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 March 31, 2016

[ ]

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

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

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 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]

[ ]

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

[ ]

Accelerated filer

[x]

Non-accelerated filer

[ ]

Smaller reporting company

[ ]

Indicate by check mark 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 March 31, 2016

Common Shares, $1 par value

51,390,049 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 March 31, 2016

Index
			Page No.
Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited)	1
		Consolidated Statement of Operations	1
		Consolidated Statement of Cash Flows	2
		Consolidated Balance Sheet	3
		Consolidated Statement of Changes in Equity	5
		Notes to Consolidated Financial Statements	7

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
		Executive Overview	14
		Terms used by U.S. Cellular	16
		Operational Overview	17
		Financial Overview	19
		Liquidity and Capital Resources	21
		Consolidated Cash Flows	24
		Consolidated Balance Sheet Analysis	25
		Application of Critical Accounting Policies and Estimates	25
		Recent Accounting Pronouncements	25
		Regulatory Matters	25
		Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement	26
		Supplemental Information	29

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30

	Item 4.	Controls and Procedures	30

Part II.	Other Information		31

	Item 1.	Legal Proceedings	31

	Item1A.	Risk Factors	31

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

	Item 5.	Other Information	31

	Item 6.	Exhibits	32

Signatures

Part I. Financial Information

Item 1. Financial Statements

United States Cellular Corporation

Consolidated Statement of Operations

(Unaudited)

			Three Months Ended
			March 31,
			2016		2015
(Dollars and shares in millions, except per share amounts)
Operating revenues
	Service		$	760	$	828
	Equipment sales			198		137
		Total operating revenues		958		965

Operating expenses
	System operations (excluding Depreciation, amortization and accretion reported below)			184		191
	Cost of equipment sold			256		238
	Selling, general and administrative (including charges from affiliates of $25 and $22, respectively)			361		369
	Depreciation, amortization and accretion			153		147
	(Gain) loss on asset disposals, net			5		4
	(Gain) loss on sale of business and other exit costs, net			–		(111)
	(Gain) loss on license sales and exchanges, net			–		(123)
		Total operating expenses		959		715

Operating income (loss)				(1)		250

Investment and other income (expense)
	Equity in earnings of unconsolidated entities			35		34
	Interest and dividend income			13		8
	Interest expense			(28)		(20)
	Other, net			1		–
		Total investment and other income		21		22

Income before income taxes				20		272
	Income tax expense			11		107
Net income				9		165
Less: Net income attributable to noncontrolling interests, net of tax				–		5
Net income attributable to U.S. Cellular shareholders			$	9	$	160

Basic weighted average shares outstanding				84		84
Basic earnings per share attributable to U.S. Cellular shareholders			$	0.10	$	1.90

Diluted weighted average shares outstanding				85		85
Diluted earnings per share attributable to U.S. Cellular shareholders			$	0.10	$	1.89

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

United States Cellular Corporation

Consolidated Statement of Cash Flows

(Unaudited)

					Three Months Ended
					March 31,
					2016		2015
(Dollars in millions)
Cash flows from operating activities
	Net income				$	9	$	165
	Add (deduct) adjustments to reconcile net income to net cash flows
		from operating activities
			Depreciation, amortization and accretion			153		147
			Bad debts expense			19		29
			Stock-based compensation expense			5		6
			Deferred income taxes, net			4		(26)
			Equity in earnings of unconsolidated entities			(35)		(34)
			Distributions from unconsolidated entities			14		13
			(Gain) loss on asset disposals, net			5		4
			(Gain) loss on sale of business and other exit costs, net			–		(111)
			(Gain) loss on license sales and exchanges, net			–		(123)
	Changes in assets and liabilities from operations
			Accounts receivable			15		(1)
			Equipment installment plans receivable			(41)		(36)
			Inventory			(2)		102
			Accounts payable			43		(19)
			Customer deposits and deferred revenues			(6)		13
			Accrued taxes			30		189
			Accrued interest			9		10
			Other assets and liabilities			(59)		(73)
				Net cash provided by operating activities		163		255

Cash flows from investing activities
	Cash paid for additions to property, plant and equipment					(103)		(116)
	Cash paid for acquisitions and licenses					–		(280)
	Cash received from divestitures and exchanges					2		274
	Other investing activities					(1)		2
				Net cash used in investing activities		(102)		(120)

Cash flows from financing activities
	Repayment of long-term debt					(3)		–
	Common shares reissued for benefit plans, net of tax payments					1		–
	Common shares repurchased					(2)		(2)
	Payment of debt issuance costs					–		(3)
	Acquisition of assets in common control transaction					–		(2)
	Other financing activities					–		(3)
				Net cash used in financing activities		(4)		(10)

Net increase in cash and cash equivalents						57		125

Cash and cash equivalents
	Beginning of period					715		212
	End of period				$	772	$	337

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

United States Cellular Corporation

Consolidated Balance Sheet — Assets

(Unaudited)

				March 31,		December 31,
				2016		2015
(Dollars in millions)
Current assets
	Cash and cash equivalents			$	772	$	715
	Accounts receivable
		Customers and agents, less allowances of $40 and $45, respectively			606		608
		Roaming			18		20
		Affiliated			1		–
		Other, less allowances of $1 and $1, respectively			41		44
	Inventory, net				151		149
	Prepaid expenses				96		81
	Other current assets				23		55
			Total current assets		1,708		1,672

Assets held for sale					26		–

Licenses					1,808		1,834
Goodwill					370		370
Investments in unconsolidated entities					384		363

Property, plant and equipment
	In service and under construction				7,693		7,669
	Less: Accumulated depreciation and amortization				5,120		5,020
			Property, plant and equipment, net		2,573		2,649

Other assets and deferred charges					188		172

Total assets1				$	7,057	$	7,060

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

United States Cellular Corporation

Consolidated Balance Sheet — Liabilities and Equity

(Unaudited)

				March 31,		December 31,
				2016		2015
(Dollars and shares in millions, except per share amounts)
Current liabilities
	Current portion of long-term debt			$	11	$	11
	Accounts payable
		Affiliated			10		10
		Trade			295		275
	Customer deposits and deferred revenues				245		251
	Accrued taxes				24		28
	Accrued compensation				41		68
	Other current liabilities				97		105
			Total current liabilities		723		748

Deferred liabilities and credits
	Net deferred income tax liability				825		821
	Other deferred liabilities and credits				297		290

Long-term debt, net					1,626		1,629

Commitments and contingencies					–		–

Noncontrolling interests with redemption features					2		1

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 84 shares (33 Series A Common and 51 Common Shares)
			Par Value ($1.00 per share) ($33 Series A Common and $55 Common Shares)		88		88
		Additional paid-in capital			1,501		1,497
		Treasury shares, at cost, 4 and 4 Common Shares, respectively			(155)		(157)
		Retained earnings			2,140		2,133
			Total U.S. Cellular shareholders' equity		3,574		3,561

	Noncontrolling interests				10		10

		Total equity			3,584		3,571

Total liabilities and equity1				$	7,057	$	7,060

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


1		The consolidated total assets as of March 31, 2016 and December 31, 2015 include certain assets held by consolidated VIEs of $828 million and $658 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, 2016 and December 31, 2015 include certain liabilities of consolidated VIEs of $19 million and $1 million, respectively, for which the creditors of the VIEs have no recourse to the general credit of U.S. Cellular. See Note 8 — Variable Interest Entities for additional information.

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)
Balance, December 31, 2015	$	88	$	1,497	$	(157)	$	2,133	$	3,561	$	10	$	3,571
Net income attributable to U.S. Cellular shareholders		–		–		–		9		9		–		9
Repurchase of Common shares		–		–		(2)		–		(2)		–		(2)
Incentive and compensation plans		–		–		4		(2)		2		–		2
Stock-based compensation awards		–		5		–		–		5		–		5
Tax windfall (shortfall) from stock awards		–		(1)		–		–		(1)		–		(1)
Balance, March 31, 2016	$	88	$	1,501	$	(155)	$	2,140	$	3,574	$	10	$	3,584

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
	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)
Balance, December 31, 2014	$	88	$	1,473	$	(169)	$	1,910	$	3,302	$	11	$	3,313
Net income attributable to U.S. Cellular shareholders		–		–		–		160		160		–		160
Net loss attributable to noncontrolling interests classified as equity		–		–		–		–		–		(1)		(1)
Repurchase of Common shares		–		–		(2)		–		(2)		–		(2)
Stock-based compensation awards		–		6		–		–		6		–		6
Acquisition of assets in common control transaction		–		1		–		(3)		(2)		–		(2)
Balance, March 31, 2015	$	88	$	1,480	$	(171)	$	2,067	$	3,464	$	10	$	3,474

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

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 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.

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 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. Calculated amounts and percentages are based on the underlying actual numbers rather than the numbers rounded to millions as presented. 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, 2015.

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, 2016 and December 31, 2015, and its results of operations, cash flows and changes in equity for the three months ended March 31, 2016 and 2015. The Consolidated Statement of Comprehensive Income was not included because comprehensive income for the three months ended March 31, 2016 and 2015 equaled net income. These results are not necessarily indicative of the results to be expected for the full year.

Recently Issued Accounting Pronouncements

In May 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. In August 2015, the FASB issued Accounting Standards Update 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, requiring the adoption of ASU 2014-09 on January 1, 2018 for U.S. Cellular. Early adoption as of January 1, 2017 is permitted; 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 and results of operations.

In August 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.

In July 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.

In January 2016, the FASB issued Accounting Standards Update 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). This ASU introduces changes to current accounting for equity investments and financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. U.S. Cellular is required to adopt ASU 2016-01 on January 1, 2018. Certain provisions are eligible for early adoption. U.S. Cellular is evaluating the effects that adoption of ASU 2016-01 will have on its financial position and results of operations.

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 requires lessees to record a right-of-use asset and lease liability for almost all leases. This ASU does not substantially impact lessor accounting. U.S. Cellular is required to adopt ASU 2016-02 on January 1, 2019. Early adoption is permitted. Upon adoption of ASU 2016-02, U.S. Cellular expects a substantial increase to assets and liabilities on its balance sheet. U.S. Cellular is still evaluating the full effects that adoption of ASU 2016-02 will have on its financial position and results of operations.

In March 2016, the FASB issued Accounting Standards Update 2016-04, Liabilities – Extinguishments of Liabilities: Recognition of Breakage from Certain Prepaid Stored-Value Products (“ASU 2016-04”). ASU 2016-04 requires companies that sell prepaid stored-value products redeemable for goods, services or cash at third-party merchants to recognize breakage (i.e. the value that is ultimately not redeemed by the consumer) in a way that is consistent with how it will be recognized under the new revenue recognition standard. U.S. Cellular is required to adopt ASU 2016-04 on January 1, 2018. Early adoption is permitted. U.S. Cellular is evaluating the effects that adoption of ASU 2016-04 will have on its financial position and results of operations.

In March 2016, the FASB issued Accounting Standards Update 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). The amendments in ASU 2016-08 clarify the guidance on principal versus agent considerations as it relates to recognizing revenue. U.S. Cellular is required to adopt ASU 2016-08 on January 1, 2018 in conjunction with the effective date of ASU 2014-09. Early adoption as of January 1, 2017 is permitted; however, U.S. Cellular does not intend to adopt early. U.S. Cellular is evaluating the effects that adoption of ASU 2016-08 will have on its financial position and results of operations.

In March 2016, the FASB issued Accounting Standards Update 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 intends to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. U.S. Cellular is required to adopt ASU 2016-09 on January 1, 2017. Early adoption is permitted. U.S. Cellular is evaluating the effects that adoption of ASU 2016-09 will have on its financial position, results of operations and cash flows.

In April 2016, the FASB issued Accounting Standards Update 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing (“ASU 2016-10”). ASU 2016-10 provides clarification around identifying performance obligations and accounting arrangements whereby a license is granted as it relates to ASC 606 – Revenue from Contracts with Customers. U.S. Cellular is required to adopt ASU 2016-10 on January 1, 2018 in conjunction with the effective date of ASU 2014-09. Early adoption as of January 1, 2017 is permitted; however, U.S. Cellular does not intend to adopt early. U.S. Cellular is evaluating the effects that adoption of ASU 2016-10 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 $17 million and $21 million for the three months ended March 31, 2016 and 2015, respectively.

Note 2 Fair Value Measurements

As of March 31, 2016 and December 31, 2015, 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	March 31, 2016				December 31, 2015
		Level within the Fair Value Hierarchy	Book Value		Fair Value		Book Value		Fair Value
(Dollars in millions)
Cash and cash equivalents		1	$	772	$	772	$	715	$	715
Long-term debt
	Retail	2		917		933		917		929
	Institutional	2		533		485		533		501
	Other	2		211		211		214		214

The fair value of Cash and cash equivalents approximates the book value 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, 7.25% Senior Notes due 2063 and 7.25% Senior Notes due 2064. 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 facility. 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 3.19% to 7.84% and 3.19% to 7.51% at March 31, 2016 and December 31, 2015, respectively.

Note 3 Equipment Installment Plans

U.S. Cellular offers customers, through its owned and agent distribution channels, the option to purchase certain devices under equipment installment contracts over a specified time period. For certain equipment installment plans (“EIP”), 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. As of March 31, 2016 and December 31, 2015, the guarantee liability related to these plans was $77 million and $93 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. Equipment installment plan receivables had a weighted average effective imputed interest rate of 9.9% and 9.7% as of March 31, 2016 and December 31, 2015, respectively.

The following table summarizes unbilled equipment installment plan receivables as of March 31, 2016 and December 31, 2015. Such amounts are included in the Consolidated Balance Sheet as Accounts receivable – customers and agents and Other assets and deferred charges, where applicable.

	March 31, 2016		December 31, 2015
(Dollars in millions)
Short-term portion of unbilled equipment installment plan receivables, gross	$	300	$	279
Short-term portion of unbilled deferred interest		(23)		(21)
Short-term portion of unbilled allowance for credit losses		(16)		(14)
Short-term portion of unbilled equipment installment plan receivables, net	$	261	$	244

Long-term portion of unbilled equipment installment plan receivables, gross	$	91	$	76
Long-term portion of unbilled deferred interest		(3)		(2)
Long-term portion of unbilled allowance for credit losses		(7)		(6)
Long-term portion of unbilled equipment installment plan receivables, net	$	81	$	68

U.S. Cellular assesses the collectability of the equipment installment plan receivables based on historical payment experience, account aging and other qualitative factors and provides an allowance for estimated losses. The credit profiles of U.S. Cellular’s customers on equipment installment plans are similar to those of U.S. Cellular customers with traditional subsidized plans. Customers with a higher risk credit profile are required to make a deposit for equipment purchased through an installment contract.

Note 4 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 share and the effects of potentially dilutive securities on the weighted average number of common shares were as follows:

		Three Months Ended
		March 31,
		2016		2015
(Dollars and shares in millions, except per share amounts)
Net income attributable to U.S. Cellular shareholders		$	9	$	160

Weighted average number of shares used in basic earnings per share			84		84
Effects of dilutive securities1			1		1
Weighted average number of shares used in diluted earnings per share			85		85

Basic earnings per share attributable to U.S. Cellular shareholders		$	0.10	$	1.90

Diluted earnings per share attributable to U.S. Cellular shareholders		$	0.10	$	1.89

1	Includes effects of stock options and restricted stock units.

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 per share attributable to U.S. Cellular shareholders because their effects were antidilutive. The number of such Common Shares excluded was approximately 2 million shares for both the three months ended March 31, 2016 and 2015.

Note 5 Acquisitions, Divestitures and Exchanges

In the first quarter of 2016, U.S. Cellular entered into multiple agreements to transfer FCC licenses in non-operating markets and receive FCC licenses in operating markets. The agreements were with third parties and provide for the transfer of certain AWS and PCS spectrum licenses and approximately $29 million, net, in cash to U.S. Cellular, in exchange for U.S. Cellular transferring certain AWS, PCS and 700 MHz spectrum licenses to the third parties. The transactions are subject to regulatory approval and other customary closing conditions, and are expected to close in 2016. Upon closing of each transaction, U.S. Cellular expects to recognize a gain. As a result of these exchange agreements, licenses with a carrying value of $26 million have been classified as “Assets held for sale” in the Consolidated Balance Sheet as of March 31, 2016.

In 2015 and 2016, U.S. Cellular entered into multiple spectrum license purchase agreements that have not yet closed. The aggregate purchase price for these spectrum licenses is $54 million. These agreements are for spectrum licenses located in U.S. Cellular’s existing operating markets and are expected to close in 2016.

Note 6 Intangible Assets

Changes in U.S. Cellular’s Licenses for the three months ended March 31, 2016 are presented below. There were no significant changes to Goodwill during the three months ended March 31, 2016.

Licenses


(Dollars in millions)
Balance December 31, 2015¹		$	1,834
	Transferred to Assets held for sale		(26)
Balance March 31, 2016¹		$	1,808

1	Amounts include payments totaling $338 million made by Advantage Spectrum L.P. to the FCC for licenses in which it was the provisional winning bidder in Auction 97. These licenses have not yet been granted by the FCC. See Note 8 — Variable Interest Entities for additional information.

Note 7 Investments in Unconsolidated Entities

Investments in unconsolidated entities consist of amounts invested in wireless entities in which U.S. Cellular holds a noncontrolling interest. These investments are accounted for using either the equity or cost method.

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,
	2016		2015
(Dollars in millions)
Revenues	$	1,682	$	1,730
Operating expenses		1,230		1,287
Operating income		452		443
Other income (expense), net		(4)		5
Net income	$	448	$	448

Note 8 Variable Interest Entities

In February 2015, the FASB issued Accounting Standards Update 2015-02, Consolidation: Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 changes consolidation accounting including revising certain criteria for identifying variable interest entities. U.S. Cellular adopted the provisions of this standard as of January 1, 2016. As a result, certain consolidated subsidiaries and unconsolidated entities that were not defined as variable interest entities under previous accounting guidance are defined as variable interest entities under the provisions of ASU 2015-02. U.S. Cellular’s modified retrospective adoption of ASU 2015-02 did not change the group of entities which U.S. Cellular is required to consolidate in its financial statements. Accordingly, the adoption of ASU 2015-02 did not impact its financial position or results of operations.

Consolidated VIEs

U.S. Cellular consolidates variable interest entities (“VIEs”) in which it has a controlling financial interest as defined by GAAP and is therefore deemed the primary beneficiary. A controlling financial interest will have both of the following characteristics: (a) the power to direct the VIE activities that most significantly impact economic performance and (b) the obligation to absorb the VIE losses and right to receive benefits that are significant to the VIE. U.S. Cellular reviews these criteria initially at the time it enters into agreements and subsequently when events warranting reconsideration occur. These VIEs have risks similar to those described in the “Risk Factors” in U.S. Cellular’s Form 10-K for the year ended December 31, 2015.

The following VIEs were formed to participate in FCC auctions of wireless spectrum and to fund, establish, and provide wireless service with respect to any FCC licenses won in the auctions:

Advantage Spectrum L.P. (“Advantage Spectrum”) and Frequency Advantage L.P., the general partner of Advantage Spectrum;
Aquinas Wireless L.P. (“Aquinas Wireless”); and
King Street Wireless L.P. (“King Street Wireless”) and King Street Wireless, Inc., the general partner of King Street Wireless.

These particular VIEs are collectively referred to as designated entities. Historically and as of March 31, 2016, U.S. Cellular consolidated these VIEs.

The power to direct the activities that most significantly impact the economic performance of these VIEs is shared. Specifically, the general partner of these VIEs has the exclusive right to manage, operate and control the limited partnerships and make all decisions to carry on the business of the partnerships. The general partner of each partnership needs the consent of the limited partner, an indirect U.S. Cellular subsidiary, to sell or lease certain licenses, to make certain large expenditures, admit other partners or liquidate the limited partnerships. Although the power to direct the activities of these VIEs is shared, U.S. Cellular has the most significant level of exposure to the variability associated with the economic performance of the VIEs, indicating that U.S. Cellular is the primary beneficiary of the VIEs. Therefore, in accordance with GAAP, these VIEs are consolidated.

In March 2015, King Street Wireless made a $60 million distribution to its owners. Of this distribution, $6 million was provided to King Street Wireless, Inc. and $54 million was provided to U.S. Cellular.

FCC Auction 97 ended in January 2015. U.S. Cellular participated in Auction 97 indirectly through its interest in Advantage Spectrum. An indirect subsidiary of U.S. Cellular is a limited partner in Advantage Spectrum. Advantage Spectrum applied as a designated entity, and expects to receive bid credits with respect to spectrum purchased in Auction 97. Advantage Spectrum was the winning bidder for 124 licenses for an aggregate bid of $338 million, after its expected designated entity discount of 25%. This amount is classified as Licenses in U.S. Cellular’s Consolidated Balance Sheet. Advantage Spectrum’s bid amount, less the initial deposit of $60 million paid in 2014, plus certain other charges totaling $2 million, was paid to the FCC in March 2015. As of March 31, 2016 and as of the filing date of this Form 10-Q, these licenses have not yet been granted by and are still pending before the FCC.

The remaining VIEs are comprised of limited partnerships that provide wireless service. ASU 2015-02 modified the manner in which limited partnerships and similar legal entities are evaluated under the variable interest model. A limited partnership is a variable interest entity unless the limited partners hold substantive participating rights or kick-out rights over the general partners. For certain limited partnerships, U.S. Cellular is the general partner and manages the operations. In these partnerships, the limited partners do not have substantive kick-out or participating rights and, further, such limited partners do not have the authority to remove the general partner. Therefore, beginning January 1, 2016, these limited partnerships are also recognized as VIEs and are consolidated under the variable interest model. Prior to the adoption of ASU 2015-02, these limited partnerships were consolidated under the voting interest model.

The following table presents the classification and balances of the consolidated VIEs’ assets and liabilities in U.S. Cellular’s Consolidated Balance Sheet.

			March 31,		December 31,
			2016¹		2015¹
(Dollars in millions)
Assets
	Cash and cash equivalents		$	2	$	1
	Accounts receivable			40		–
	Other current assets			7		–
	Assets held for sale			2		–
	Licenses2			652		649
	Property, plant and equipment, net			116		8
	Other assets and deferred charges			9		–
		Total assets	$	828	$	658

Liabilities
	Current liabilities		$	25	$	–
	Deferred liabilities and credits			12		1
		Total liabilities	$	37	$	1

1		ASU 2015-02 was adopted on a modified retrospective basis and, accordingly, prior year amounts have not been revised to reflect the change in guidance.
2		Includes payments totaling $338 million made by Advantage Spectrum to the FCC as described above.

Unconsolidated VIEs

U.S. Cellular manages the operations of and holds a variable interest in certain other limited partnerships, but is not the primary beneficiary of these entities and, therefore, does not consolidate them under the variable interest model outlined in ASU 2015-02.

U.S. Cellular’s total investment in these unconsolidated entities was $5 million at March 31, 2016 and December 31, 2015, and is included in Investments in unconsolidated entities in U.S. Cellular’s Consolidated Balance Sheet. The maximum exposure from unconsolidated VIEs is limited to the investment held by U.S. Cellular in those entities.

Other Related Matters

U.S. Cellular made contributions, loans and/or advances to its VIEs totaling $13 million and $281 million during the three months ended March 31, 2016 and March 31, 2015, respectively. U.S. Cellular may agree to make additional capital contributions and/or advances to these or other VIEs and/or to their general partners to provide additional funding for operations or the development of licenses granted in various auctions. U.S. Cellular may finance such amounts with a combination of cash on hand, borrowings under its revolving credit agreement and/or other long-term debt. There is no assurance that U.S. Cellular will be able to obtain additional financing on commercially reasonable terms or at all to provide such financial support.

United States Cellular Corporation

Item 2. Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Executive Overview

The following discussion and analysis should be read in conjunction with United States Cellular Corporation’s (“U.S. Cellular”) interim consolidated financial statements and notes included in Item 1 above, 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, 2015. Analysis of U.S. Cellular’s financial results compares the three months ended March 31, 2016 to the three months ended March 31, 2015. Calculated amounts and percentages are based on the underlying actual numbers rather than the numbers rounded to millions as presented.

This report contains statements that are not based on historical facts, including the words “believes,” “anticipates,” “intends,” “expects” and similar words. 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.

U.S. Cellular uses certain “non-GAAP financial measures” throughout the MD&A. A discussion of the reason U.S. Cellular uses these measures 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 section within the MD&A of this Form 10-Q Report.

General

U.S. Cellular owns, operates, and invests in wireless markets throughout the United States. U.S. Cellular is an 84%-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

Serves approximately 4.9 million customers including 4.5 million postpaid and 0.4 million prepaid customers
Operates in 23 states
Employs approximately 6,500 employees
Headquartered in Chicago, Illinois
6,306 cell sites including 3,989 owned towers in service

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 2016, U.S. Cellular will continue to execute on its strategies to grow revenues by increasing its customer base, driving smartphone adoption and ongoing data usage monetization. Strategic efforts include:

U.S. Cellular deployed 4G LTE as a result of U.S. Cellular’s strategic initiative to enhance its network. 4G LTE now reaches 99% of postpaid customers and 98% of cell sites. The adoption of data-centric smartphones and connected devices is driving significant growth in data traffic. At the end of the first quarter, 74% of postpaid customers had 4G capable devices, with the LTE network handling 88% of data traffic. In 2015, U.S. Cellular began field trials related to VoLTE technology. VoLTE technology, when deployed commercially, will enable customers to utilize the LTE network for both voice and data services. These trials were completed in the first quarter of 2016. Efforts related to the deployment of VoLTE will continue throughout 2016.
In the first quarter of 2016, U.S. Cellular continued to enhance its spectrum position and monetize non-strategic assets by entering into multiple agreements to transfer FCC licenses in non-operating markets and receive FCC licenses in operating markets. The agreements were with third parties for the purchase of certain spectrum licenses for cash and for the transfer of certain AWS and PCS spectrum licenses and approximately $29 million, net, in cash to U.S. Cellular, in exchange for U.S. Cellular transferring certain AWS, PCS and 700 MHz spectrum licenses to the third parties. The transactions are subject to regulatory approval and other customary closing conditions, and are expected to close in 2016. Upon closing of each transaction, U.S. Cellular expects to recognize a gain. See Note 5 — Acquisitions, Divestitures and Exchanges for additional information related to these transactions.
U.S. Cellular is focused on expanding its solutions available to business and government customers, including a growing suite of machine-to-machine solutions across various categories. U.S. Cellular will continue to enhance its advanced wireless services and connected solutions for consumer, business and government customers.

Terms U sed by U.S. Cellular

All defined terms in this MD&A are used as defined in the Notes to Consolidated Financial Statements, and additional terms are defined below:

4G LTE – fourth generation Long-Term Evolution which is a wireless broadband technology.
Auction 97 – An FCC auction of AWS-3 spectrum licenses that ended in January 2015.
Auction 1000 – An FCC auction of 600 MHz spectrum licenses being held in 2016 involving: (1) a “reverse auction” in which broadcast television licensees submit bids to voluntarily relinquish spectrum usage rights in exchange for payments; (2) a “repacking” of the broadcast television bands in order to free up certain broadcast spectrum for other uses; and (3) a “forward auction” of licenses for spectrum cleared through this process to be used for wireless communications.
Churn Rate – represents the percentage of the customers that disconnect service each month. These rates represent the average monthly churn rate for each respective period.
FCC – Federal Communications Commission
Gross Additions – represents the total number of new customers added during the period, without regard to customers who terminate service.
Net Additions – represents the total number of new customers added during the period, net of customers who terminated service during that period.
Postpaid Average Billings per Account (“Postpaid ABPA”) – metric is calculated by dividing total postpaid service revenues plus equipment installment plan billings by the average number of postpaid accounts and by the number of months in the period.
Postpaid Average Billings per User (“Postpaid ABPU”) – metric is calculated by dividing total postpaid service revenues plus equipment installment plan billings by the average number of postpaid customers and by the number of months in the period.
Postpaid Average Revenue per Account (“Postpaid ARPA”) – metric 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 is calculated by dividing total postpaid service revenues by the average number of postpaid customers and by the number of months in the period.
Smartphone Penetration – is calculated by dividing postpaid smartphone customers by total postpaid customers.
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 communication and data over 4G LTE networks.

Operational Overview

Postpaid Customer Results
		Q1 2015	Q1 2016
	Gross Additions	200,000	215,000
	Net Additions	9,000	45,000
	Churn	1.48%	1.28%