Edgar Filing: UNITED STATES CELLULAR CORP

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 June 30, 2015

[ ]

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)

(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

Indicate by check mark

Yes

• 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]

[ ]

• 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).

[x]

[ ]

• 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

[ ]

Accelerated filer

[x]

Non-accelerated filer

[ ]

Smaller reporting company

[ ]

• whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[ ]

[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 June 30, 2015

Common Shares, $1 par value

51,341,340 Shares

Series A Common Shares, $1 par value

33,005,877 Shares

United States Cellular Corporation

Quarterly Report on Form 10-Q
For the Quarterly Period Ended June 30, 2015

Index
				Page No.
Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited)		4

		Consolidated Statement of Operations		4
			Three and Six Months Ended June 30, 2015 and 2014

		Consolidated Statement of Cash Flows		5
			Six Months Ended June 30, 2015 and 2014

		Consolidated Balance Sheet		6
			June 30, 2015 and December 31, 2014

		Consolidated Statement of Changes in Equity		8
			Six Months Ended June 30, 2015 and 2014

		Notes to Consolidated Financial Statements		10

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		18

		Overview		19

		Regulatory Matters		21

		Results of Operations		22

		Recent Accounting Pronouncements		29

		Liquidity and Capital Resources		30

		Application of Critical Accounting Policies and Estimates		34

		Certain Relationships and Related Transactions		34

		Safe Harbor Cautionary Statement		35

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		37

	Item 4.	Controls and Procedures		37

Part II.	Other Information			37

	Item 1.	Legal Proceedings		37

	Item1A.	Risk Factors		37

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38

	Item 5.	Other Information	38

	Item 6.	Exhibits	39

Signatures

Part I. Financial Information

Item 1. Financial Statements

United States Cellular Corporation

Consolidated Statement of Operations

(Unaudited)

			Three Months Ended				Six Months Ended
			June 30,				June 30,
(Dollars and shares in thousands, except per share amounts)			2015		2014		2015		2014
Operating revenues
	Service		$	824,373	$	843,473	$	1,652,584	$	1,697,086
	Equipment sales			151,294		114,300		288,328		186,498
		Total operating revenues		975,667		957,773		1,940,912		1,883,584

Operating expenses
	System operations (excluding Depreciation, amortization and accretion reported below)			196,276		187,131		386,953		367,738
	Cost of equipment sold			253,671		271,978		491,972		542,452
	Selling, general and administrative (including charges from affiliates of $24.0 million and $22.9 million, respectively, for the three months, and $43.7 million and $44.1 million, respectively, for the six months)			362,971		404,252		731,939		799,816
	Depreciation, amortization and accretion			150,581		148,337		297,666		316,090
	(Gain) loss on asset disposals, net			5,399		6,893		9,650		8,827
	(Gain) loss on sale of business and other exit costs, net			(1,705)		(10,511)		(113,182)		(17,411)
	(Gain) loss on license sales and exchanges, net			(25)		–		(122,898)		(91,446)
		Total operating expenses		967,168		1,008,080		1,682,100		1,926,066

Operating income (loss)				8,499		(50,307)		258,812		(42,482)

Investment and other income (expense)
	Equity in earnings of unconsolidated entities			35,584		33,120		70,055		70,195
	Interest and dividend income			8,969		1,573		16,535		2,457
	Interest expense			(20,154)		(14,336)		(40,118)		(29,198)
	Other, net			91		100		196		186
		Total investment and other income		24,490		20,457		46,668		43,640

Income (loss) before income taxes				32,989		(29,850)		305,480		1,158
	Income tax expense (benefit)			13,079		(10,399)		120,580		2,205
Net income (loss)				19,910		(19,451)		184,900		(1,047)
Less: Net income (loss) attributable to noncontrolling interests, net of tax				558		(662)		5,484		(1,740)
Net income (loss) attributable to U.S. Cellular shareholders				19,352		(18,789)		179,416		693

Basic weighted average shares outstanding				84,293		84,341		84,168		84,277
Basic earnings (loss) per share attributable to U.S. Cellular shareholders			$	0.23	$	(0.22)	$	2.13	$	0.01

Diluted weighted average shares outstanding				84,892		84,341		84,849		85,041
Diluted earnings (loss) per share attributable to U.S. Cellular shareholders			$	0.23	$	(0.22)	$	2.11	$	0.01

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

United States Cellular Corporation

Consolidated Statement of Cash Flows

(Unaudited)

				Six Months Ended
				June 30,
(Dollars in thousands)				2015		2014
Cash flows from operating activities
	Net income (loss)			$	184,900	$	(1,047)
	Add (deduct) adjustments to reconcile net income (loss) to cash flows
		from operating activities
			Depreciation, amortization and accretion		297,666		316,090
			Bad debts expense		51,973		49,083
			Stock-based compensation expense		11,913		10,560
			Deferred income taxes, net		(16,549)		(13,267)
			Equity in earnings of unconsolidated entities		(70,055)		(70,195)
			Distributions from unconsolidated entities		27,214		65,565
			(Gain) loss on asset disposals, net		9,650		8,827
			(Gain) loss on sale of business and other exit costs, net		(113,182)		(17,411)
			(Gain) loss on license sales and exchanges, net		(122,898)		(91,446)
			Noncash interest expense		795		540
			Other operating activities		(387)		57
	Changes in assets and liabilities from operations
			Accounts receivable		4,669		79,148
			Equipment installment plans receivable		(65,124)		(47,971)
			Inventory		131,667		38,329
			Accounts payable		25,404		(36,600)
			Customer deposits and deferred revenues		(7,284)		10,793
			Accrued taxes		138,804		(20,280)
			Accrued interest		392		61
			Other assets and liabilities		(65,599)		(67,976)
					423,969		212,860

Cash flows from investing activities
	Cash used for additions to property, plant and equipment				(259,235)		(262,397)
	Cash paid for acquisitions and licenses				(279,656)		(17,245)
	Cash received from divestitures and exchanges				281,573		125,905
	Cash received for investments				–		10,000
	Other investing activities				1,125		836
					(256,193)		(142,901)

Cash flows from financing activities
	Common shares reissued for benefit plans, net of tax payments				(1,570)		830
	Common shares repurchased				(2,302)		(8,298)
	Payment of debt issuance costs				(3,080)		–
	Acquisition of towers in common control transaction				(2,437)		–
	Distributions to noncontrolling interests				(5,872)		(482)
	Other financing activities				(1,746)		(16)
					(17,007)		(7,966)

Net increase in cash and cash equivalents					150,769		61,993

Cash and cash equivalents
	Beginning of period				211,513		342,065
	End of period			$	362,282	$	404,058

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

United States Cellular Corporation

Consolidated Balance Sheet — Assets

(Unaudited)

			June 30,		December 31,
(Dollars in thousands)			2015		2014
Current assets
	Cash and cash equivalents		$	362,282	$	211,513
	Accounts receivable
		Customers and agents, less allowances of $39,942 and $37,654, respectively		489,832		466,048
		Roaming		26,439		23,865
		Affiliated		359		994
		Other, less allowances of $843 and $859, respectively		45,838		66,051
	Inventory, net			135,401		267,068
	Prepaid expenses			73,319		59,744
	Net deferred income tax asset			77,969		93,058
	Other current assets			18,144		90,834
				1,229,583		1,279,175

Assets held for sale				22,203		107,055

Investments
	Licenses			1,827,656		1,443,438
	Goodwill			369,596		370,151
	Investments in unconsolidated entities			325,857		283,014
				2,523,109		2,096,603
Property, plant and equipment
	In service and under construction			7,420,889		7,458,740
	Less: Accumulated depreciation			4,795,074		4,730,523
				2,625,815		2,728,217

Other assets and deferred charges				195,909		276,218

Total assets			$	6,596,619		6,487,268

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

United States Cellular Corporation

Consolidated Balance Sheet — Liabilities and Equity

(Unaudited)

				June 30,		December 31,
(Dollars and shares in thousands)				2015		2014
Current liabilities
	Current portion of long-term debt			$	57	$	46
	Accounts payable
		Affiliated			11,892		9,774
		Trade			274,844		306,845
	Customer deposits and deferred revenues				280,715		287,562
	Accrued taxes				97,537		36,652
	Accrued compensation				54,533		66,162
	Other current liabilities				108,996		149,853
					828,574		856,894

Liabilities held for sale					–		20,934

Deferred liabilities and credits
	Net deferred income tax liability				827,339		859,867
	Other deferred liabilities and credits				290,302		284,002

Long-term debt					1,151,999		1,151,819

Commitments and contingencies					–		–

Noncontrolling interests with redemption features					1,178		1,150

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 84,347 shares (33,006 Series A Common and 51,341 Common Shares) and 84,080 shares (33,006 Series A Common and 51,074 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			1,484,753		1,472,558
		Treasury shares, at cost, 3,727 and 3,994 Common Shares, respectively			(157,795)		(169,139)
		Retained earnings			2,072,000		1,910,498
			Total U.S. Cellular shareholders' equity		3,487,032		3,301,991

	Noncontrolling interests				10,195		10,611

		Total equity			3,497,227		3,312,602

Total liabilities and equity				$	6,596,619	$	6,487,268

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

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, 2014	$	88,074	$	1,472,558	$	(169,139)	$	1,910,498	$	3,301,991	$	10,611	$	3,312,602
Add (Deduct)
Net income attributable to U.S. Cellular shareholders		–		–		–		179,416		179,416		–		179,416
Net loss attributable to noncontrolling interests classified as equity		–		–		–		–		–		(183)		(183)
Repurchase of Common Shares		–		–		(2,302)		–		(2,302)		–		(2,302)
Incentive and compensation plans		–		186		13,646		(15,477)		(1,645)		–		(1,645)
Stock-based compensation awards		–		11,436		–		–		11,436		–		11,436
Tax windfall (shortfall) from stock awards		–		(307)		–		–		(307)		–		(307)
Distributions to noncontrolling interests		–		–		–		–		–		(233)		(233)
Acquisition of towers in common control transaction		–		885		–		(2,437)		(1,552)		–		(1,552)
Adjust investment in subsidiaries for noncontrolling interest purchases		–		(5)		–		–		(5)		–		(5)
Balance, June 30, 2015	$	88,074	$	1,484,753	$	(157,795)	$	2,072,000	$	3,487,032	$	10,195	$	3,497,227

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

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, 2013	$	88,074	$	1,424,729	$	(164,692)	$	2,043,095	$	3,391,206	$	18,391	$	3,409,597
Add (Deduct)
Net income attributable to U.S. Cellular shareholders		–		–		–		693		693		–		693
Net loss attributable to noncontrolling interests classified as equity		–		–		–		–		–		(2,136)		(2,136)
Repurchase of Common Shares		–		–		(8,598)		–		(8,598)		–		(8,598)
Incentive and compensation plans		–		–		12,153		(11,433)		720		–		720
Stock-based compensation awards		–		9,845		–		–		9,845		–		9,845
Tax windfall (shortfall) from stock awards		–		(529)		–		–		(529)		–		(529)
Distributions to noncontrolling interests		–		–		–		–		–		(459)		(459)
Balance, June 30, 2014	$	88,074	$	1,434,045	$	(161,137)	$	2,032,355	$	3,393,337	$	15,796	$	3,409,133

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

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, 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. Certain prior year amounts have been reclassified to conform to the 2015 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, 2014.

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 June 30, 2015 and December 31, 2014, the results of operations for the three and six months ended June 30, 2015 and 2014, and cash flows and changes in equity for the six months ended June 30, 2015 and 2014. The Consolidated Statement of Comprehensive Income was not included because comprehensive income for the three and six months ended June 30, 2015 and 2014 equaled net income for these periods. These results are not necessarily indicative of the results to be expected for the full year.

Recently Issued Accounting Pronouncements

On May 28, 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers. ASU 2014-09 has an effective date of January 1, 2017. However, on July 9, 2015, the FASB affirmed a proposal to defer the effective date for one year to January 1, 2018. Under this proposal, early adoption as of January 1, 2017 also would be permissible; however, U.S. Cellular does not intend to adopt early. U.S. Cellular is evaluating the effects that adoption of ASU 2014-09 will have on its financial position, results of operations, and disclosures.

On August 27, 2014, the FASB issued Accounting Standards Update 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 requires U.S. Cellular to assess its ability to continue as a going concern each interim and annual reporting period and provide certain disclosures if there is substantial doubt about the entity’s ability to continue as a going concern, including management’s plan to alleviate the substantial doubt. U.S. Cellular is required to adopt the provisions of ASU 2014-15 for the annual period ending December 31, 2016, but early adoption is permitted. The adoption of ASU 2014-15 will not impact U.S. Cellular’s financial position or results of operations but may impact future disclosures.

On February 18, 2015, the FASB issued Accounting Standards Update 2015-02, Consolidation: Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 simplifies consolidation accounting by reducing the number of consolidation models. Additionally, ASU 2015-02 changes certain criteria for identifying variable interest entities. U.S. Cellular is required to adopt the provisions of ASU 2015-02 effective January 1, 2016. Early adoption is permitted. U.S. Cellular expects that certain consolidated subsidiaries that are not defined as variable interest entities under current accounting guidance will be defined as variable interest entities under the provisions of ASU 2015-02. However, U.S. Cellular does not expect the adoption of ASU 2015-02 to change the group of entities which U.S. Cellular is required to consolidate in its financial statements. Accordingly, U.S. Cellular does not expect the adoption of ASU 2015-02 to impact its financial position or results of operations. However, additional disclosures are expected.

On April 7, 2015, the FASB issued Accounting Standards Update 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires certain debt issuance costs to be presented in the balance sheet as an offset to the related debt obligation. U.S. Cellular is required to apply the provisions of this update effective January 1, 2016 on a retrospective basis. Early adoption is permitted. As of June 30, 2015, U.S. Cellular had $27.3 million in debt issuance costs classified as Other assets and deferred charges that, upon adoption of the new standard, would be reclassified as an offset to Long-term debt.

On July 22, 2015, the FASB issued Accounting Standards Update 2015-11, Inventory: Simplifying the Measurement of Inventory (“ASU 2015-11), which requires inventory to be measured at the lower of cost or net realizable value. U.S. Cellular is required to adopt ASU 2015-11 on January 1, 2017. Early adoption is permitted. U.S. Cellular is evaluating the effects that adoption of ASU 2015-11 will have on its financial position and results of operations.

Amounts Collected from Customers and Remitted to Governmental Authorities

U.S. Cellular records amounts collected from customers and remitted to governmental authorities net within a tax liability account if the 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. 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 $20.0 million and $41.2 million for the three and six months ended June 30, 2015, respectively, and $25.4 million and $51.8 million for the three and six months ended June 30, 2014, respectively.

2. Fair Value Measurements

As of June 30, 2015 and December 31, 2014, U.S. Cellular did not have any 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 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.

		Level within the Fair Value Hierarchy	June 30, 2015				December 31, 2014
		Level within the Fair Value Hierarchy	Book Value		Fair Value		Book Value		Fair Value
(Dollars in thousands)
Cash and cash equivalents		1	$	362,282	$	362,282	$	211,513	$	211,513
Long-term debt
	Retail	2		617,000		614,846		617,000		608,462
	Institutional	2		532,866		503,732		532,722		513,647

The fair value of Cash and cash equivalents approximate their book values due to the short-term nature of these financial instruments. Long-term debt excludes capital lease obligations and the current portion of Long-term debt. The fair value of “Retail” Long-term debt was estimated using market prices for the 6.95% Senior Notes and 7.25% Senior Notes. U.S. Cellular’s “Institutional” debt consists of the 6.7% Senior Notes which are traded over the counter. U.S. Cellular estimated the fair value of its Institutional debt through a discounted cash flow analysis using an estimated yield to maturity of 7.44% and 7.25% at June 30, 2015 and December 31, 2014, respectively.

3. Equipment Installment Plans

U.S. Cellular offers customers the option to purchase certain devices under an equipment installment contract over a period of up to 24 months. Under certain equipment installment plans, the customer has the right to upgrade to a new device after a specified period of time 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. As of June 30, 2015 and December 31, 2014, the guarantee liability related to these plans was $80.2 million and $57.5 million, respectively, and is reflected in Customer deposits and deferred revenues in the Consolidated Balance Sheet.

U.S. Cellular equipment installment plans do not provide for explicit interest charges. For equipment installment plans with a duration of greater than twelve months, U.S. Cellular imputes interest.

The following table summarizes unbilled equipment installment plan receivables as of June 30, 2015 and December 31, 2014. Such amounts are presented on the Consolidated Balance Sheet as Accounts receivable – customers and agents (short-term portion) and Other assets and deferred charges (long-term portion).

(Dollars in thousands)	June 30, 2015		December 31, 2014
Short-term portion of unbilled equipment installment plan receivables, gross	$	208,955	$	127,400
Short-term portion of unbilled deferred interest		(19,488)		(16,365)
Short-term portion of unbilled allowance for credit losses		(7,404)		(3,686)
Short-term portion of unbilled equipment installment plan receivables, net	$	182,063	$	107,349

Long-term portion of unbilled equipment installment plan receivables, gross	$	73,548	$	89,435
Long-term portion of unbilled deferred interest		(1,136)		(2,791)
Long-term portion of unbilled allowance for credit losses		(5,176)		(6,065)
Long-term portion of unbilled equipment installment plan receivables, net	$	67,236	$	80,579

U.S. Cellular assesses the collectability of equipment installment plan receivables based on historical payment experience, account aging and other qualitative factors. To mitigate credit risk, U.S. Cellular requires certain customers who desire to purchase equipment under an installment plan to make a down payment.

U.S. Cellular recorded out-of-period adjustments during the six months ended June 30, 2015 due to errors related to equipment installment plan transactions that were attributable to 2014. U.S. Cellular has determined that these adjustments were not material to the prior quarterly or annual periods, and also were not material to the current period or anticipated full year 2015 results. These equipment installment plan adjustments had the impact of reducing Equipment sales revenues by $5.7 million and $6.2 million, and Income before income taxes by $5.3 million and $5.8 million, for the three and six months ended June 30, 2015, respectively.

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 (loss) before income taxes for the three and six months ended June 30, 2015 was 39.6% and 39.5%, respectively, and for the three and six months ended June 30, 2014 was 34.8% and 190.4%, respectively.

The unusually high effective tax rate for the six months ended June 30, 2014 resulted from the relatively low amount of Income (loss) before income taxes in that period, which magnified the effective rate impact of discrete tax expense items.

5. Earnings Per Share

Basic earnings (loss) per share attributable to U.S. Cellular shareholders is computed by dividing Net income (loss) attributable to U.S. Cellular shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share attributable to U.S. Cellular shareholders is computed by dividing Net income (loss) 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 (loss) per common share and the effects of potentially dilutive securities on the weighted average number of common shares were as follows:

		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2015		2014		2015		2014
(Dollars and shares in thousands, except per share amounts)
Net income (loss) attributable to U.S. Cellular shareholders		$	19,352	$	(18,789)	$	179,416	$	693

Weighted average number of shares used in basic earnings (loss) per share			84,293		84,341		84,168		84,277
Effects of dilutive securities:
	Stock options		166		–		159		193
	Restricted stock units		433		–		522		571
Weighted average number of shares used in diluted earnings (loss) per share			84,892		84,341		84,849		85,041

Basic earnings (loss) per share attributable to U.S. Cellular shareholders		$	0.23	$	(0.22)	$	2.13	$	0.01

Diluted earnings (loss) per share attributable to U.S. Cellular shareholders		$	0.23	$	(0.22)	$	2.11	$	0.01

Certain Common Shares issuable upon the exercise of stock options or vesting of restricted stock units were not included in average diluted shares outstanding for the calculation of Diluted earnings (loss) per share attributable to U.S. Cellular shareholders because their effects were antidilutive. The number of such Common Shares excluded, if any, is shown in the table below.

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2015	2014	2015	2014
(Shares in thousands)
Stock options	3,539	3,559	2,953	1,820
Restricted stock units	85	1,191	205	141

6. Acquisitions, Divestitures and Exchanges

Divestiture Transaction

On May 16, 2013, pursuant to a Purchase and Sale Agreement, U.S. Cellular sold customers and certain PCS license spectrum to subsidiaries of Sprint Corp. fka Sprint Nextel Corporation (“Sprint”) in U.S. Cellular’s Chicago, central Illinois, St. Louis and certain Indiana/Michigan/Ohio markets (“Divestiture Markets”) in consideration for $480 million in cash. The Purchase and Sale Agreement also contemplated certain other agreements, together with the Purchase and Sale Agreement collectively referred to as the “Divestiture Transaction.”

These agreements require Sprint to reimburse U.S. Cellular up to $200 million (the “Sprint Cost Reimbursement”) for certain network decommissioning costs, network site lease rent and termination costs, network access termination costs, and employee termination benefits for specified engineering employees. As of June 30, 2015, U.S. Cellular had received a cumulative total of $104.8 million pursuant to the Sprint Cost Reimbursement. For the six months ended June 30, 2015 and 2014, $23.2 million and $34.1 million, respectively, of the Sprint Cost Reimbursement had been received and recorded in Cash received from divestitures and exchanges in the Consolidated Statement of Cash Flows.

For the six months ended June 30, 2015 and 2014, as a result of the Divestiture Transaction, U.S. Cellular recognized gains of $5.9 million and $17.7 million, respectively, in (Gain) loss on sale of business and other exit costs, net. For the three months ended June 30, 2015 and 2014, U.S. Cellular recognized gains of $1.5 million and $10.6 million, respectively.

Other Acquisitions, Divestitures and Exchanges

In March 2015, U.S. Cellular exchanged certain of its unbuilt PCS licenses for certain other PCS licenses located in U.S. Cellular’s existing operating markets and $117.0 million of cash. As of the transaction date, the licenses received in the transaction had an estimated fair value, per a market approach, of $43.5 million. A gain of $125.2 million was recorded in (Gain) loss on license sales and exchanges, net in the Consolidated Statement of Operations in the first quarter of 2015.
An FCC auction of AWS-3 spectrum licenses, referred to as Auction 97, ended in January 2015. U.S. Cellular participated in Auction 97 indirectly through its limited partnership interest in Advantage Spectrum L.P. (“Advantage Spectrum”). Advantage Spectrum was the provisional winning bidder for 124 licenses for an aggregate winning bid of $338.3 million, after its designated entity discount of 25%. Advantage Spectrum’s bid amount, less the initial deposit amount of $60.0 million paid in 2014, was paid to the FCC in March 2015. These licenses are expected to be granted by the FCC during the latter half of 2015. See Note 9 — Variable Interest Entities for additional information.
In December 2014, U.S. Cellular entered into an agreement with a third party to sell 595 towers and certain related contracts, assets, and liabilities for $159.0 million. This transaction was accomplished in two closings. The first closing occurred in December 2014 and included the sale of