2013 Annual Report uscellular.com |
U.S. Cellular Value Proposition Data Products & Services Membership Experience Local Approach Best-in-Class Network Competitive devices, plans, and pricing Understanding customer needs in each of our markets Outstanding customer service and Rewards Program |
To Our Shareholders U.S. CELLULAR 1 2013 Performance Highlights We had a year of significant change, as we implemented strategic actions and initiatives that positioned us to compete more effectively going forward. We divested underperforming wireless markets to focus on stronger markets. We launched Apple products for the first time to create a truly competitive device portfolio. We converted to a new billing and operational support system that will support faster delivery of new services and products and more consistent customer experiences. We achieved a seamless, mid-year leadership transition. We also returned $482 million to U.S. Cellular shareholders through a special dividend, and entered into agreements to sell non-strategic spectrum for more than $400 million. While our financial and operating results continue to reflect the competitive environment and the impact of these necessary investments, we believe the actions weve taken will enable us to improve our performance over time. In addition to the initiatives above, we made progress in a number of important areas: Increased smartphone penetration and data use through expanded 4G LTE access, shared data plans, and Android, Apple, and Windows device offerings. Launched a new billing and operational system that provides an important platform for future growth. Although implementation challenges impacted customer service more than anticipated, we believe the long-term benefits will be substantial. Further expanded retail distribution through agreements with Sams Club and Amazon. U.S. Cellular operates on a customer satisfaction strategy, driving loyalty and performance by providing a high-quality network, a comprehensive range of wireless services and products, and outstanding customer experiences. J.D. Power Customer Champion, 2014 |
Increasing Smartphone Penetration and Monetizing Data Use By the end of 2013, we off ered our strongest-ever portfolio of Android, Apple, and Windows devices, along with attractive shared data plans. Fift y-one percent of postpaid customers were smartphone customers in the fourth quarter, and 80 percent of total devices sold in the quarter were smartphones. We expanded 4G LTE coverage to nearly 90 percent of customers by year end, and 4G LTE devices were 69 percent of devices sold in the fourth quarter. Comprehensive 4G LTE coverage ensures substantial capacity and monetization opportunities as smartphone adoption and data use increase dramatically in our markets. The recent Federal Communications Commission decision to mandate device interoperability supports our strategy by ensuring that we can continue to off er a greater choice of devices to our customers, and off er nationwide 4G LTE roaming coverage in the future. 2 U.S. CELLULAR Attracting Customers and Building Loyalty Our strategy is to provide the best wireless customer experiences in the industry, centered around a best-in-class 4G LTE network. The fast and reliable network is the backbone for our competitive data off erings and devices, and our Rewards Programunique in the wireless industrymakes U.S. Cellular customers feel like members. Attracting new customers and reducing churn are our highest priorities. We enhanced our value proposition in 2013 by expanding 4G LTE access to nearly 90 percent of our customers, launching Apple devices to strengthen our portfolio, off ering shared data plans, and working to provide a seamless and consistently highquality experience across our sales and service channels. We introduced customizable plans for small and medium businesses, and expanded our distribution to Sams Club and Amazon. We also converted to a new billing and operational support systeman essential platform for delivering services and products more effi ciently. During and following the conversion, many of our customers experienced extended reductions in service levels as we worked through implementation issues, and this led to an increase in postpaid churn. These experiences were below our standards, and we provided additional rewards points to postpaid customers in appreciation for their patience and commitment. We launched our Apple devices for the fi rst time in November of 2013, and reinstituted contracts for postpaid customers, to help reduce postpaid churn over time. Highest Network Quality Performance Among Wireless Cell Phone Users in North Central Region -J.D. Power More than ever, we believe network quality is the most important element of customer satisfaction. |
Building Connections in Our Communities An important part of our localized attention to customer needs is building connections with the communities we serve, and supporting the people and organizations that make our communities successful. As part of our Spotlight on Americas Backbone contest, we reached out to small businesses in our markets and selected a winning business to receive up to $25,000 in advertising, a year of wireless service with six Apple devices, and $5,000 cash. Twenty K-12 schools across 11 states in our footprint received $25,000 each through our Calling All Communities campaign. Community members cast more than 37,000 votes on uscellular.com for their favorite schools. Ensuring Customer Focus and Accountability U.S. Cellulars passionate and dedicated associates are the heart of our company, and together we create an environment that values ethical practices, diverse perspectives and outstanding business performance, and is focused on delivering an outstanding customer experience. We call this the Dynamic Organization. We are committed to demonstrating the values and behaviors of the Dynamic Organization, and driving accountability and ownership of overall company performance throughout U.S. Cellular. U.S. CELLULAR 3 Smartphone Customers as a Percentage of Postpaid Customers 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0 4G 3G Q412 Q113 Q213 Q313 Q413 51% 47% 46% 43% 42% 15% 21% 29% 33% 42% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0 Smartphones as a Percentage of Total Devices Sold Q412 Q113 Q213 Q313 Q413 80% 65% 66% 62% 63% 46% 46% 55% 58% 69% 4G 3G Growth in data use is a critical driver of U.S. Cellulars future success. Total data traff ic increased 97 percent from 2012 to 2013. 2013 U.S. Cellular is committed to building productive relationships in the communities we serve. |
We plan to attract new customers and build customer loyalty with customer experiences grounded in network quality, competitive data products and services and devices, an innovative Rewards Program that makes customers feel like members, and localized attention to customer needs. Were focused on driving revenues through smartphone penetration and attractive data offerings that enable us to monetize the growth in data traffic. Well continue to invest in our future by continuing to expand 4G LTE access and enhance our customers data experiences. At the same time, well seek opportunities to increase operational efficiency. Sincerely, Kenneth R. Meyers LeRoy T. Carlson, Jr. President and Chairman Chief Executive Officer 4 U.S. CELLULAR Looking Ahead Thank you to all of our associates for your commitment to our customers. Thank you to our shareholders and debt holders for your continuing support of our long-term strategies. |
UNITED STATES CELLULAR CORPORATION
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 2013
Pursuant to SEC Rule 14a-3
The following audited financial statements and certain other financial information for the year ended December 31, 2013, represent U.S. Cellular's annual report to shareholders as required by the rules and regulations of the Securities and Exchange Commission ("SEC").
The following information was filed with the SEC on February 28, 2014 as Exhibit 13 to U.S. Cellular's Annual Report on Form 10-K for the year ended December 31, 2013. Such information has not been updated or revised since the date it was originally filed with the SEC. Accordingly, you are encouraged to review such information together with any subsequent information that we have filed with the SEC and other publicly available information.
United States Cellular Corporation and Subsidiaries
Financial Reports Contents
United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
United States Cellular Corporation ("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").
The following discussion and analysis should be read in conjunction with U.S. Cellular's audited consolidated financial statements and the description of U.S. Cellular's business included in Item 1 of the U.S. Cellular Annual Report on Form 10-K ("Form 10-K") for the year ended December 31, 2013. The discussion and analysis contained herein refers to consolidated data and results of operations, unless otherwise noted.
The following is a summary of certain selected information contained in the comprehensive Management's Discussion and Analysis of Financial Condition and Results of Operations that follows. The overview does not contain all of the information that may be important. You should carefully read the entire Management's Discussion and Analysis of Financial Condition and Results of Operations and not rely solely on the overview.
In its consolidated operating markets, U.S. Cellular serves approximately 4.8 million customers in 23 states. As of December 31, 2013, U.S. Cellular's average penetration rate in its consolidated operating markets was 15.0%. U.S. Cellular operates on a customer satisfaction strategy, striving to meet or exceed customer needs by providing a comprehensive range of wireless products and services, excellent customer support, and a high-quality network. U.S. Cellular's business development strategy is to obtain interests in and access to wireless licenses in its current operating markets and in areas that are adjacent to or in close proximity to its other wireless licenses, thereby building contiguous operating market areas with strong spectrum positions. U.S. Cellular believes that the acquisition of additional licenses within its current operating markets will enhance its network capacity to meet its customers' increased demand for data services. U.S. Cellular anticipates that grouping its operations into market areas will continue to provide it with certain economies in its capital and operating costs.
Financial and operating highlights in 2013 included the following:
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United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following operating information is presented for Core Markets. As used here, Core Markets is defined as all consolidated markets in which U.S. Cellular currently conducts business and, therefore, excludes the Divestiture Markets and the NY1 & NY2 Deconsolidated Markets. Core Markets as defined also includes any other income or expenses due to U.S. Cellular's direct or indirect ownership interests in other spectrum in the Divestiture Markets which was not included in the Divestiture Transaction and other retained assets from the Divestiture Markets.
The following financial information is presented for U.S. Cellular consolidated results:
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United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
to sales of the Divestiture Markets and spectrum licenses. See additional discussion below in "Results of Operations".
U.S. Cellular anticipates that future results will be affected by the following factors:
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United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
value of the license has been accounted for and disclosed as "held for sale" in the Consolidated Balance Sheet at December 31, 2013.
Pro Forma Financial Information
Refer to U.S. Cellular's Form 8-K filed on February 26, 2014 for pro forma financial information related to the Divestiture Transaction and the NY1 & NY2 Deconsolidation for the three and twelve months ended December 31, 2013, as if the transactions had occurred at the beginning of the respective periods. Also refer to U.S. Cellular's Form 8-K filed on May 3, 2013 for pro forma financial information related to the Divestiture Transaction and the NY1 & NY2 Deconsolidation for the twelve months ended December 31, 2012.
REGULATORY DEVELOPMENTS
FCC Reform Order
In 2011, the FCC released an order ("Reform Order") to: reform its universal service and intercarrier compensation mechanisms; establish a new, broadband-focused support mechanism; and propose further rules to advance reform. Appeals of the Reform Order were consolidated and argued in the U.S. Court of Appeals for the 10th Circuit on November 19, 2013, with a decision anticipated in 2014.
There have been no significant changes to the Reform Order since December 31, 2012 that are expected to adversely affect U.S. Cellular. U.S. Cellular cannot predict the outcome of the consolidated appeals referred to above or any future rulemaking, reconsideration or legal challenges and, as a consequence, the impacts that such potential developments may have on U.S. Cellular's business, financial condition or results of operations.
FCC Interoperability Order
On October 25, 2013, the FCC adopted a Report and Order and Order of Proposed Modification confirming a voluntary industry agreement on interoperability in the Lower 700 MHz spectrum band. The FCC's Report and Order lays out a roadmap for the voluntary commitments of AT&T and DISH Network Corporation ("DISH") to become fully binding under a regulatory framework which will require the FCC to take additional actions proposed to be completed by the first quarter of 2014. Pursuant to this voluntary agreement, AT&T will begin incorporating changes in its network and devices that will foster interoperability across all paired spectrum blocks in the Lower 700 MHz Band, collectively comprising "Band 12" under the standards of the 3rd Generation Partnership Project ("3GPP"). AT&T also agreed to support LTE roaming on its networks for carriers with compatible Band 12 devices, consistent with the FCC's rules on roaming. As outlined in its voluntary commitment, AT&T will be implementing the foregoing changes in phases starting with network software enhancement taking place possibly through the third quarter of 2015 with its Band 12 device roll-out to follow. In addition the FCC has adopted changes in its technical rules for certain unpaired spectrum licensed to AT&T and DISH in the Lower 700 MHz band to enhance prospects for Lower 700 MHz interoperability. AT&T's network and devices currently only interoperate across two of the three paired blocks in the Lower 700 MHz band. U.S. Cellular's LTE deployment, carried out in conjunction with its partner, King Street Wireless, utilizes spectrum in all three of these blocks and consequently was not interoperable with the AT&T configuration. U.S. Cellular believes that the FCC action will broaden the ecosystem of devices available to U.S. Cellular's customers over time.
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United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
Summary Operating Data for U.S. Cellular Consolidated Markets
Following is a table of summarized operating data for U.S. Cellular's Consolidated Markets. Consolidated Markets herein refers to markets which U.S. Cellular currently consolidates, or previously consolidated in the periods presented, and is not adjusted in prior periods presented for subsequent divestitures or deconsolidations. Unless otherwise noted, figures reported in Results of Operations are representative of consolidated results.
As of or for the Year Ended December 31,
|
2013 | 2012 | 2011 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Retail Customers |
||||||||||
Postpaid |
||||||||||
Total at end of period |
4,267,000 | 5,134,000 | 5,302,000 | |||||||
Gross additions |
697,000 | 880,000 | 836,000 | |||||||
Net additions (losses) |
(325,000 | ) | (165,000 | ) | (117,000 | ) | ||||
ARPU(1) |
$ | 54.31 | $ | 54.32 | $ | 52.20 | ||||
Churn rate(2) |
1.8 | % | 1.7 | % | 1.5 | % | ||||
Smartphone penetration(3)(4) |
50.8 | % | 41.8 | % | 30.5 | % | ||||
Prepaid |
||||||||||
Total at end of period |
343,000 | 423,000 | 306,000 | |||||||
Gross additions |
309,000 | 368,000 | 228,000 | |||||||
Net additions (losses) |
(21,000 | ) | 118,000 | (8,000 | ) | |||||
ARPU(1) |
$ | 31.44 | $ | 33.26 | $ | 33.42 | ||||
Churn rate(2) |
7.0 | % | 6.0 | % | 6.6 | % | ||||
Total customers at end of period |
4,774,000 | 5,798,000 | 5,891,000 | |||||||
Billed ARPU(1) |
$ | 50.73 | $ | 50.81 | $ | 48.63 | ||||
Service revenue ARPU(1) |
$ | 57.61 | $ | 58.70 | $ | 56.54 | ||||
Smartphones sold as a percent of total devices sold |
68.4 | % | 55.8 | % | 44.0 | % | ||||
Total Population |
||||||||||
Consolidated markets(5) |
58,013,000 | 93,244,000 | 91,965,000 | |||||||
Consolidated operating markets(5) |
31,759,000 | 46,966,000 | 46,888,000 | |||||||
Market penetration at end of period |
||||||||||
Consolidated markets(6) |
8.2 | % | 6.2 | % | 6.4 | % | ||||
Consolidated operating markets(6) |
15.0 | % | 12.3 | % | 12.6 | % | ||||
Capital expenditures (000s) |
$ | 737,501 | $ | 836,748 | $ | 782,526 | ||||
Total cell sites in service |
6,975 | 8,028 | 7,882 | |||||||
Owned towers in service |
4,448 | 4,408 | 4,311 |
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United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
Summary Operating Data for U.S. Cellular Core Markets
Following is a table of summarized operating data for U.S. Cellular's Core Markets (which excludes the Divestiture Markets and NY1 and NY2 markets) as of or for the year ended December 31, 2013 or 2012.
As of or for the Year Ended December 31,
|
2013 | 2012 | |||||
---|---|---|---|---|---|---|---|
Retail Customers |
|||||||
Postpaid |
|||||||
Total at end of period |
4,267,000 | 4,496,000 | |||||
Gross additions |
682,000 | 746,000 | |||||
Net additions (losses) |
(217,000 | ) | (92,000 | ) | |||
ARPU(1) |
$ | 54.23 | $ | 53.65 | |||
Churn rate(2) |
1.7 | % | 1.5 | % | |||
Smartphone penetration(3)(4) |
50.8 | % | 41.1 | % | |||
Prepaid |
|||||||
Total at end of period |
343,000 | 342,000 | |||||
Gross additions |
295,000 | 288,000 | |||||
Net additions (losses) |
2,000 | 124,000 | |||||
ARPU(1) |
$ | 31.45 | $ | 32.98 | |||
Churn rate(2) |
6.7 | % | 5.2 | % | |||
Total customers at end of period |
4,774,000 | 5,022,000 | |||||
Billed ARPU(1) |
$ | 50.82 | $ | 50.54 | |||
Service revenue ARPU(1) |
$ | 57.66 | $ | 58.49 | |||
Smartphones sold as a percent of total devices sold |
68.6 | % | 56.1 | % | |||
Total Population |
|||||||
Consolidated markets(5) |
58,013,000 | 83,384,000 | |||||
Consolidated operating markets(5) |
31,759,000 | 31,445,000 | |||||
Market penetration at end of period |
|||||||
Consolidated markets(6) |
8.2 | % | 6.0 | % | |||
Consolidated operating markets(6) |
15.0 | % | 16.0 | % | |||
Capital expenditures (000s) |
$ | 735,082 | $ | 768,884 | |||
Total cell sites in service |
6,161 | 6,130 | |||||
Owned towers in service |
3,913 | 3,847 |
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United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
Components of Operating Income
Year Ended December 31,
|
2013 | Increase/ (Decrease) |
Percentage Change |
2012 | Increase/ (Decrease) |
Percentage Change |
2011 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|
|
|
|
|
|
|
|||||||||||||||
Retail service |
$ | 3,165,496 | $ | (382,483 | ) | (11 | )% | $ | 3,547,979 | $ | 61,457 | 2 | % | $ | 3,486,522 | |||||||
Inbound roaming |
263,186 | (85,531 | ) | (25 | )% | 348,717 | 408 | N | /M | 348,309 | ||||||||||||
Other |
166,091 | (36,069 | ) | (18 | )% | 202,160 | (16,806 | ) | (8 | )% | 218,966 | |||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Service revenues |
3,594,773 | (504,083 | ) | (12 | )% | 4,098,856 | 45,059 | 1 | % | 4,053,797 | ||||||||||||
Equipment sales |
324,063 | (29,165 | ) | (8 | )% | 353,228 | 63,679 | 22 | % | 289,549 | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total operating revenues |
3,918,836 | (533,248 | ) | (12 | )% | 4,452,084 | 108,738 | 3 | % | 4,343,346 | ||||||||||||
System operations (excluding Depreciation, amortization and accretion reported below) |
763,435 |
(183,370 |
) |
(19 |
)% |
946,805 |
17,426 |
2 |
% |
929,379 |
||||||||||||
Cost of equipment sold |
999,000 | 63,053 | 7 | % | 935,947 | 144,145 | 18 | % | 791,802 | |||||||||||||
Selling, general and administrative |
1,677,395 | (87,538 | ) | (5 | )% | 1,764,933 | (4,768 | ) | N | /M | 1,769,701 | |||||||||||
Depreciation, amortization and accretion |
803,781 | 195,148 | 32 | % | 608,633 | 35,076 | 6 | % | 573,557 | |||||||||||||
(Gain) loss on asset disposals, net |
30,606 | (12,518 | ) | (69 | )% | 18,088 | (8,199 | ) | (83 | )% | 9,889 | |||||||||||
(Gain) loss on sale of business and other exit costs, net |
(246,767 | ) | 267,789 | >100 | % | 21,022 | (21,022 | ) | N | /M | | |||||||||||
(Gain) loss on license sales and exchanges |
(255,479 | ) | 255,479 | N | /M | | (11,762 | ) | N | /M | (11,762 | ) | ||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total operating expenses |
3,771,971 | (523,457 | ) | (12 | )% | 4,295,428 | 232,862 | 6 | % | 4,062,566 | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Operating income |
$ | 146,865 | $ | (9,791 | ) | (6 | )% | $ | 156,656 | $ | (124,124 | ) | (44 | )% | $ | 280,780 | ||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
N/MPercentage change not meaningful
7
United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
Operating Revenues
Service revenues
Service revenues consist primarily of: (i) charges for access, airtime, roaming, recovery of regulatory costs and value-added services, including data products and services, provided to U.S. Cellular's retail customers and to end users through third-party resellers ("retail service"); (ii) charges to other wireless carriers whose customers use U.S. Cellular's wireless systems when roaming, including long-distance roaming ("inbound roaming"); and (iii) amounts received from the Federal USF.
Retail service revenues
Retail service revenues decreased by $382.5 million, or 11%, to $3,165.5 million due primarily to a decrease in U.S. Cellular's average customer base (including the reductions caused by the Divestiture Transaction and NY1 & NY2 Deconsolidation) and a slight decrease in billed ARPU. In 2012, retail service revenues increased by $61.5 million, or 2%, to $3,548.0 million due primarily to the impact of an increase in billed ARPU, partially offset by a decrease in U.S. Cellular's average customer base.
In the fourth quarter of 2013, U.S. Cellular issued loyalty reward points with a value of $43.5 million as a loyalty bonus in recognition of the inconvenience experienced by customers during U.S. Cellular's recent billing system conversion. The value of the loyalty bonus reduced Operating revenues in the Consolidated Statement of Operations and increased Customer deposits and deferred revenues in the Consolidated Balance Sheet.
Billed ARPU of $50.73 in 2013 was relatively flat compared to $50.81 in 2012. The special issuance of loyalty rewards points in the fourth quarter of 2013 negatively impacted billed ARPU by $0.70 in 2013, which was partially offset by an increase in smartphone adoption and corresponding revenues from data products and services. The increase in billed ARPU in 2012 from $48.63 in 2011 also reflects the impact of a larger portion of the customer base using smartphones which drives incremental data access revenue.
U.S. Cellular expects continued pressure on revenues in the foreseeable future due to industry competition for customers and related effects on pricing of service plan offerings offset to some degree by continued adoption of smartphones and data usage.
Inbound roaming revenues
Inbound roaming revenues decreased by $85.5 million, or 25% in 2013 to $263.2 million. The decrease was due primarily to lower rates ($47.9 million) and the impacts of the Divestiture Transaction and NY1 & NY2 Deconsolidation ($37.6 million). Data volume increased year-over year but the impact of this increase was offset by the combined impacts of lower volume for voice and lower rates for both data and voice. The decline in roaming revenues was offset by a decline in roaming expense also due to lower rates. U.S. Cellular expects continued growth in data volume but also expects that the revenue impact of this growth will be offset by the impacts of decreases in data rates and voice volume.
Inbound roaming revenues of $348.7 million were flat in 2012 compared to 2011 as higher data revenues, reflecting significantly higher volumes but lower negotiated rates, were offset by lower voice revenues, reflecting both lower volumes and rates.
Other revenues
Other revenues decreased by $36.1 million, or 18%, in 2013 compared to 2012. In 2012, Other revenues decreased by $16.8 million, or 8%. The decreases in both years are due primarily to decreases in ETC support.
Pursuant to the FCC's Reform Order (See "OverviewFCC Reform Order"), U.S. Cellular's current ETC support is being phased down at the rate of 20% per year beginning July 1, 2012. If the Phase II Mobility
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United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
Fund is not operational by July 2014, the phase down will halt at that time and U.S. Cellular will continue to receive 60% of its baseline support until the Phase II Mobility Fund is operational.
At this time, U.S. Cellular cannot predict the net effect of the FCC's changes to the USF high cost support program in the Reform Order. Accordingly, U.S. Cellular cannot predict whether such changes will have a material adverse effect on U.S. Cellular's business, financial condition or results of operations.
Equipment sales revenues
Equipment sales revenues include revenues from sales of wireless devices and related accessories to both new and existing customers, as well as revenues from sales of wireless devices and accessories to agents. All Equipment sales revenues are recorded net of rebates.
U.S. Cellular offers a competitive portfolio of quality wireless devices to both new and existing customers. U.S. Cellular's customer acquisition and retention efforts include offering new wireless devices to customers at discounted prices; in addition, customers on currently offered rate plans receive loyalty reward points that may be used to purchase a new wireless device or accelerate the timing of a customer's eligibility for a wireless device upgrade at promotional pricing. U.S. Cellular also continues to sell wireless devices to agents including national retailers; this practice enables U.S. Cellular to provide better control over the quality of wireless devices sold to its customers, establish roaming preferences and earn quantity discounts from wireless device manufacturers which are passed along to agents and other retailers.
The decrease in 2013 equipment sales revenues of $29.2 million, or 8%, to $324.1 million was driven primarily by selling fewer devices, partially due to the Divestiture Transaction. Declines in volume were offset by an increase of 12.0% in average revenue per device. The increase in 2012 equipment sales revenues of $63.7 million, or 22%, to $353.2 million was driven primarily by a 17% increase in average revenue per wireless device sold; an increase in equipment activation fees also was a factor. Average revenue per wireless device sold increased in both years due to a continued shift in customer preference to higher priced smartphones.
Operating Expenses
System operations expenses (excluding Depreciation, amortization and accretion)
System operations expenses (excluding Depreciation, amortization and accretion) include charges from telecommunications service providers for U.S. Cellular's customers' use of their facilities, costs related to local interconnection to the wireline network, charges for cell site rent and maintenance of U.S. Cellular's network, long-distance charges, outbound roaming expenses and payments to third-party data product and platform developers.
System operations expenses decreased $183.4 million, or 19%, to $763.4 million in 2013 and increased $17.4 million, or 2%, to $946.8 million in 2012. Key components of the net changes in System operations expenses were as follows:
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United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
primarily by an increase in the number of cell sites within U.S. Cellular's network and costs related to the deployment and operation of LTE networks.
U.S. Cellular expects system operations expenses to increase in the future to support the continued growth in cell sites and other network facilities as it continues to add capacity, enhance quality and deploy new technologies as well as to support increases in total customer usage, particularly data usage. However, these increases are expected to be offset to some extent by cost savings generated by shifting data traffic to the 4G LTE network from the 3G network.
Cost of equipment sold
Cost of equipment sold increased $63.1 million, or 7%, in 2013 and $144.1 million, or 18% in 2012. In both years, the increase was driven primarily by an increase in the average cost per wireless device sold (33% in 2013 and 18% in 2012). Average cost per device sold increased due to general customer preference for higher priced 4G LTE smartphones, including the introduction of Apple products in the fourth quarter of 2013. In 2013, total devices sold decreased by 18% partially due to the Divestiture Transaction; in 2012, total devices sold increased by 1%.
U.S. Cellular's loss on equipment, defined as equipment sales revenues less cost of equipment sold, was $674.9 million, $582.7 million and $502.3 million for 2013, 2012 and 2011, respectively. U.S. Cellular expects loss on equipment to continue to be a significant cost in the foreseeable future as wireless carriers continue to use device pricing as a means of competitive differentiation. In addition, U.S. Cellular expects increasing sales of data centric wireless devices to result in higher equipment subsidies over time; these devices generally have higher purchase costs which cannot be recovered through proportionately higher selling prices to customers under the standard contract/subsidy model the industry has operated with for many years. However, U.S. Cellular is beginning to offer new equipment pricing constructs such as device financing to offset a higher proportion of increasing equipment costs.
Selling, general and administrative expenses
Selling, general and administrative expenses include salaries, commissions and expenses of field sales and retail personnel and facilities; telesales department salaries and expenses; agent commissions and related expenses; corporate marketing and merchandise management; and advertising expenses. Selling, general and administrative expenses also include bad debts expense, costs of operating customer care centers and corporate expenses.
Selling, general and administrative expenses decreased by $87.5 million to $1,677.4 million in 2013 and by $4.8 million to $1,764.9 in 2012. Key components of the net changes in Selling, general and administrative expenses were as follows:
2013
10
United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
2012
Depreciation, amortization and accretion
Depreciation, amortization and accretion expense increased $195.1 million, or 32%, in 2013, and $35.1 million, or 6%, in 2012 due primarily to the acceleration of depreciation, amortization and accretion in the Divestiture Markets. The impact of the acceleration year over year was $158.5 million in 2013. The accelerated depreciation, amortization and accretion in the Divestiture Markets is expected to conclude in the first quarter of 2014.
(Gain) loss on asset disposals, net
(Gain) loss on asset disposals, net was a loss of $30.6 million in 2013 and $18.1 million in 2012 due primarily to losses resulting from the write-off and disposals of certain network assets.
(Gain) loss on sale of business and other exit costs, net
(Gain) loss on sale of business and other exit costs, net was a gain of $246.8 million in 2013, primarily related to the closing of the Divestiture Transaction. The loss of $21.0 million in 2012 was due primarily to employee severance costs and asset write-offs in the Divestiture Markets, partially offset by a $4.2 million gain resulting from the sale of a wireless market in March 2012.
(Gain) loss on license sales and exchanges
(Gain) loss on license sales and exchanges resulted from the sale of the Mississippi Valley non-operating market license for $308.0 million, which resulted in a pre-tax gain of $250.6 million.
11
United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
Components of Other Income (Expense)
Year Ended December 31,
|
2013 | Increase / (Decrease) |
Percentage Change |
2012 | Increase / (Decrease) |
Percentage Change |
2011 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|
|
|
|
|
|
|
|||||||||||||||
Operating income |
$ | 146,865 | $ | (9,791 | ) | (6 | )% | $ | 156,656 | $ | (124,124 | ) | (44 | )% | $ | 280,780 | ||||||
Equity in earnings of unconsolidated entities |
131,949 | 41,585 | 46 | % | 90,364 | 6,798 | 8 | % | 83,566 | |||||||||||||
Interest and dividend income |
3,961 | 317 | 9 | % | 3,644 | 249 | 7 | % | 3,395 | |||||||||||||
Gain (loss) on investments |
18,556 | 22,274 | >100 | % | (3,718 | ) | (15,091 | ) | >(100 | )% | 11,373 | |||||||||||
Interest expense |
(43,963 | ) | 1,570 | 4 | % | (42,393 | ) | (23,221 | ) | (35 | )% | (65,614 | ) | |||||||||
Other, net |
288 | (212 | ) | (42 | )% | 500 | 1,178 | >100 | % | (678 | ) | |||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total investment and other income |
110,791 | 62,394 | >100 | % | 48,397 | 16,355 | 51 | % | 32,042 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes |
257,656 | 52,603 | 26 | % | 205,053 | (107,769 | ) | (34 | )% | 312,822 | ||||||||||||
Income tax expense |
113,134 | 49,157 | 77 | % | 63,977 | (50,101 | ) | (44 | )% | 114,078 | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Net income |
144,522 | 3,446 | 2 | % | 141,076 | (57,668 | ) | (29 | )% | 198,744 | ||||||||||||
Less: Net income attributable to noncontrolling interests, net of tax |
(4,484 | ) | 25,586 | 85 | % | (30,070 | ) | (6,367 | ) | (27 | )% | (23,703 | ) | |||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Net income attributable to U.S. Cellular shareholders |
$ | 140,038 | $ | 29,032 | 26 | % | $ | 111,006 | $ | (64,035 | ) | (37 | )% | $ | 175,041 | |||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Equity in earnings of unconsolidated entities
Equity in earnings of unconsolidated entities represents U.S. Cellular's share of net income from entities in which it has a noncontrolling interest and that are accounted for by the equity method. U.S. Cellular generally follows the equity method of accounting for unconsolidated entities in which its ownership interest is less than or equal to 50% but equals or exceeds 20% for corporations and 3% for partnerships and limited liability companies, or for unconsolidated entities in which its ownership is greater than 50% but U.S. Cellular does not have a controlling financial interest.
U.S. Cellular's investment in the Los Angeles SMSA Limited Partnership ("LA Partnership") contributed $78.4 million, $67.2 million and $55.3 million to Equity in earnings of unconsolidated entities in 2013, 2012 and 2011, respectively. U.S. Cellular received cash distributions from the LA Partnership of $71.5 million in 2013 and $66.0 million in 2012 and 2011.
On April 3, 2013, U.S. Cellular deconsolidated the NY1 & NY2 Partnerships and began reporting them as equity method investments in its consolidated financial statements as of that date. In 2013, U.S. Cellular's investments in the NY1 & NY2 Partnerships contributed $24.7 million to Equity in earnings of unconsolidated entities subsequent to their deconsolidation. No amounts were included in 2012 or 2011 because the NY1 & NY2 Partnerships were consolidated in those years. Distributions from the NY1 & NY2 Partnerships of $29.4 million in 2013, after the deconsolidation on April 1, 2013, are included in Distributions from unconsolidated entities on the Consolidated Statement of Cash Flows.
Gain (loss) on investments
In connection with the deconsolidation of the NY1 & NY2 Partnerships, U.S. Cellular recognized a non-cash pre-tax gain of $18.5 million which was recorded in Gain (loss) on investments in 2013. See Note 7Investments in Unconsolidated Entities for additional information.
Interest expense
Interest expense in 2013 as compared to 2012 was relatively flat. In 2012, interest expense decreased by $23.2 million from 2011 due to lower effective interest rates on long-term debt and an increase in
12
United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
capitalized interest for multi-year projects; in addition, in 2011, U.S. Cellular wrote off $8.2 million of unamortized debt issuance costs related to its $330 million, 7.5% Senior Notes redeemed on June 20, 2011.
Income tax expense
The effective tax rates on Income before income taxes for 2013, 2012 and 2011 were 43.9%, 31.2% and 36.5%, respectively. The following significant discrete and other items impacted income tax expense for these years:
2013Includes a tax expense of $20.4 million related to the NY1 & NY2 Deconsolidation and the Divestiture Transaction, and a tax benefit of $5.4 million resulting from statute of limitation expirations.
2012Includes tax benefits of $12.1 million resulting from statute of limitation expirations and $5.3 million resulting from corrections relating to a prior period.
2011Includes a tax benefit of $9.9 million resulting from state statute of limitations expirations and tax expense of $6.1 million resulting from corrections of partnership basis.
See Note 3Income Taxes in the Notes to Consolidated Financial Statements for a discussion of income tax expense and the overall effective tax rate on Income before income taxes.
Net income attributable to noncontrolling interests, net of tax
The large decrease in 2013 is primarily due to the elimination of the noncontrolling interests as a result of the NY1 & NY2 Deconsolidation on April 3, 2013.
Management believes that inflation affects U.S. Cellular's business to no greater or lesser extent than the general economy.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In general, recently issued accounting pronouncements did not have and are not expected to have a significant effect on U.S. Cellular's financial condition and results of operations.
See Note 1Summary of Significant Accounting Policies and Recent Accounting Pronouncements in the Notes to Consolidated Financial Statements for information on recently issued accounting pronouncements.
U.S. Cellular operates a capital- and marketing-intensive business. U.S. Cellular utilizes cash on hand, cash from operating activities, cash proceeds from divestitures and disposition of investments, short-term credit facilities and long-term debt financing to fund its acquisitions (including licenses), construction costs, operating expenses and share repurchases. Cash flows may fluctuate from quarter to quarter and year to year due to seasonality, the timing of acquisitions, capital expenditures and other factors. The
13
United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
table below and the following discussion in this Financial Resources section summarize U.S. Cellular's cash flow activities in 2013, 2012 and 2011.
(Dollars in thousands) |
2013 | 2012 | 2011 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Cash flows from (used in) |
||||||||||
Operating activities |
$ | 290,897 | $ | 899,291 | $ | 987,862 | ||||
Investing activities |
172,749 | (896,611 | ) | (759,603 | ) | |||||
Financing activities |
(499,939 | ) | (48,477 | ) | (81,019 | ) | ||||
| | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents |
$ | (36,293 | ) | $ | (45,797 | ) | $ | 147,240 | ||
| | | | | | | | | | |
| | | | | | | | | | |
Cash Flows from Operating Activities
Cash flows from operating activities were $290.9 million in 2013 and $899.3 million in 2012. Significant items to note are as follows:
Cash flows from operating activities were $899.3 million in 2012 and $987.9 million in 2011. Significant items to note are as follows:
14
United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
carrybacks from the 2011 tax year to the 2009 and 2010 tax years. Tax refunds received in 2011 primarily represented federal refunds related to overpayment of 2010 taxes.
Cash Flows from Investing Activities
U.S. Cellular makes substantial investments to acquire wireless licenses and properties and to construct and upgrade wireless telecommunications networks and facilities as a basis for creating long-term value for shareholders. In recent years, rapid changes in technology and new opportunities have required substantial investments in potentially revenue-enhancing and cost-reducing upgrades of U.S. Cellular's networks.
The primary purpose of U.S. Cellular's construction and expansion expenditures is to provide for customer and usage growth, to upgrade service and to take advantage of service-enhancing and cost-reducing technological developments.
Capital expenditures (i.e., additions to property, plant and equipment and system development expenditures) totaled $737.5 million in 2013, $836.7 million in 2012 and $782.5 million in 2011. Cash used for additions to property, plant and equipment is reported in the Consolidated Statement of Cash Flows, and excludes amounts accrued in Accounts payable for capital expenditures at December 31 of the current year and includes amounts paid in the current period that were accrued at December 31 of the prior year. Cash used for additions to property, plant and equipment totaled $717.9 million, $826.4 million and $771.8 million in 2013, 2012 and 2011, respectively. These expenditures were made to construct new cell sites, build out 4G LTE networks in certain markets, increase capacity in existing cell sites and switches, develop new and enhance existing office systems such as the new Billing and Operational Support System ("B/OSS") and customer relationship management platforms, and construct new and remodel existing retail stores. The decrease in capital expenditures on a year-over-year basis is due primarily to the timing of spending for network operations equipment.
Cash payments for acquisitions in 2013, 2012 and 2011 were as follows:
Cash Payments for Acquisitions
|
2013 | 2012 | 2011 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|
|
|
|||||||
Licenses |
$ | 16,540 | $ | 122,690 | $ | 4,406 | ||||
Additional interest in operating market |
| | 19,367 | |||||||
| | | | | | | | | | |
Total |
$ | 16,540 | $ | 122,690 | $ | 23,773 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
Cash amounts paid for the acquisitions may differ from the purchase price due to cash acquired in the transactions and the timing of cash payments related to the respective transactions.
15
United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
Cash received from divestitures in 2013, 2012 and 2011 were as follows:
Cash Received from Divestitures
|
2013 | 2012 | 2011 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|
|
|
|||||||
Licenses |
$ | 311,989 | $ | | $ | | ||||
Businesses |
499,131 | 49,932 | | |||||||
| | | | | | | | | | |
Total |
$ | 811,120 | $ | 49,932 | $ | | ||||
| | | | | | | | | | |
| | | | | | | | | | |
U.S. Cellular received $480.0 million in cash at the close of the Divestiture Transaction in May 2013. In addition, U.S. Cellular received $10.6 million in reimbursements for certain network decommissioning costs, network site lease rent and termination costs, network access termination costs, and employee termination benefits for specified engineering employees (the "Sprint Cost Reimbursement") in 2013.
On October 4, 2013, U.S. Cellular sold the majority of its Mississippi Valley unbuilt license for $308.0 million. This sale resulted in a $250.6 million gain which was recorded in the fourth quarter of 2013.
On August 14, 2013 U.S. Cellular entered into a definitive agreement to sell the majority of its St. Louis area unbuilt license for $92.3 million. The sale will result in an estimated pre-tax gain of $76.2 million. This transaction is subject to regulatory approval and is expected to close in the first quarter of 2014.
U.S. Cellular invested $120.0 million and $110.0 million in 2012 and 2011, respectively, in U.S. Treasury Notes and corporate notes with maturities greater than three months from the acquisition date. U.S. Cellular realized cash proceeds of $100.0 million, $125.0 million, and $145.3 million in 2013, 2012, and 2011, respectively, related to the maturities of its investments in U.S. Treasury Notes and corporate notes.
Cash Flows from Financing Activities
Cash flows from financing activities include repayments of and proceeds from short-term and long-term debt, dividends to shareholders, distributions to noncontrolling interests, cash used to repurchase Common Shares and cash proceeds from reissuance of Common Shares pursuant to stock-based compensation plans.
In May 2011, U.S. Cellular issued $342.0 million of 6.95% Senior Notes due 2060, and paid related debt issuance costs of $11.0 million. The net proceeds from the 6.95% Senior Notes were used primarily to redeem $330.0 million of U.S. Cellular's 7.5% Senior Notes in June 2011. The redemption price of the 7.5% Senior Notes was equal to 100% of the principal amount plus accrued and unpaid interest thereon to the redemption date.
On June 25, 2013, U.S. Cellular paid a special cash dividend of $5.75 per share, for an aggregate amount of $482.3 million, to all holders of U.S. Cellular Common Shares and Series A Common Shares as of June 11, 2013.
U.S. Cellular repurchased Common Shares for $18.5 million, $20.0 million and $62.3 million in 2013, 2012 and 2011, respectively. See Note 14Common Shareholders' Equity in the Notes to Consolidated Financial Statements for additional information related to these transactions.
16
United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
Free Cash Flow
The following table presents Free cash flow. Free cash flow is defined as Cash flows from operating activities less Cash used for additions to property, plant and equipment. Free cash flow is a non-GAAP financial measure which U.S. Cellular believes may be useful to investors and other users of its financial information in evaluating the amount of cash generated by business operations, after Cash used for additions to property, plant and equipment.
(Dollars in thousands) |
2013 | 2012 | 2011 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Cash flows from operating activities |
$ | 290,897 | $ | 899,291 | $ | 987,862 | ||||
Cash used for additions to property, plant and equipment |
(717,862 | ) | (826,400 | ) | (771,798 | ) | ||||
| | | | | | | | | | |
Free cash flow |
$ | (426,965 | ) | $ | 72,891 | $ | 216,064 | |||
| | | | | | | | | | |
| | | | | | | | | | |
See Cash flows from Operating Activities and Cash flows from Investing Activities for details on the changes to the components of Free cash flow.
LIQUIDITY AND CAPITAL RESOURCES
U.S. Cellular believes that existing cash and investment balances, funds available under its revolving credit facility and expected cash flows from operating and investing activities provide substantial liquidity and financial flexibility for U.S. Cellular to meet its normal financing needs for the foreseeable future. In addition, U.S. Cellular may access public and private capital markets to help meet its financing needs.
U.S. Cellular's profitability historically has been lower in the fourth quarter as a result of significant marketing and promotional activities during the holiday season. Changes in these or other economic factors could have a material adverse effect on demand for U.S. Cellular's products and services and on U.S. Cellular's financial condition and results of operations.
U.S. Cellular cannot provide assurances that circumstances that could have a material adverse effect on its liquidity or capital resources will not occur. Economic conditions, changes in financial markets or other factors could restrict U.S. Cellular's liquidity and availability of financing on terms and prices acceptable to U.S. Cellular, which could require U.S. Cellular to reduce its capital expenditure, acquisition or share repurchase programs. Such reductions could have a material adverse effect on U.S. Cellular's business, financial condition or results of operations.
The following table summarizes U.S. Cellular's cash and investments as of December 31, 2013.
(Dollars in thousands) |
||||
Cash and cash equivalents |
$ | 342,065 | ||
Short-term investments |
$ | 50,104 |
Cash and Cash Equivalents
Cash and cash equivalents include cash and short-term, highly liquid investments with original maturities of three months or less. The primary objective of U.S. Cellular's Cash and cash equivalents investment activities is to preserve principal. At December 31, 2013, the majority of U.S. Cellular's Cash and cash equivalents was held in bank deposit accounts and in money market funds that invest exclusively in U.S. Treasury Notes or in repurchase agreements fully collateralized by such obligations. U.S. Cellular monitors the financial viability of the money market funds and direct investments in which it invests and believes that the credit risk associated with these investments is low.
17
United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
Short-term and Long-term Investments
Short-term investments consist of U.S. Treasury Notes which are designated as held-to-maturity investments and are recorded at amortized cost in the Consolidated Balance Sheet. For these investments, U.S. Cellular's objective is to earn a higher rate of return on funds that are not anticipated to be required to meet liquidity needs in the near term, while maintaining a low level of investment risk. See Note 2Fair Value Measurements in the Notes to Consolidated Financial Statements for additional information on Short-term investments. As of December 31, 2013, U.S. Cellular does not hold Long-term investments.
Revolving Credit Facility
U.S. Cellular has a revolving credit facility available for general corporate purposes.
In connection with U.S. Cellular's revolving credit facility, TDS and U.S. Cellular entered into a subordination agreement dated December 17, 2010 together with the administrative agent for the lenders under U.S. Cellular's revolving credit facility. At December 31, 2013, no U.S. Cellular debt was subordinated pursuant to this subordination agreement.
U.S. Cellular's interest cost on its revolving credit facility is subject to increase if its current credit rating from nationally recognized credit rating agencies is lowered, and is subject to decrease if the rating is raised. The credit facility would not cease to be available nor would the maturity date accelerate solely as a result of a downgrade in U.S. Cellular's credit rating. However, a downgrade in U.S. Cellular's credit rating could adversely affect its ability to renew the credit facility or obtain access to other credit facilities in the future.
As of December 31, 2013, U.S. Cellular's senior debt credit rating from nationally recognized credit rating agencies remained at investment grade.
In June 2013, U.S. Cellular provided $17.4 million in letters of credit to the FCC in connection with U.S. Cellular's winning bids in Auction 901. See Note 16Supplemental Cash Flow Disclosures in the Notes to Consolidated Financial Statements for additional information on Auction 901.
The continued availability of the revolving credit facility requires U.S. Cellular to comply with certain negative and affirmative covenants, maintain certain financial ratios and make representations regarding certain matters at the time of each borrowing. The covenants also prescribe certain terms associated with intercompany loans from TDS or TDS subsidiaries to U.S. Cellular or U.S. Cellular subsidiaries. There were no intercompany loans at December 31, 2013 or 2012. U.S. Cellular believes that it was in compliance as of December 31, 2013 with all of the financial covenants and requirements set forth in its revolving credit facility.
See Note 10Debt in the Notes to Consolidated Financial Statements for additional information regarding the revolving credit facility.
Long-Term Financing
U.S. Cellular's long-term debt indentures do not contain any provisions resulting in acceleration of the maturities of outstanding debt in the event of a change in U.S. Cellular's credit rating. However, a downgrade in U.S. Cellular's credit rating could adversely affect its ability to obtain long-term debt financing in the future. U.S. Cellular believes that it was in compliance as of December 31, 2013 with all financial covenants and other requirements set forth in its long-term debt indentures. U.S. Cellular has not failed to make nor does it expect to fail to make any scheduled payment of principal or interest under such indentures.
The long-term debt principal payments due for the next four years represent less than 1% of the total long-term debt obligation at December 31, 2013. Refer to Market RiskLong-Term Debt for additional information regarding required principal payments and the weighted average interest rates related to U.S. Cellular's Long-term debt.
U.S. Cellular, at its discretion, may from time to time seek to retire or purchase its outstanding debt through cash purchases and/or exchanges for other securities, in open market purchases, privately negotiated
18
United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
transactions, tender offers, exchange offers or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
U.S. Cellular has an effective shelf registration statement on Form S-3 to issue senior or subordinated debt securities. The proceeds from any such issuance may be used for general corporate purposes, including: the possible reduction of other long-term debt; in connection with acquisition, construction and development programs; the reduction of short-term debt; for working capital; to provide additional investments in subsidiaries; or the repurchase of shares. The U.S. Cellular shelf registration statement permits U.S. Cellular to issue at any time and from time to time senior or subordinated debt securities in one or more offerings up to an aggregate principal amount of $500 million. The ability of U.S. Cellular to complete an offering pursuant to such shelf registration statement is subject to market conditions and other factors at the time.
See Note 10Debt in the Notes to Consolidated Financial Statements for additional information on Long-term financing.
Capital Expenditures
U.S. Cellular's capital expenditures for 2014 are expected to be approximately $640 million. These expenditures are expected to be for the following general purposes:
U.S. Cellular plans to finance its capital expenditures program for 2014 using primarily Cash flows from operating activities and, as necessary, existing cash balances and short-term investments.
Acquisitions, Divestitures and Exchanges
U.S. Cellular assesses its existing wireless interests on an ongoing basis with a goal of improving the competitiveness of its operations and maximizing its long-term return on investment. As part of this strategy, U.S. Cellular reviews attractive opportunities to acquire additional wireless operating markets and wireless spectrum. In addition, U.S. Cellular may seek to divest outright or include in exchanges for other wireless interests those interests that are not strategic to its long-term success. As a result, U.S. Cellular may be engaged from time to time in negotiations relating to the acquisition, divestiture or exchange of companies, properties or wireless spectrum. In general, U.S. Cellular may not disclose such transactions until there is a definitive agreement. See Note 5Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to significant transactions.
Variable Interest Entities
U.S. Cellular consolidates certain entities because they are "variable interest entities" under accounting principles generally accepted in the United States of America ("GAAP"). See Note 12Variable Interest Entities in the Notes to Consolidated Financial Statements for additional information related to these variable interest entities. U.S. Cellular may elect to make additional capital contributions and/or advances to these variable interest entities in future periods in order to fund their operations.
Common Share Repurchase Program
In the past year, U.S. Cellular has repurchased and expects to continue to repurchase its Common Shares, subject to its repurchase program. For additional information related to the current repurchase authorization
19
United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
and repurchases made during 2013, 2012 and 2011, see Note 14Common Shareholders' Equity in the Notes to Consolidated Financial Statements and Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Contractual and Other Obligations
At December 31, 2013, the resources required for contractual obligations were as follows:
|
|
Payments Due by Period | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) |
Total | Less Than 1 Year |
1 - 3 Years |
3 - 5 Years |
More Than 5 Years |
|||||||||||
Long-term debt obligations(1) |
$ | 886.0 | $ | | $ | | $ | | $ | 886.0 | ||||||
Interest payments on long-term debt obligations |
1,846.2 | 60.3 | 120.4 | 120.4 | 1,545.1 | |||||||||||
Operating leases(2) |
1,363.6 | 152.3 | 251.3 | 176.3 | 783.7 | |||||||||||
Capital leases |
6.9 | 0.5 | 1.1 | 1.0 | 4.3 | |||||||||||
Purchase obligations(3) |
1,797.3 | 589.9 | 1,006.9 | 121.0 | 79.5 | |||||||||||
| | | | | | | | | | | | | | | | |
|
$ | 5,900.0 | $ | 803.0 | $ | 1,379.7 | $ | 418.7 | $ | 3,298.6 | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
The table above excludes liabilities related to "unrecognized tax benefits" as defined by GAAP because U.S. Cellular is unable to predict the period of settlement of such liabilities. Such unrecognized tax benefits were $28.8 million at December 31, 2013. See Note 3Income Taxes in the Notes to Consolidated Financial Statements for additional information on unrecognized tax benefits.
Agreements
As previously disclosed, on August 17, 2010, U.S. Cellular and Amdocs Software Systems Limited ("Amdocs") entered into a Software License and Maintenance Agreement ("SLMA") and a Master Service Agreement ("MSA") (collectively, the "Amdocs Agreements") to develop a Billing and Operational Support System (B/OSS"). In July 2013, U.S. Cellular implemented B/OSS, pursuant to an updated Statement of Work dated June 29, 2012. Total payments to Amdocs related to this implementation are estimated to be approximately $183.9 million (subject to certain potential adjustments) over the period from commencement of the SLMA through the first half of 2014. As of December 31, 2013, $136.8 million had been paid to Amdocs.
20
United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
Apple iPhone Products Purchase Commitment
In March 2013, U.S. Cellular entered into an agreement with Apple to purchase certain minimum quantities of iPhone products over a three-year period beginning in November 2013. The minimum quantity of iPhone products to be purchased during the first contract year is fixed and is subject to adjustment for the second and third contract years based on the percentage growth in smartphone sales in the United States for the immediately preceding calendar year. Based on current forecasts, U.S. Cellular estimates that the remaining contractual purchase commitment as of December 31, 2013 is approximately $950 million. At this time, U.S. Cellular expects to meet its contractual commitment with Apple.
Off-Balance Sheet Arrangements
U.S. Cellular had no transactions, agreements or other contractual arrangements with unconsolidated entities involving "off-balance sheet arrangements," as defined by SEC rules, that had or are reasonably likely to have a material current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Dividends
On June 25, 2013, U.S. Cellular paid a special cash dividend of $5.75 per share, for an aggregate amount of $482.3 million, to all holders of U.S. Cellular Common Shares and Series A Common Shares as of June 11, 2013.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
U.S. Cellular prepares its consolidated financial statements in accordance with GAAP. U.S. Cellular's significant accounting policies are discussed in detail in Note 1Summary of Significant Accounting Policies and Recent Accounting Pronouncements in the Notes to Consolidated Financial Statements.
Management believes the application of the following critical accounting policies and the estimates required by such application reflect its most significant judgments and estimates used in the preparation of U.S. Cellular's consolidated financial statements. Management has discussed the development and selection of each of the following accounting policies and related estimates and disclosures with the Audit Committee of U.S. Cellular's Board of Directors.
Goodwill and Licenses
See the Goodwill and Licenses Impairment Assessment section of Note 1Summary of Significant Accounting Policies and Recent Accounting Pronouncements in the Notes to Consolidated Financial Statements for information on Goodwill and Licenses impairment testing policies and methods. U.S. Cellular performs annual impairment testing of Goodwill and Licenses, as required by GAAP, in the fourth quarter of its fiscal year, based on fair values and net carrying values determined as of November 1.
See Note 6Intangible Assets in the Notes to Consolidated Financial Statements for additional information related to Goodwill and Licenses activity in 2013 and 2012.
Goodwill
U.S. Cellular tests Goodwill for impairment at the level of reporting referred to as a reporting unit. For purposes of impairment testing of Goodwill in 2013, U.S. Cellular identified four reporting units based on geographic service areas. For purposes of the impairment testing of Goodwill in 2012, U.S. Cellular identified five reporting units based on geographic service areas. The change in reporting units resulted from the NY1 & NY2 Deconsolidation more fully described in Note 7Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements. There were no changes to U.S. Cellular's overall Goodwill impairment testing methodology between November 1, 2013 and November 1, 2012.
21
United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
A discounted cash flow approach was used to value each reporting unit, using value drivers and risks specific to the industry and current economic factors. The cash flow estimates incorporated assumptions that market participants would use in their estimates of fair value and may not be indicative of U.S. Cellular specific assumptions. The most significant assumptions made in this process were the revenue growth rate (shown as a ten year compound annual growth rate in the table below), the terminal revenue growth rate, the discount rate and capital expenditures as a percentage of revenue (shown as a simple average in the table below). The averages below are based on ten year projection periods. These assumptions were as follows for November 1, 2013 and 2012:
Key Assumptions
|
November 1, 2013 |
November 1, 2012 |
|||||
---|---|---|---|---|---|---|---|
Revenue growth rate |
2.2 | % | 2.2 | % | |||
Terminal revenue growth rate |
2.0 | % | 2.0 | % | |||
Discount rate |
10.0 | % | 11.0 | % | |||
Capital expenditures as a percentage of revenue |
16.0 | % | 15.2 | % |
The carrying value of each U.S. Cellular reporting unit as of November 1, 2013 was as follows:
Reporting Unit
|
Carrying Value | |||
---|---|---|---|---|
(Dollars in millions) |
||||
Central Region |
$ | 2,902 | ||
Mid-Atlantic Region |
811 | |||
New England Region |
256 | |||
Northwest Region |
318 | |||
| | | | |
Total |
$ | 4,287 | ||
| | | | |
| | | | |
As of November 1, 2013, the fair values of the reporting units exceeded their respective carrying values by amounts ranging from 19.1% to 40.2%. Therefore, no impairment of Goodwill existed. Given that the fair values of the respective reporting units exceed their respective carrying values, provided all other assumptions remained the same, the discount rate would have to increase to a range of 11.7% to 13.2% to yield estimated fair values of reporting units that equal their respective carrying values at November 1, 2013. Further, assuming all other assumptions remained the same, the terminal growth rate assumptions would need to decrease to amounts ranging from negative 2.1% to negative 7.7% to yield estimates of fair value equal to the carrying values of the respective reporting units at November 1, 2013.
Licenses
U.S. Cellular tests licenses for impairment at the level of reporting referred to as a unit of accounting. For purposes of its impairment testing of licenses as of November 1, 2013, U.S. Cellular separated its FCC licenses into eleven units of accounting based on geographic service areas. As of November 1, 2012, U.S. Cellular separated its FCC licenses into thirteen units of accounting based on geographic service areas. The change in units of accounting resulted from (i) the Divestiture Transaction and the Mississippi Valley non-operating market license sale, both of which are more fully described in Note 5Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements and (ii) the NY1 & NY2 Deconsolidation more fully described in Note 7Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements. In both 2013 and 2012, seven of the units of accounting represented geographic groupings of licenses which, because they were not being utilized and, therefore, were not expected to generate cash flows from operating activities in the foreseeable future, were considered separate units of accounting for purposes of impairment testing.
22
United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
Developed operating market licenses ("built licenses")
U.S. Cellular applies the build-out method to estimate the fair values of built licenses. The most significant assumptions applied for purposes of the November 1, 2013 and 2012 licenses impairment assessments were as follows:
Key Assumptions
|
November 1, 2013 |
November 1, 2012 |
|||||
---|---|---|---|---|---|---|---|
Build-out period |
5 years | 7 years | |||||
Discount rate |
8.5 | % | 8.5 | % | |||
Terminal revenue growth rate |
2.0 | % | 2.0 | % | |||
Terminal capital expenditures as a percentage of revenue |
13.6 | % | 13.2 | % | |||
Customer penetration rates |
12.5-16.7 | % | 13.3-17.3 | % |
The shorter build-out period in 2013 reflects a change in management's expectations of the time required to build out the U.S. Cellular network and is based on recent company-specific experience and industry observation.
The discount rate used in the valuation of licenses is less than the discount rate used in the valuation of reporting units for purposes of goodwill impairment testing. The discount rate used for licenses does not include a company-specific risk premium as a wireless license would not be subject to such risk.
The discount rate is the most significant assumption used in the build-out method. The discount rate is estimated based on the overall risk-free interest rate adjusted for industry participant information, such as a typical capital structure (i.e., debt-equity ratio), the after-tax cost of debt and the cost of equity. The cost of equity takes into consideration the average risk specific to individual market participants.
As of November 1, 2013, the fair values of the built licenses units of accounting exceeded their respective carrying values by amounts ranging from 33.8% to 75.9%. Therefore, no impairment of Licenses existed. Given that the fair values of the licenses exceed their respective carrying values, the discount rate would have to increase to a range of 8.9% to 9.5% to yield estimated fair values of licenses in the respective units of accounting that equal their respective carrying values at November 1, 2013. An increase of 50 basis points to the assumed discount rate would cause an impairment of approximately $7 million.
Non-operating market licenses ("unbuilt licenses")
For purposes of performing impairment testing of unbuilt licenses, U.S. Cellular prepares estimates of fair value by reference to prices paid in recent auctions and market transactions where available. If such information is not available, the fair value of the unbuilt licenses is assumed to have changed by the same percentage, and in the same direction, that the fair value of built licenses measured using the build-out method changed during the period. There was no impairment loss recognized related to unbuilt licenses as a result of the November 1, 2013 licenses impairment test.
23
United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
Carrying Value of Licenses
The carrying value of licenses at November 1, 2013 was as follows:
Unit of Accounting(1)
|
Carrying Value | |||
---|---|---|---|---|
(Dollars in millions) |
||||
Developed Operating markets |
||||
Central Region |
$ | 749 | ||
Mid-Atlantic Region |
235 | |||
New England Region |
102 | |||
Northwest Region |
68 | |||
Non-operating markets |
||||
New England |
1 | |||
North Northwest |
3 | |||
South Northwest |
2 | |||
North Central |
59 | |||
South Central |
22 | |||
East Central |
107 | |||
Mid-Atlantic |
50 | |||
| | | | |
Total(2) |
$ | 1,398 | ||
| | | | |
| | | | |
Income Taxes
U.S. Cellular is included in a consolidated federal income tax return with other members of the TDS consolidated group. TDS and U.S. Cellular are parties to a Tax Allocation Agreement which provides that U.S. Cellular and its subsidiaries be included with the TDS affiliated group in a consolidated federal income tax return and in state income or franchise tax returns in certain situations. For financial statement purposes, U.S. Cellular and its subsidiaries calculate their income, income tax and credits as if they comprised a separate affiliated group. Under the Tax Allocation Agreement, U.S. Cellular remits its applicable income tax payments to TDS.
The amounts of income tax assets and liabilities, the related income tax provision and the amount of unrecognized tax benefits are critical accounting estimates because such amounts are significant to U.S. Cellular's financial condition and results of operations.
The preparation of the consolidated financial statements requires U.S. Cellular to calculate a provision for income taxes. This process involves estimating the actual current income tax liability together with assessing temporary differences resulting from the different treatment of items for tax purposes. These temporary differences result in deferred income tax assets and liabilities, which are included in U.S. Cellular's Consolidated Balance Sheet. U.S. Cellular must then assess the likelihood that deferred income tax assets will be realized based on future taxable income and, to the extent management believes that realization is not likely, establish a valuation allowance. Management's judgment is required
24
United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
in determining the provision for income taxes, deferred income tax assets and liabilities and any valuation allowance that is established for deferred income tax assets.
U.S. Cellular recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.
See Note 3Income Taxes in the Notes to Consolidated Financial Statements for details regarding U.S. Cellular's income tax provision, deferred income taxes and liabilities, valuation allowances and unrecognized tax benefits, including information regarding estimates that impact income taxes.
Loyalty Reward Program
See the Revenue Recognition section of Note 1Summary of Significant Accounting Policies and Recent Accounting Pronouncements in the Notes to Consolidated Financial Statements for a description of this program and the related accounting.
U.S. Cellular follows the deferred revenue method of accounting for its loyalty reward program. Under this method, revenue allocated to loyalty reward points is deferred. Revenue is recognized at the time of customer redemption or when such points have been depleted via an account maintenance charge. U.S. Cellular periodically reviews and revises the redemption and depletion rates as appropriate based on history and related future expectations. As of December 31, 2013, U.S. Cellular estimated loyalty reward points breakage based on actuarial estimates and recorded a $7.4 million change in estimate, which reduced Customer deposits and deferred revenues in the Consolidated Balance Sheet and increased Total operating revenues in the Consolidated Statement of Operations.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Note 17Related Parties and Note 18Certain Relationships and Related Transactions in the Notes to Consolidated Financial Statements.
Possible related party transaction
U.S. Cellular is currently considering a possible purchase of FCC spectrum licenses from TDS. U.S. Cellular's spectrum requirements and the relative value of the FCC licenses are being reviewed. U.S. Cellular formed a special committee comprised entirely of independent and disinterested directors with the exclusive power to consider, negotiate and, if appropriate, approve a transaction with TDS. The U.S. Cellular special committee has engaged independent financial advisors and legal counsel. There is no assurance as to whether a transaction will be consummated.
25
United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR CAUTIONARY STATEMENT
This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Annual Report contain 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. Such risks, uncertainties and other factors include, but are not limited to, the following risks:
26
United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
27
United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
resulting delays in filing periodic reports with the SEC, could have an adverse effect on U.S. Cellular's business, financial condition or results of operations.
See "Risk Factors" in U.S. Cellular's Annual Report on Form 10-K for the year ended December 31, 2013 for a further discussion of these risks. U.S. Cellular undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Readers should evaluate any statements in light of these important factors.
28
United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
Long-Term Debt
As of December 31, 2013, the majority of U.S. Cellular's long-term debt was in the form of fixed-rate notes with maturities ranging up to 47 years. Fluctuations in market interest rates can lead to significant fluctuations in the fair value of these fixed-rate notes.
The following table presents the scheduled principal payments on long-term debt and capital lease obligations, and the related weighted average interest rates by maturity dates at December 31, 2013:
|
Principal Payments Due by Period | ||||||
---|---|---|---|---|---|---|---|
(Dollars in millions) |
Long-Term Debt Obligations(1) |
Weighted-Avg. Interest Rates on Long-Term Debt Obligations(2) |
|||||
2014 |
$ | 0.2 | 9.7 | % | |||
2015 |
0.2 | 9.7 | % | ||||
2016 |
0.2 | 9.7 | % | ||||
2017 |
0.2 | 9.7 | % | ||||
2018 |
0.2 | 9.7 | % | ||||
After 5 years |
888.8 | 6.8 | % | ||||
| | | | | | | |
Total |
$ | 889.8 | 6.8 | % | |||
| | | | | | | |
| | | | | | | |
Fair Value of Long-Term Debt
At December 31, 2013 and 2012, the estimated fair value of long-term debt obligations, excluding capital lease obligations and the current portion of such long-term debt, was $817.5 million and $959.4 million, respectively. 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 at December 31, 2013 and 2012 and discounted cash flow analysis for the 6.7% Senior Notes at December 31, 2013 and 2012.
Other Market Risk Sensitive Instruments
The substantial majority of U.S. Cellular's other market risk sensitive instruments (as defined in item 305 of SEC Regulation S-K) are short-term, including Cash and cash equivalents and Short-term investments. The fair value of such instruments is less sensitive to market fluctuations than longer term instruments. Accordingly, U.S. Cellular believes that a significant change in interest rates would not have a material effect on such other market risk sensitive instruments.
29
United States Cellular Corporation
Consolidated Statement of Operations
Year Ended December 31,
|
2013 | 2012 | 2011 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars and shares in thousands, except per share amounts) |
|
|
|
|||||||
Operating revenues |
||||||||||
Service |
$ | 3,594,773 | $ | 4,098,856 | $ | 4,053,797 | ||||
Equipment sales |
324,063 | 353,228 | 289,549 | |||||||
| | | | | | | | | | |
Total operating revenues |
3,918,836 | 4,452,084 | 4,343,346 | |||||||
| | | | | | | | | | |
Operating expenses |
||||||||||
System operations (excluding Depreciation, amortization and accretion reported below) |
763,435 | 946,805 | 929,379 | |||||||
Cost of equipment sold |
999,000 | 935,947 | 791,802 | |||||||
Selling, general and administrative (including charges from affiliates of $99.2 million, $104.3 million and $104.1 million in 2013, 2012 and 2011) |
1,677,395 | 1,764,933 | 1,769,701 | |||||||
Depreciation, amortization and accretion |
803,781 | 608,633 | 573,557 | |||||||
(Gain) loss on asset disposals, net |
30,606 | 18,088 | 9,889 | |||||||
(Gain) loss on sale of business and other exit costs, net |
(246,767 | ) | 21,022 | | ||||||
(Gain) loss on license sales and exchanges |
(255,479 | ) | | (11,762 | ) | |||||
| | | | | | | | | | |
Total operating expenses |
3,771,971 | 4,295,428 | 4,062,566 | |||||||
| | | | | | | | | | |
Operating income |
146,865 |
156,656 |
280,780 |
|||||||
Investment and other income (expense) |
||||||||||
Equity in earnings of unconsolidated entities |
131,949 | 90,364 | 83,566 | |||||||
Interest and dividend income |
3,961 | 3,644 | 3,395 | |||||||
Gain (loss) on investments |
18,556 | (3,718 | ) | 11,373 | ||||||
Interest expense |
(43,963 | ) | (42,393 | ) | (65,614 | ) | ||||
Other, net |
288 | 500 | (678 | ) | ||||||
| | | | | | | | | | |
Total investment and other income (expense) |
110,791 | 48,397 | 32,042 | |||||||
| | | | | | | | | | |
Income before income taxes |
257,656 |
205,053 |
312,822 |
|||||||
Income tax expense |
113,134 | 63,977 | 114,078 | |||||||
| | | | | | | | | | |
Net income |
144,522 |
141,076 |
198,744 |
|||||||
Less: Net income attributable to noncontrolling interests, net of tax |
4,484 | 30,070 | 23,703 | |||||||
| | | | | | | | | | |
Net income attributable to U.S. Cellular shareholders |
$ |
140,038 |
$ |
111,006 |
$ |
175,041 |
||||
| | | | | | | | | | |
| | | | | | | | | | |
Basic weighted average shares outstanding |
83,968 |
84,645 |
84,877 |
|||||||
Basic earnings per share attributable to U.S. Cellular shareholders |
$ | 1.67 | $ | 1.31 | $ | 2.06 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
Diluted weighted average shares outstanding |
84,730 |
85,230 |
85,448 |
|||||||
Diluted earnings per share attributable to U.S. Cellular shareholders |
$ | 1.65 | $ | 1.30 | $ | 2.05 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
Special dividend per share to U.S. Cellular shareholders |
$ |
5.75 |
$ |
|
$ |
|
||||
| | | | | | | | | | |
| | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
30
United States Cellular Corporation
Consolidated Statement of Cash Flows
Year Ended December 31,
|
2013 | 2012 | 2011 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|
|
|
|||||||
Cash flows from operating activities |
||||||||||
Net income |
$ | 144,522 | $ | 141,076 | $ | 198,744 | ||||
Add (deduct) adjustments to reconcile net income to net cash flows from operating activities |
||||||||||
Depreciation, amortization and accretion |
803,781 | 608,633 | 573,557 | |||||||
Bad debts expense |
98,864 | 67,372 | 62,157 | |||||||
Stock-based compensation expense |
15,844 | 21,466 | 20,183 | |||||||
Deferred income taxes, net |
(75,348 | ) | 49,244 | 203,264 | ||||||
Equity in earnings of unconsolidated entities |
(131,949 | ) | (90,364 | ) | (83,566 | ) | ||||
Distributions from unconsolidated entities |
125,660 | 84,417 | 91,768 | |||||||
(Gain) loss on asset disposals, net |
30,606 | 18,088 | 9,889 | |||||||
(Gain) loss on sale of business and other exit costs, net |
(246,767 | ) | 21,022 | | ||||||
(Gain) loss on license sales and exchanges |
(255,479 | ) | | (11,762 | ) | |||||
(Gain) loss on investments |
(18,556 | ) | 3,718 | (11,373 | ) | |||||
Noncash interest expense |
1,059 | (1,822 | ) | 10,040 | ||||||
Other operating activities |
646 | 546 | 102 | |||||||
Changes in assets and liabilities from operations |
||||||||||
Accounts receivable |
(291,759 | ) | (64,816 | ) | (82,175 | ) | ||||
Inventory |
(82,422 | ) | (28,786 | ) | (14,640 | ) | ||||
Accounts payabletrade |
85,199 | (4,977 | ) | 28,410 | ||||||
Accounts payableaffiliate |
147 | (1,458 | ) | 1,392 | ||||||
Customer deposits and deferred revenues |
66,344 | 30,353 | 34,927 | |||||||
Accrued taxes |
30,037 | 73,064 | (39,984 | ) | ||||||
Accrued interest |
273 | 167 | 225 | |||||||
Other assets and liabilities |
(9,805 | ) | (27,652 | ) | (3,296 | ) | ||||
| | | | | | | | | | |
|
290,897 | 899,291 | 987,862 | |||||||
| | | | | | | | | | |
Cash flows from investing activities |
||||||||||
Cash used for additions to property, plant and equipment |
(717,862 | ) | (826,400 | ) | (771,798 | ) | ||||
Cash paid for acquisitions and licenses |
(16,540 | ) | (122,690 | ) | (23,773 | ) | ||||
Cash received from divestitures |
811,120 | 49,932 | | |||||||
Cash paid for investments |
| (120,000 | ) | (110,000 | ) | |||||
Cash received for investments |
100,000 | 125,000 | 145,250 | |||||||
Other investing activities |
(3,969 | ) | (2,453 | ) | 718 | |||||
| | | | | | | | | | |
|
172,749 | (896,611 | ) | (759,603 | ) | |||||
| | | | | | | | | | |
Cash flows from financing activities |
||||||||||
Repayment of long-term debt |
(414 | ) | (145 | ) | (330,338 | ) | ||||
Issuance of long-term debt |
| | 342,000 | |||||||
Common shares reissued for benefit plans, net of tax payments |
5,784 | (2,205 | ) | 1,935 | ||||||
Common shares repurchased |
(18,544 | ) | (20,045 | ) | (62,294 | ) | ||||
Payment of debt issuance costs |
(23 | ) | (514 | ) | (11,400 | ) | ||||
Dividends paid |
(482,270 | ) | | | ||||||
Distributions to noncontrolling interests |
(3,766 | ) | (22,970 | ) | (21,094 | ) | ||||
Payments to acquire additional interest in subsidiaries |
(1,005 | ) | (3,167 | ) | | |||||
Other financing activities |
299 | 569 | 172 | |||||||
| | | | | | | | | | |
|
(499,939 | ) | (48,477 | ) | (81,019 | ) | ||||
| | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents |
(36,293 |
) |
(45,797 |
) |
147,240 |
|||||
Cash and cash equivalents |
||||||||||
Beginning of period |
378,358 | 424,155 | 276,915 | |||||||
| | | | | | | | | | |
End of period |
$ | 342,065 | $ | 378,358 | $ | 424,155 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
31
United States Cellular Corporation
Consolidated Balance SheetAssets
December 31,
|
2013 | 2012 | |||||
---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|
|
|||||
Current assets |
|||||||
Cash and cash equivalents |
$ | 342,065 | $ | 378,358 | |||
Short-term investments |
50,104 | 100,676 | |||||
Accounts receivable |
|||||||
Customers and agents, less allowances of $59,206 and $24,290, respectively |
467,255 | 349,424 | |||||
Roaming |
30,136 | 31,782 | |||||
Affiliated |
980 | 375 | |||||
Other, less allowances of $1,032 and $2,612, respectively |
88,224 | 63,639 | |||||
Inventory, net |
238,188 | 155,886 | |||||
Income taxes receivable |
| 1,612 | |||||
Prepaid expenses |
65,596 | 62,560 | |||||
Net deferred income tax asset |
99,105 | 35,419 | |||||
Other current assets |
19,538 | 16,745 | |||||
| | | | | | | |
|
1,401,191 | 1,196,476 | |||||
Assets held for sale |
16,027 |
216,763 |
|||||
Investments |
|||||||
Licenses |
1,401,126 | 1,456,794 | |||||
Goodwill |
387,524 | 421,743 | |||||
Investments in unconsolidated entities |
265,585 | 144,531 | |||||
Long-term investments |
| 50,305 | |||||
| | | | | | | |
|
2,054,235 | 2,073,373 | |||||
Property, plant and equipment |
|||||||
In service and under construction |
7,717,512 | 7,478,428 | |||||
Less: Accumulated depreciation |
4,860,992 | 4,455,840 | |||||
| | | | | | | |
|
2,856,520 | 3,022,588 | |||||
Other assets and deferred charges |
117,735 |
78,250 |
|||||
| | | | | | | |
Total assets |
$ |
6,445,708 |
$ |
6,587,450 |
|||
| | | | | | | |
| | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
32
United States Cellular Corporation
Consolidated Balance SheetLiabilities and Equity
December 31,
|
2013 | 2012 | |||||
---|---|---|---|---|---|---|---|
(Dollars and shares in thousands) |
|
|
|||||
Current liabilities |
|||||||
Current portion of long-term debt |
$ | 166 | $ | 92 | |||
Accounts payable |
|||||||
Affiliated |
11,243 | 10,725 | |||||
Trade |
405,583 | 310,936 | |||||
Customer deposits and deferred revenues |
256,740 | 192,113 | |||||
Accrued taxes |
73,820 | 35,834 | |||||
Accrued compensation |
66,566 | 90,418 | |||||
Other current liabilities |
192,055 | 114,881 | |||||
| | | | | | | |
|
1,006,173 | 754,999 | |||||
Liabilities held for sale |
|
19,594 |
|||||
Deferred liabilities and credits |
|||||||
Net deferred income tax liability |
836,297 | 849,818 | |||||
Other deferred liabilities and credits |
315,073 | 288,441 | |||||
Long-term debt |
878,032 | 878,858 | |||||
Commitments and contingencies |
|||||||
Noncontrolling interests with redemption features |
536 |
493 |
|||||
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 84,205 shares (33,006 Series A Common and 51,199 Common Shares) and 84,168 shares (33,006 Series A Common and 51,162 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 |
1,424,729 | 1,412,453 | |||||
Treasury Shares, at cost, 3,869 and 3,906 Common Shares, respectively |
(164,692 | ) | (165,724 | ) | |||
Retained earnings |
2,043,095 | 2,399,052 | |||||
| | | | | | | |
Total U.S. Cellular shareholders' equity |
3,391,206 | 3,733,855 | |||||
Noncontrolling interests |
18,391 | 61,392 | |||||
| | | | | | | |
Total equity |
3,409,597 | 3,795,247 | |||||
| | | | | | | |
Total liabilities and equity |
$ |
6,445,708 |
$ |
6,587,450 |
|||
| | | | | | | |
| | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
33
United States Cellular Corporation
Consolidated Statement of Changes in Equity
|
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, 2012 |
$ | 88,074 | $ | 1,412,453 | $ | (165,724 | ) | $ | 2,399,052 | $ | 3,733,855 | $ | 61,392 | $ | 3,795,247 | |||||||
Add (Deduct) |
||||||||||||||||||||||
Net income attributable to U.S. Cellular shareholders |
| | | 140,038 | 140,038 | | 140,038 | |||||||||||||||
Net income attributable to noncontrolling interests classified as equity |
| | | | | 4,251 | 4,251 | |||||||||||||||
Common and Series A Common Shares dividends |
| | | (482,270 | ) | (482,270 | ) | | (482,270 | ) | ||||||||||||
Repurchase of Common Shares |
| | (18,544 | ) | | (18,544 | ) | | (18,544 | ) | ||||||||||||
Incentive and compensation plans |
| 222 | 19,576 | (13,725 | ) | 6,073 | | 6,073 | ||||||||||||||
Stock-based compensation awards |
| 15,467 | | | 15,467 | | 15,467 | |||||||||||||||
Tax windfall (shortfall) from stock awards |
| (3,267 | ) | | | (3,267 | ) | | (3,267 | ) | ||||||||||||
Distributions to noncontrolling interests |
| | | | | (3,576 | ) | (3,576 | ) | |||||||||||||
Adjust investment in subsidiaries for noncontrolling interest purchases |
| (146 | ) | | | (146 | ) | 94 | (52 | ) | ||||||||||||
Deconsolidation of partnerships |
| | | | | (43,770 | ) | (43,770 | ) | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2013 |
$ | 88,074 | $ | 1,424,729 | $ | (164,692 | ) | $ | 2,043,095 | $ | 3,391,206 | $ | 18,391 | $ | 3,409,597 | |||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
34
United States Cellular Corporation
Consolidated Statement of Changes in Equity
|
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 |
| | | 111,006 | 111,006 | | 111,006 | |||||||||||||||
Net income attributable to noncontrolling interests classified as equity |
| | | | | 30,019 | 30,019 | |||||||||||||||
Repurchase of Common Shares |
| | (20,045 | ) | | (20,045 | ) | | (20,045 | ) | ||||||||||||
Incentive and compensation plans |
| 137 | 7,138 | (9,317 | ) | (2,042 | ) | | (2,042 | ) | ||||||||||||
Stock-based compensation awards |
| 21,249 | | | 21,249 | | 21,249 | |||||||||||||||
Tax windfall (shortfall) from stock awards |
| (1,518 | ) | | | (1,518 | ) | | (1,518 | ) | ||||||||||||
Distributions to noncontrolling interests |
| | | | | (22,970 | ) | (22,970 | ) | |||||||||||||
Adjust investment in subsidiaries for noncontrolling interest purchases |
| 5,244 | | | 5,244 | (1,586 | ) | 3,658 | ||||||||||||||
Other |
| | | | | (27 | ) | (27 | ) | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2012 |
$ | 88,074 | $ | 1,412,453 | $ | (165,724 | ) | $ | 2,399,052 | $ | 3,733,855 | $ | 61,392 | $ | 3,795,247 | |||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
35
United States Cellular Corporation
Consolidated Statement of Changes in Equity
|
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 |
| | | 175,041 | 175,041 | | 175,041 | |||||||||||||||
Net income attributable to noncontrolling interests classified as equity |
| | | | | 23,532 | 23,532 | |||||||||||||||
Repurchase of Common Shares |
| | (62,294 | ) | | (62,294 | ) | | (62,294 | ) | ||||||||||||
Incentive and compensation plans |
| 57 | 15,093 | (13,185 | ) | 1,965 | | 1,965 | ||||||||||||||
Stock-based compensation awards |
| 20,183 | | | 20,183 | | 20,183 | |||||||||||||||
Tax windfall (shortfall) from stock awards |
| (1,386 | ) | | | (1,386 | ) | | (1,386 | ) | ||||||||||||
Distributions to noncontrolling interests |
| | | | | (21,094 | ) | (21,094 | ) | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2011 |
$ | 88,074 | $ | 1,387,341 | $ | (152,817 | ) | $ | 2,297,363 | $ | 3,619,961 | $ | 55,956 | $ | 3,675,917 | |||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
36
United States Cellular Corporation
Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
United States Cellular Corporation ("U.S. Cellular"), a Delaware Corporation, is an 84%-owned subsidiary of Telephone and Data Systems, Inc. ("TDS").
Nature of Operations
U.S. Cellular owns, operates and invests in wireless systems throughout the United States. As of December 31, 2013, U.S. Cellular served 4.8 million customers. U.S. Cellular operates as one reportable segment.
Principles of Consolidation
The accounting policies of U.S. Cellular conform to accounting principles generally accepted in the United States of America ("GAAP") as set forth in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC"). Unless otherwise specified, references to accounting provisions and GAAP in these notes refer to the requirements of the FASB ASC. The consolidated financial statements include the accounts of U.S. Cellular, its majority-owned subsidiaries, general partnerships in which U.S. Cellular has a majority partnership interest and variable interest entities ("VIEs") in which U.S. Cellular is the primary beneficiary. Both VIE and primary beneficiary represent terms defined by GAAP.
Intercompany accounts and transactions have been eliminated.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 2013 financial statement presentation. These reclassifications did not affect consolidated net income attributable to U.S. Cellular shareholders, cash flows, assets, liabilities or equity for the years presented.
Business Combinations
U.S. Cellular accounts for business combinations at fair value in accordance with the acquisition method. This method requires that the acquirer recognize 100% of the acquiree's assets and liabilities at their fair values on the acquisition date for all acquisitions, whether full or partial. In addition, transaction costs related to acquisitions are expensed.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (a) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and (b) the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Significant estimates are involved in accounting for goodwill and indefinite-lived intangible assets, depreciation, amortization and accretion, allowance for doubtful accounts, loyalty reward points, income taxes, stock based compensation and asset retirement obligations.
Cash and Cash Equivalents
Cash and cash equivalents include cash and short-term, highly liquid investments with original maturities of three months or less.
37
United States Cellular Corporation
Notes to Consolidated Financial Statements (Continued)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
Short-Term and Long-Term Investments
At December 31, 2013 and 2012, U.S. Cellular had $50.1 million and $100.7 million, respectively, in Short-term investments. At December 31, 2012, U.S. Cellular had $50.3 million in Long-term investments. Short-term and Long-term investments consist primarily of U.S. Treasury Notes which are designated as held-to-maturity investments and are recorded at amortized cost in the Consolidated Balance Sheet. For these investments, U.S. Cellular's objective is to earn a higher rate of return on funds that are not anticipated to be required to meet liquidity needs in the near term, while maintaining a low level of investment risk. See Note 2Fair Value Measurements for additional details on Short-term and Long-term investments.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist primarily of amounts owed by customers for wireless services and equipment sales, by agents for sales of equipment to them and by other wireless carriers whose customers have used U.S. Cellular's wireless systems.
The allowance for doubtful accounts is the best estimate of the amount of probable credit losses related to existing accounts receivable. The allowance is estimated based on historical experience and other factors that could affect collectability. Accounts receivable balances are reviewed on either an aggregate or individual basis for collectability depending on the type of receivable. When it is probable that an account balance will not be collected, the account balance is charged against the allowance for doubtful accounts. U.S. Cellular does not have any off-balance sheet credit exposure related to its customers.
The changes in the allowance for doubtful accounts during the years ended December 31, 2013, 2012 and 2011 were as follows:
(Dollars in thousands) |
2013 | 2012 | 2011 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Beginning balance |
$ | 26,902 | $ | 23,537 | $ | 25,816 | ||||
Additions, net of recoveries |
98,864 | 67,372 | 62,157 | |||||||
Deductions |
(65,528 | ) | (64,007 | ) | (64,436 | ) | ||||
| | | | | | | | | | |
Ending balance |
$ | 60,238 | $ | 26,902 | $ | 23,537 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
Inventory
Inventory consists primarily of wireless devices stated at the lower of cost or market, with cost determined using the first-in, first-out method and market determined by replacement costs or estimated net realizable value.
Fair Value Measurements
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
38
United States Cellular Corporation
Notes to Consolidated Financial Statements (Continued)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
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.
Goodwill
U.S. Cellular has Goodwill as a result of its acquisitions of wireless businesses. Such Goodwill represents the excess of the total purchase price over the fair value of net assets acquired in these transactions.
Licenses
Licenses consist of direct and incremental costs incurred in acquiring Federal Communications Commission ("FCC") licenses to provide wireless service.
U.S. Cellular has determined that wireless licenses are indefinite-lived intangible assets and, therefore, not subject to amortization based on the following factors:
Goodwill and Licenses Impairment Assessment
Goodwill and Licenses must be assessed for impairment annually or more frequently if events or changes in circumstances indicate that such assets might be impaired. U.S. Cellular performs its annual impairment assessment of Goodwill and Licenses as of November 1 of each year.
U.S. Cellular may first assess qualitative factors, such as company, industry and economic trends to determine whether it is necessary to perform the two-step Goodwill impairment test. If determined to be necessary, the first step compares the fair value of the reporting unit to its carrying value. If the carrying amount exceeds the fair value, the second step of the test is performed to measure the amount of impairment loss, if any. The second step compares the implied fair value of reporting unit Goodwill with the carrying amount of that Goodwill. To calculate the implied fair value of Goodwill in this second step, an enterprise allocates the fair value of the reporting unit to all of the assets and liabilities of that reporting unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value was the price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amount assigned to the assets and liabilities of the reporting unit is the implied fair value of Goodwill. If the carrying amount of Goodwill exceeds the implied fair value of Goodwill, an impairment loss is recognized for that difference.
39
United States Cellular Corporation
Notes to Consolidated Financial Statements (Continued)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
The impairment test for an indefinite-lived intangible asset other than Goodwill may consist of first assessing qualitative factors, such as company, industry and economic trends. If determined to be necessary, the next step compares the fair value of the intangible asset to its carrying amount. If the carrying amount exceeds the fair value, an impairment loss is recognized for the difference.
Quoted market prices in active markets are the best evidence of fair value of an intangible asset or reporting unit and are used when available. If quoted market prices are not available, the estimate of fair value is based on the best information available, including prices for similar assets and the use of other valuation techniques. Other valuation techniques include present value analysis, multiples of earnings or revenues, or similar performance measures. The use of these techniques involve assumptions by management about factors that are uncertain including future cash flows, the appropriate discount rate, and other inputs. Different assumptions for these inputs could create materially different results.
U.S. Cellular tests Goodwill for impairment at the level of reporting referred to as a reporting unit. For purposes of its impairment testing of Goodwill in 2013, U.S. Cellular identified four reporting units. The four reporting units represent four geographic groupings of operating markets, representing four geographic service areas. For purposes of its impairment testing of Goodwill in 2012, U.S. Cellular identified five reporting units. The change in reporting units resulted from the NY1 & NY2 Deconsolidation more fully described in Note 7Investments in Unconsolidated Entities.
A discounted cash flow approach was used to value each reporting unit for purposes of the Goodwill impairment review by using value drivers and risks specific to the current industry and economic markets. The cash flow estimates incorporated assumptions that market participants would use in their estimates of fair value. Key assumptions made in this process were the discount rate, estimated expected revenue growth rate, projected capital expenditures and the terminal growth rate.
U.S. Cellular tests Licenses for impairment at the level of reporting referred to as a unit of accounting. For purposes of its 2013 impairment testing of Licenses, U.S. Cellular separated its FCC licenses into eleven units of accounting based on geographic service areas. For purposes of its 2012 impairment testing of Licenses, U.S. Cellular separated its FCC licenses into thirteen units of accounting based on geographic service areas. The change in units of accounting resulted from (i) the Divestiture Transaction and the Mississippi Valley non-operating market license sale, both of which are more fully described in Note 5Acquisitions, Divestitures and Exchanges and (ii) the NY1 & NY2 Deconsolidation more fully described in Note 7Investments in Unconsolidated Entities. In both 2013 and 2012, seven of the units of accounting represented geographic groupings of licenses which, because they were not being utilized and, therefore, were not expected to generate cash flows from operating activities in the foreseeable future, were considered separate units of accounting for purposes of impairment testing.
U.S. Cellular estimates the fair value of built licenses for purposes of impairment testing using the build-out method. The build-out method estimates the fair value of Licenses by calculating future cash flows from a hypothetical start-up wireless company and assuming that the only assets available upon formation are the underlying Licenses. To apply this method, a hypothetical build-out of U.S. Cellular's wireless network, infrastructure, and related costs are projected based on market participant information. Calculated cash flows, along with a terminal value, are discounted to the present and summed to determine the estimated fair value.
For units of accounting which consist of unbuilt licenses, U.S. Cellular prepares estimates of fair value by reference to prices paid in recent auctions and market transactions where available. If such information is not available, the fair value of the unbuilt licenses is assumed to change by the same percentage, and in the same direction, that the fair value of built licenses measured using the build-out method changed during the period.
40
United States Cellular Corporation
Notes to Consolidated Financial Statements (Continued)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
Investments in Unconsolidated Entities
Investments in unconsolidated entities consist of amounts invested in wireless entities in which U.S. Cellular holds a noncontrolling interest. U.S. Cellular follows the equity method of accounting for such investments in which its ownership interest is less than or equal to 50% but equals or exceeds 20% for corporations and 3% for partnerships and limited liability companies, or for unconsolidated entities in which its ownership is greater than 50% but U.S. Cellular does not have a controlling financial interest. The cost method of accounting is followed for such investments in which U.S. Cellular's ownership interest is less than 20% for corporations and is less than 3% for partnerships and limited liability companies and for investments for which U.S. Cellular does not have the ability to exercise significant influence.
For its equity method investments for which financial information is readily available, U.S. Cellular records its equity in the earnings of the entity in the current period. For its equity method investments for which financial information is not readily available, U.S. Cellular records its equity in the earnings of the entity on a one quarter lag basis.
Property, Plant and Equipment
U.S. Cellular's Property, plant and equipment is stated at the original cost of construction or purchase including capitalized costs of certain taxes, payroll-related expenses, interest and estimated costs to remove the assets.
Expenditures that enhance the productive capacity of assets in service or extend their useful lives are capitalized and depreciated. Expenditures for maintenance and repairs of assets in service are charged to System operations expense or Selling, general and administrative expense, as applicable. Retirements and disposals of assets are recorded by removing the original cost of the asset (along with the related accumulated depreciation) from plant in service and charging it, together with net removal costs (removal costs less any applicable accrued asset retirement obligations and salvage value realized), to (Gain) loss on asset disposals, net.
Costs of developing new information systems are capitalized and amortized over their expected economic useful lives.
Depreciation
Depreciation is provided using the straight-line method over the estimated useful life of the assets.
U.S. Cellular depreciates leasehold improvement assets associated with leased properties over periods ranging from one to thirty years; such periods approximate the shorter of the assets' economic lives or the specific lease terms.
Useful lives of specific assets are reviewed throughout the year to determine if changes in technology or other business changes would warrant accelerating the depreciation of those specific assets. Due to the Divestiture Transaction more fully described in Note 5Acquisitions, Divestitures and Exchanges, U.S. Cellular changed the useful lives of certain assets in 2013 and 2012. Other than the Divestiture Transaction, there were no other material changes to useful lives of property, plant and equipment in 2013, 2012 or 2011.
Impairment of Long-lived Assets
U.S. Cellular reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the assets might be impaired. If necessary, the impairment test for tangible long-lived assets
41
United States Cellular Corporation
Notes to Consolidated Financial Statements (Continued)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
is a two-step process. The first step compares the carrying value of the asset (or asset group) with the estimated undiscounted cash flows over the remaining asset (or asset group) life. If the carrying value of the asset (or asset group) is greater than the undiscounted cash flows, the second step of the test is performed to measure the amount of impairment loss. The second step compares the carrying value of the asset to its estimated fair value. If the carrying value exceeds the estimated fair value (less cost to sell), an impairment loss is recognized for the difference.
U.S. Cellular has one asset group for purposes of assessing property, plant and equipment for impairment based on the fact that the individual operating markets are reliant on centrally operated data centers, mobile telephone switching offices, network operations center and wide-area network. As a result, U.S. Cellular operates a single integrated national wireless network, and the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities represent cash flows generated by this single interdependent network.
Quoted market prices in active markets are the best evidence of fair value of a tangible long-lived asset and are used when available. If quoted market prices are not available, the estimate of fair value is based on the best information available, including prices for similar assets and the use of other valuation techniques. A present value analysis of cash flow scenarios is often the best available valuation technique. The use of this technique involves assumptions by management about factors that are uncertain including future cash flows, the appropriate discount rate and other inputs. Different assumptions for these inputs could create materially different results.
Agent Liabilities
U.S. Cellular has relationships with agents, which are independent businesses that obtain customers for U.S. Cellular. At December 31, 2013 and 2012, U.S. Cellular had accrued $121.3 million and $88.2 million, respectively, for amounts due to agents. This amount is included in Other current liabilities in the Consolidated Balance Sheet.
Other Assets and Deferred Charges
Other assets and deferred charges include underwriters' and legal fees and other charges related to issuing U.S. Cellular's various borrowing instruments and other long-term agreements, and are amortized over the respective term of each instrument. The amounts for deferred charges included in the Consolidated Balance Sheet at December 31, 2013 and 2012, are shown net of accumulated amortization of $26.0 million and $12.7 million, respectively.
Asset Retirement Obligations
U.S. Cellular operates cell sites, retail stores and office spaces in its operating markets. A majority of these sites, stores and office spaces are leased. Most of these leases contain terms which require or may require U.S. Cellular to return the leased property to its original condition at the lease expiration date.
U.S. Cellular accounts for asset retirement obligations by recording the fair value of a liability for legal obligations associated with an asset retirement in the period in which the obligations are incurred. At the time the liability is incurred, U.S. Cellular records a liability equal to the net present value of the estimated cost of the asset retirement obligation and increases the carrying amount of the related long-lived asset by an equal amount. The liability is accreted to its present value over a period ending with the estimated settlement date of the respective asset retirement obligation. The carrying amount of the long-lived asset is depreciated over the useful life of the asset. Upon settlement of the obligation, any
42
United States Cellular Corporation
Notes to Consolidated Financial Statements (Continued)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
difference between the cost to retire the asset and the recorded liability (including accretion of discount) is recognized in the Consolidated Statement of Operations.
Treasury Shares
Common Shares repurchased by U.S. Cellular are recorded at cost as treasury shares and result in a reduction of equity. Treasury shares are reissued as part of U.S. Cellular's stock-based compensation programs. When treasury shares are reissued, U.S. Cellular determines the cost using the first-in, first-out cost method. The difference between the cost of the treasury shares and reissuance price is included in Additional paid-in capital or Retained earnings.
Revenue Recognition
Revenues from wireless operations consist primarily of:
Revenues related to wireless services and other value added services are recognized as services are rendered. Revenues billed in advance or in arrears of the services being provided are estimated and deferred or accrued, as appropriate.
Revenues from sales of equipment and accessories are recognized when title and risk of loss passes to the agent or end-user customer.
U.S. Cellular allocates revenue to each element of multiple element service offerings using the relative selling price method. Under this method, arrangement consideration, which consists of the amounts billed to the customer net of any cash-based discounts, is allocated to each element on the basis of its relative selling price on a stand-alone basis. Such stand-alone selling price is determined in accordance with the following hierarchy:
U.S. Cellular estimates stand-alone selling prices of the elements of its service offerings as follows:
43
United States Cellular Corporation
Notes to Consolidated Financial Statements (Continued)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
U.S. Cellular follows the deferred revenue method of accounting for its loyalty reward program. Under this method, revenue allocated to loyalty reward points is deferred. Revenue is recognized at the time of customer redemption or when such points have been depleted via an account maintenance charge. U.S. Cellular periodically reviews and revises the redemption and depletion rates as appropriate based on history and related future expectations. As of December 31, 2013, U.S. Cellular estimated loyalty reward points breakage based on actuarial estimates and recorded a $7.4 million change in estimate, which reduced Customer deposits and deferred revenues in the Consolidated Balance Sheet and increased Service revenues in the Consolidated Statement of Operations.
In the fourth quarter of 2013, U.S. Cellular issued loyalty reward points with a value of $43.5 million as a loyalty bonus in recognition of the inconvenience experienced by customers during U.S. Cellular's recent billing system conversion. The value of the loyalty bonus reduced Service revenues in the Consolidated Statement of Operations and increased Customer deposits and deferred revenues in the Consolidated Balance Sheet.
As of December 31, 2013 and 2012, U.S. Cellular had deferred revenue related to loyalty reward points outstanding of $116.2 million and $56.6 million, respectively. These amounts are recorded in Customer deposits and deferred revenues (a current liability account) in the Consolidated Balance Sheet, as customers may redeem their reward points within the current period.
Cash-based discounts and incentives, including discounts to customers who pay their bills through the use of on-line bill payment methods, are recognized as a reduction of Operating revenues concurrently with the associated revenue, and are allocated to the various products and services in the bundled offering based on their respective relative selling price.
In order to provide better control over wireless device quality, U.S. Cellular sells wireless devices to agents. U.S. Cellular pays rebates to agents at the time an agent activates a new customer or retains an existing customer in a transaction involving a wireless device. U.S. Cellular accounts for these rebates by reducing revenues at the time of the wireless device sale to the agent rather than at the time the agent activates a new customer or retains a current customer. Similarly, U.S. Cellular offers certain wireless device sales rebates and incentives to its retail customers and records the revenue net of the corresponding rebate or incentive. The total potential rebates and incentives are reduced by U.S. Cellular's estimate of rebates that will not be redeemed by customers based on historical experience of such redemptions.
GAAP requires that activation fees charged with the sale of equipment and service be allocated to the equipment and service based upon the relative selling prices of each item. Device activation fees charged at agent locations, where U.S. Cellular does not also sell a wireless device to the customer, are deferred and recognized over the average device life. Device activation fees charged as a result of handset sales at Company-owned retail stores are recognized at the time the handset is delivered to the customer.
ETC revenues recognized in the reporting period represent the amounts which U.S. Cellular is entitled to receive for such period, as determined and approved in connection with U.S. Cellular's designation as an ETC in various states.
44
United States Cellular Corporation
Notes to Consolidated Financial Statements (Continued)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
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 $114.7 million, $135.7 million and $125.2 million for 2013, 2012 and 2011, respectively.
Advertising Costs
U.S. Cellular expenses advertising costs as incurred. Advertising costs totaled $199.9 million, $227.0 million and $257.8 million in 2013, 2012 and 2011, respectively.
Income Taxes
U.S. Cellular is included in a consolidated federal income tax return with other members of the TDS consolidated group. TDS and U.S. Cellular are parties to a Tax Allocation Agreement which provides that U.S. Cellular and its subsidiaries be included with the TDS affiliated group in a consolidated federal income tax return and in state income or franchise tax returns in certain situations. For financial statement purposes, U.S. Cellular and its subsidiaries calculate their income, income taxes and credits as if they comprised a separate affiliated group. Under the Tax Allocation Agreement, U.S. Cellular remits its applicable income tax payments to TDS. U.S. Cellular had a tax payable balance with TDS of $34.8 million and $1.1 million as of December 31, 2013 and 2012, respectively.
Deferred taxes are computed using the liability method, whereby deferred tax assets are recognized for future deductible temporary differences and operating loss carryforwards, and deferred tax liabilities are recognized for future taxable temporary differences. Both deferred tax assets and liabilities are measured using the tax rates anticipated to be in effect when the temporary differences reverse. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. U.S. Cellular evaluates income tax uncertainties, assesses the probability of the ultimate settlement with the applicable taxing authority and records an amount based on that assessment.
Stock-Based Compensation
U.S. Cellular has established a long-term incentive plan and a Non-Employee Director compensation plan, and previously had an employee stock purchase plan before this was terminated in the fourth quarter of 2011. Also, U.S. Cellular employees were eligible to participate in the TDS employee stock purchase plan before this was terminated in the fourth quarter of 2011. These plans are described more fully in Note 15Stock-based Compensation. These plans are considered compensatory plans and, therefore, recognition of compensation cost for grants made under these plans is required.
U.S. Cellular values its share-based payment transactions using a Black-Scholes valuation model. Stock-based compensation cost recognized during the period is based on the portion of the share-based payment awards that are ultimately expected to vest. Accordingly, stock-based compensation cost recognized has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting
45
United States Cellular Corporation
Notes to Consolidated Financial Statements (Continued)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
forfeitures and expected life are estimated based on historical experience related to similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. U.S. Cellular believes that its historical experience provides the best estimates of future pre-vesting forfeitures and future expected life. The expected volatility assumption is based on the historical volatility of U.S. Cellular's common stock over a period commensurate with the expected life. The dividend yield assumption is zero because U.S. Cellular has never paid a dividend, except a special cash dividend in June 2013, and has expressed its intention to retain all future earnings in the business. The risk-free interest rate assumption is determined using the U.S. Treasury Yield Curve Rate with a term length that approximates the expected life of the stock options.
The fair value of options is recognized as compensation cost over the respective requisite service period of the awards, which is generally the vesting period, on a straight-line basis for each separate vesting portion of the awards as if the awards were, in-substance, multiple awards (graded vesting attribution method).
Defined Contribution Plans
U.S. Cellular participates in a qualified noncontributory defined contribution pension plan sponsored by TDS; such plan provides pension benefits for the employees of U.S. Cellular and its subsidiaries. Under this plan, pension benefits and costs are calculated separately for each participant and are funded currently. Pension costs were $10.4 million, $12.4 million and $11.6 million in 2013, 2012 and 2011, respectively.
U.S. Cellular also participates in a defined contribution retirement savings plan ("401(k) plan") sponsored by TDS. Total costs incurred from U.S. Cellular's contributions to the 401(k) plan were $15.4 million, $17.1 million and $15.5 million in 2013, 2012 and 2011, respectively.
Operating Leases
U.S. Cellular is a party to various lease agreements for office space, retail stores, cell sites and equipment that are accounted for as operating leases. Certain leases have renewal options and/or fixed rental increases. Renewal options that are reasonably assured of exercise are included in determining the lease term. U.S. Cellular accounts for certain operating leases that contain rent abatements, lease incentives and/or fixed rental increases by recognizing lease revenue and expense on a straight-line basis over the lease term.
Recently Issued Accounting Pronouncements
On July 18, 2013, the FASB issued Accounting Standards Update 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryfoward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"). ASU 2013-11 addresses the presentation of an unrecognized tax benefit when a net operating loss carryforward or tax credit carryforward exists. In such event, an unrecognized tax benefit, or portion of an unrecognized tax benefit, would be presented in the Consolidated Balance Sheet as a reduction to deferred tax assets unless the net operating loss carryforward or tax credit carryforward at the reporting date is not available under the tax law of the applicable jurisdiction. U.S. Cellular is required to adopt the provisions of ASU 2013-11 effective January 1, 2014. The adoption of ASU 2013-11 is not expected to have a significant impact on U.S. Cellular's financial position or results of operations.
46
United States Cellular Corporation
Notes to Consolidated Financial Statements (Continued)
NOTE 2 FAIR VALUE MEASUREMENTS
As of December 31, 2013 and 2012, 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.
|
|
December 31, 2013 | December 31, 2012 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Level within the Fair Value Hierarchy |
|||||||||||||||
|
Book Value | Fair Value | Book Value | Fair Value | ||||||||||||
(Dollars in thousands) |
||||||||||||||||
Cash and cash equivalents |
1 | $ | 342,065 | $ | 342,065 | $ | 378,358 | $ | 378,358 | |||||||
Short-term investments |
||||||||||||||||
U.S. Treasury Notes |
1 | 50,104 | 50,104 | 100,676 | 100,676 | |||||||||||
Long-term investments |
||||||||||||||||
U.S. Treasury Notes |
1 | | | 50,305 | 50,339 | |||||||||||
Long-term debt |
||||||||||||||||
6.95% Senior Notes |
1 | 342,000 | 309,852 | 342,000 | 376,610 | |||||||||||
6.7% Senior Notes |
2 | 532,449 | 507,697 | 532,194 | 582,744 |
Short-term investments are designated as held-to-maturity investments and recorded at amortized cost in the Consolidated Balance Sheet. Long-term debt excludes capital lease obligations and the current portion of Long-term debt.
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 was estimated using market prices for the 6.95% Senior Notes, and discounted cash flow analysis using an estimated yield to maturity of 7.35% and 6.09% for the 6.7% Senior Notes at December 31, 2013 and 2012, respectively.
As of December 31, 2013 and 2012, 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.
NOTE 3 INCOME TAXES
U.S. Cellular's income taxes balances at December 31, 2013 and 2012 were as follows:
December 31,
|
2013 | 2012 | |||||
---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|||||||
Federal income taxes (payable) |
$ | (32,351 | ) | $ | (1,614 | ) | |
State income taxes receivable (payable) |
(1,545 | ) | 1,612 |
Income tax expense (benefit) is summarized as follows:
Year Ended December 31,
|
2013 | 2012 | 2011 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) |
||||||||||
Current |
||||||||||
Federal |
$ | 180,056 | $ | 10,547 | $ | (90,235 | ) | |||
State |
8,426 | 4,186 | 1,049 | |||||||
Deferred |
||||||||||
Federal |
(69,917 | ) | 54,490 | 187,581 | ||||||
State |
(5,431 | ) | (5,246 | ) | 15,683 | |||||
| | | | | | | | | | |
|
$ | 113,134 | $ | 63,977 | $ | 114,078 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
47
United States Cellular Corporation
Notes to Consolidated Financial Statements (Continued)
NOTE 3 INCOME TAXES (Continued)
A reconciliation of U.S. Cellular's income tax expense computed at the statutory rate to the reported income tax expense, and the statutory federal income tax expense rate to U.S. Cellular's effective income tax expense rate is as follows:
|
2013 | 2012 | 2011 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Year Ended December 31,
|
Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||
(Dollars in millions) |
|
|
|
|
|
|
|||||||||||||
Statutory federal income tax expense and rate |
$ | 90.2 | 35.0 | % | $ | 71.8 | 35.0 | % | $ | 109.5 | 35.0 | % | |||||||
State income taxes, net of federal benefit(1) |
5.2 | 2.0 | 3.7 | 1.8 | 4.5 | 1.4 | |||||||||||||
Effect of noncontrolling interests |
(2.2 | ) | (0.9 | ) | (6.3 | ) | (3.1 | ) | (4.9 | ) | (1.6 | ) | |||||||
Gains (losses) on investments and sale of assets(2) |
20.5 | 8.0 | | | | | |||||||||||||
Correction of deferred taxes(3) |
| | (5.3 | ) | (2.6 | ) | 6.1 | 2.0 | |||||||||||
Other differences, net |
(0.6 | ) | (0.2 | ) | 0.1 | 0.1 | (1.1 | ) | (0.3 | ) | |||||||||
| | | | | | | | | | | | | | | | | | | |
Total income tax expense and rate |
$ | 113.1 | 43.9 | % | $ | 64.0 | 31.2 | % | $ | 114.1 | 36.5 | % | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
U.S. Cellular's current Net deferred income tax asset totaled $99.1 million and $35.4 million at December 31, 2013 and 2012, respectively, and primarily represents the deferred tax effects of the deferred revenue for the loyalty reward points, the allowance for doubtful accounts on customer receivables and accrued liabilities.
U.S. Cellular's noncurrent deferred income tax assets and liabilities at December 31, 2013 and 2012 and the temporary differences that gave rise to them were as follows:
December 31,
|
2013 | 2012 | |||||
---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|||||||
Noncurrent deferred tax assets |
|||||||
Net operating loss ("NOL") carryforwards |
$ | 61,294 | $ | 63,240 | |||
Stock-based compensation |
19,028 | 22,411 | |||||
Compensation and benefitsother |
3,746 | 13,673 | |||||
Deferred rent |
19,462 | 15,822 | |||||
Other |
24,604 | 25,432 | |||||
| | | | | | | |
|
128,134 | 140,578 | |||||
Less valuation allowance |
(40,392 | ) | (40,208 | ) | |||
| | | | | | | |
Total noncurrent deferred tax assets |
87,742 | 100,370 | |||||
Noncurrent deferred tax liabilities |
|||||||
Property, plant and equipment |
503,491 | 527,547 | |||||
Licenses/intangibles |
282,764 | 294,738 | |||||
Partnership investments |
133,931 | 124,221 | |||||
Other |
3,853 | 3,682 | |||||
| | | | | | | |
Total noncurrent deferred tax liabilities |
924,039 | 950,188 | |||||
| | | | | | | |
Net noncurrent deferred income tax liability |
$ | 836,297 | $ | 849,818 | |||
| | | | | | | |
| | | | | | | |
48
United States Cellular Corporation
Notes to Consolidated Financial Statements (Continued)
NOTE 3 INCOME TAXES (Continued)
At December 31, 2013, U.S. Cellular and certain subsidiaries had $1,149.4 million of state NOL carryforwards (generating a $51.1 million deferred tax asset) available to offset future taxable income. The state NOL carryforwards expire between 2014 and 2033. Certain subsidiaries had federal NOL carryforwards (generating a $10.2 million deferred tax asset) available to offset their future taxable income. The federal NOL carryforwards expire between 2018 and 2033. A valuation allowance was established for certain state NOL carryforwards and federal NOL carryforwards since it is more likely than not that a portion of such carryforwards will expire before they can be used.
A summary of U.S. Cellular's deferred tax asset valuation allowance is as follows:
(Dollars in thousands) |
2013 | 2012 | 2011 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Balance at January 1, |
$ | 41,295 | $ | 30,261 | $ | 29,891 | ||||
Charged to income tax expense |
(1,527 | ) | 3,033 | (1,450 | ) | |||||
Charged to other accounts |
3,607 | 8,001 | 1,820 | |||||||
| | | | | | | | | | |
Balance at December 31, |
$ | 43,375 | $ | 41,295 | $ | 30,261 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
As of December 31, 2013, the valuation allowance reduced current deferred tax assets by $3.0 million and noncurrent deferred tax assets by $40.4 million.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(Dollars in thousands) |
2013 | 2012 | 2011 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Unrecognized tax benefits balance at January 1, |
$ | 26,460 | $ | 28,745 | $ | 32,547 | ||||
Additions for tax positions of current year |
5,925 | 6,656 | 4,487 | |||||||
Additions for tax positions of prior years |
1,501 | 854 | 332 | |||||||
Reductions for tax positions of prior years |
(45 | ) | (115 | ) | (1,104 | ) | ||||
Reductions for settlements of tax positions |
(576 | ) | | (244 | ) | |||||
Reductions for lapses in statutes of limitations |
(4,452 | ) | (9,680 | ) | (7,273 | ) | ||||
| | | | | | | | | | |
Unrecognized tax benefits balance at December 31, |
$ | 28,813 | $ | 26,460 | $ | 28,745 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
Unrecognized tax benefits are included in Accrued taxes and Other deferred liabilities and credits in the Consolidated Balance Sheet. If these benefits were recognized, they would have reduced income tax expense in 2013, 2012 and 2011 by $18.7 million, $17.2 million and $18.7 million, respectively, net of the federal benefit from state income taxes. As of December 31, 2013, U.S. Cellular does not expect unrecognized tax benefits to change significantly in the next twelve months.
U.S. Cellular recognizes accrued interest and penalties related to unrecognized tax benefits in Income tax expense. The amounts charged to Income tax expense related to interest and penalties resulted in an expense of $0.6 million in 2013, and a benefit of $2.2 million and $2.6 million in 2012 and 2011, respectively. Net accrued interest and penalties were $12.3 million and $12.8 million at December 31, 2013 and 2012, respectively.
U.S. Cellular is included in TDS' consolidated federal income tax return. U.S. Cellular also files various state and local income tax returns. The TDS consolidated group remains subject to federal income tax audits for the tax years after 2011. With only a few exceptions, TDS is no longer subject to state income tax audits for years prior to 2009.
49
United States Cellular Corporation
Notes to Consolidated Financial Statements (Continued)
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:
Year ended December 31,
|
2013 | 2012 | 2011 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars and shares in thousands, except earnings per share) |
||||||||||
Net income attributable to U.S. Cellular shareholders |
$ |
140,038 |
$ |
111,006 |
$ |
175,041 |
||||
| | | | | | | | | | |
| | | | | | | | | | |
Weighted average number of shares used in basic earnings per share |
83,968 |
84,645 |
84,877 |
|||||||
Effect of dilutive securities: |
||||||||||
Stock options |
211 | 184 | 224 | |||||||
Restricted stock units |
551 | 401 | 347 | |||||||
| | | | | | | | | | |
Weighted average number of shares used in diluted earnings per share |
84,730 | 85,230 | 85,448 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
Basic earnings per share attributable to U.S. Cellular shareholders |
$ | 1.67 | $ | 1.31 | $ | 2.06 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
Diluted earnings per share attributable to U.S. Cellular shareholders |
$ | 1.65 | $ | 1.30 | $ | 2.05 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
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, if any, is shown in the table below.
Year Ended December 31,
|
2013 | 2012 | 2011 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Shares in thousands) |
||||||||||
Stock options |
2,010 | 2,123 | 1,591 | |||||||
Restricted stock units |
190 | 369 | 250 |
On June 25, 2013, U.S. Cellular paid a special cash dividend of $5.75 per share, for an aggregate amount of $482.3 million, to all holders of U.S. Cellular Common Shares and Series A Common Shares as of June 11, 2013. Outstanding U.S. Cellular stock options and restricted stock unit awards were equitably adjusted for the special cash dividend. The impact of such adjustments on the earnings per share calculation was fully reflected for all years presented.
NOTE 5 ACQUISITIONS, DIVESTITURES AND EXCHANGES
U.S. Cellular assesses its existing wireless interests on an ongoing basis with a goal of improving the competitiveness of its operations and maximizing its long-term return on investment. As part of this strategy, U.S. Cellular reviews attractive opportunities to acquire additional operating markets and wireless spectrum. In addition, U.S. Cellular may seek to divest outright or include in exchanges for other wireless interests those interests that are not strategic to its long-term success.
Acquisitions did not have a material impact on U.S. Cellular's consolidated financial statements for the periods presented and pro forma results, assuming acquisitions had occurred at the beginning of each period presented, would not be materially different from the results reported.
50
United States Cellular Corporation
Notes to Consolidated Financial Statements (Continued)
NOTE 5 ACQUISITIONS, DIVESTITURES AND EXCHANGES (Continued)
Divestiture Transaction
On November 6, 2012, U.S. Cellular entered into a Purchase and Sale Agreement with subsidiaries of Sprint Corp., fka Sprint Nextel Corporation ("Sprint"). Pursuant to the Purchase and Sale Agreement, on May 16, 2013, U.S. Cellular transferred customers and certain PCS license spectrum to 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."
U.S. Cellular retained other assets and liabilities related to the Divestiture Markets, including network assets, retail stores and related equipment, and other buildings and facilities. The transaction did not affect spectrum licenses held by U.S. Cellular or variable interest entities ("VIEs") that were not used in the operations of the Divestiture Markets. Pursuant to the Purchase and Sale Agreement, U.S. Cellular and Sprint also entered into certain other agreements, including customer and network transition services agreements, which require U.S. Cellular to provide customer, billing and network services to Sprint for a period of up to 24 months after the May 16, 2013 closing date. Sprint will reimburse U.S. Cellular for providing such services at an amount equal to U.S. Cellular's estimated costs, including applicable overhead allocations. In addition, 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. It is estimated that up to $175 million of the Sprint Cost Reimbursement will be recorded in (Gain) loss on sale of business and other exit costs, net and up to $25 million of the Sprint Cost Reimbursement will be recorded in System operations in the Consolidated Statement of Operations. For the year ended December 31, 2013, $10.6 million of the Sprint Cost Reimbursement had been received and recorded in Cash received from divestitures in the Consolidated Statement of Cash Flows.
Financial impacts of the Divestiture Transaction are classified in the Consolidated Statement of Operations within Operating income. The table below describes the amounts U.S. Cellular has recognized and expects to recognize in the Consolidated Statement of Operations between the date the Purchase and Sale Agreement was signed and the end of the transition services period.
(Dollars in thousands) |
Expected Period of Recognition |
Projected Range | Cumulative Amount Recognized as of December 31, 2013 |
Actual Amount Recognized Year Ended December 31, 2013 |
Actual Amount Recognized Three Months Ended December 31, 2013 |
Actual Amount Recognized Three Months and Year Ended December 31, 2012 |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Gain) loss on sale of business and other exit costs, net |
||||||||||||||||||||||
Proceeds from Sprint |
||||||||||||||||||||||
Purchase price |
2013 | $ | (480,000 | ) | $ | (480,000 | ) | $ | (480,000 | ) | $ | (480,000 | ) | $ | | $ | | |||||
Sprint Cost Reimbursement |
2013-2014 | (120,000 | ) | (175,000 | ) | (47,641 | ) | (47,641 | ) | (43,420 | ) | | ||||||||||
Net assets transferred |
2013 | 213,593 | 213,593 | 213,593 | 213,593 | | | |||||||||||||||
Non-cash charges for the write-off and write-down of property under construction and related assets |
2012-2014 | 10,000 | 14,000 | 10,675 | 3 | (51 | ) | 10,672 | ||||||||||||||
Employee related costs including severance, retention and outplacement |
2012-2014 | 12,000 | 18,000 | 14,262 | 1,653 | (809 | ) | 12,609 | ||||||||||||||
Contract termination costs |
2012-2014 | 110,000 | 160,000 | 59,584 | 59,525 | 40,744 | 59 | |||||||||||||||
Transaction costs |
2012-2014 | 5,000 | 6,000 | 5,565 | 4,428 | 347 | 1,137 | |||||||||||||||