tax purposes is 50% for 2012 and will expire at the end of the year. U.S. Cellular expects federal income tax payments to substantially increase beginning in 2013 and remain at a higher level for several years as the amount of U.S. Cellular’s federal tax depreciation deduction substantially decreases.

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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 exercise of outstanding stock options and the vesting of restricted stock units.

The amounts used in computing earnings per Common and Series A Common Share and the effects of potentially dilutive securities on the weighted average number of Common and Series A Common Shares are as follows:

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2012		2011		2012		2011
(Dollars and shares in thousands, except per share amounts)
Net income attributable to U.S. Cellular shareholders		$	35,451	$	62,140	$	150,628	$	172,240

Weighted average number of shares used in basic earnings per share			84,737		84,547		84,671		84,984
Effects of dilutive securities:
	Stock options		57		86		63		124
	Restricted stock units		358		307		356		340
Weighted average number of shares used in diluted earnings per share