UNITED STATES CELLULAR CORP

Previous wording

The following discussion and analysis compares United States Cellular Corporation’s (UScellular) financial results for the three months ended March 31, 2024, to the three months ended March 31, 2023. It should be read in conjunction with UScellular’s interim consolidated financial statements and notes included herein, and with the description of UScellular’s business, its audited consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) included in UScellular’s Annual Report on Form 10-K (Form 10-K) for the year ended December 31, 2023. Certain numbers included herein are rounded to millions for ease of presentation; however, certain calculated amounts and percentages are determined using the unrounded numbers.

Current wording

The following discussion and analysis compares United States Cellular Corporation’s (UScellular) financial results for the three and six months ended June 30, 2024, to the three and six months ended June 30, 2023. It should be read in conjunction with UScellular’s interim consolidated financial statements and notes included herein, and with the description of UScellular’s business, its audited consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) included in UScellular’s Annual Report on Form 10-K (Form 10-K) for the year ended December 31, 2023. Certain numbers included herein are rounded to millions for ease of presentation; however, certain calculated amounts and percentages are determined using the unrounded numbers.

Previous wording

▪Serves customers with 4.5 million retail connections including 4.1 million postpaid and 0.4 million prepaid connections

Current wording

▪Serves customers with 4.5 million retail connections including approximately 4.0 million postpaid and 0.4 million prepaid connections

Previous wording

▪Operates 6,995 cell sites in service

Current wording

▪Operates 6,990 cell sites in service

Previous wording

UScellular’s mission is to connect its customers to what matters most to them. This includes providing exceptional wireless communication services which enhance consumers’ lives, increasing the competitiveness of local businesses, and improving the efficiency of government operations in the markets UScellular serves.

Current wording

UScellular’s mission is to connect its customers to what matters most to them. This includes providing exceptional wireless communication services which enhance consumers’ lives, increase the competitiveness of local businesses, and improve the efficiency of government operations in the markets UScellular serves.

Previous wording

▪Universal Service Fund (USF) – a system of telecommunications collected fees and support payments managed by the FCC intended to promote universal access to telecommunications services in the United States.

Current wording

▪Universal Service Fund (USF) – a system of telecommunications collected fees and support payments managed by the Federal Communications Commission (FCC) intended to promote universal access to telecommunications services in the United States.

Previous wording

Equity in earnings of unconsolidated entities represents UScellular’s share of net income from entities in which it has a noncontrolling interest and that are accounted for using the equity method or the net asset value practical expedient. UScellular’s investment in the Los Angeles SMSA Limited Partnership (LA Partnership) contributed pretax income of $16 million and $20 million for the three months ended March 31, 2024 and 2023, respectively. See Note 6 — Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.

Current wording

Equity in earnings of unconsolidated entities represents UScellular’s share of net income from entities in which it has a noncontrolling interest and that are accounted for using the equity method or the net asset value practical expedient. UScellular’s investment in the Los Angeles SMSA Limited Partnership (LA Partnership) contributed pre-tax income of $17 million and $18 million for the three months ended June 30, 2024 and 2023, respectively and $33 million and $38 million for the six months ended June 30, 2024 and 2023, respectively. See Note 8 — Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.

Previous wording

Interest expense decreased for the three months ended March 31, 2024 due primarily to a decrease in the average principal balance outstanding on the receivables securitization agreement and higher capitalized interest, partially offset by interest rate increases on variable rate debt. See Market Risk for additional information regarding maturities of long-term debt and weighted average interest rates.

Current wording

Interest expense decreased for the three and six months ended June 30, 2024 due primarily to a decrease in the average principal balance outstanding on the receivables securitization agreement. See Market Risk for additional information regarding maturities of long-term debt and weighted average interest rates.

Previous wording

Income tax expense increased for the three months ended March 31, 2024 due primarily to the increase in Income before income taxes.

Current wording

Income tax expense increased for the six months ended June 30, 2024, due primarily to an increase in Income before income taxes, partially offset by state valuation allowance adjustments recorded in the second quarter of 2023 that reduced the net value of deferred tax assets.

Previous wording

Total postpaid handset net losses increased for the three months ended March 31, 2024, when compared to the same period last year due to lower gross additions as a result of continued aggressive industry-wide competition and a decrease in the pool of available customers.

Current wording

Total postpaid handset net losses increased for the six months ended June 30, 2024 when compared to the same period last year due to lower gross additions as a result of a decrease in the pool of available customers and continued aggressive industry-wide competition.

Previous wording

Total postpaid connected device net additions increased for the three months ended March 31, 2024, when compared to the same period last year due to higher demand for fixed wireless home internet as well as a decrease in hotspot churn.

Current wording

Total postpaid connected device net additions increased for the three and six months ended June 30, 2024, when compared to the same period last year due to higher demand for fixed wireless home internet as well as a decrease in tablet, hotspot and home phone defections as a result of improvements in churn.

Previous wording

Postpaid ARPU increased for the three months ended March 31, 2024, when compared to the same period last year, due to a decrease in promotional discounts, an increase in cost recovery surcharges, favorable plan and product offering mix, and an increase in device protection plan revenues.

Current wording

Postpaid ARPU increased for the three and six months ended June 30, 2024, when compared to the same period last year, due to favorable plan and product offering mix and an increase in cost recovery surcharges.

Previous wording

Postpaid ARPA increased slightly for the three months ended March 31, 2024, when compared to the same period last year, due to the impacts to Postpaid ARPU, partially offset by a decrease in the number of connections per account.

Current wording

Postpaid ARPA increased slightly for the three and six months ended June 30, 2024, when compared to the same period last year, due to the impacts to Postpaid ARPU, partially offset by a decrease in the number of connections per account.

Previous wording

Retail service revenues decreased for the three months ended March 31, 2024, primarily as result of a decrease in average postpaid and prepaid connections, partially offset by an increase in Postpaid ARPU as previously discussed in the Operational Overview section.

Current wording

Retail service revenues decreased for the three and six months ended June 30, 2024, primarily as result of a decrease in average postpaid and prepaid connections, partially offset by an increase in Postpaid ARPU as previously discussed in the Operational Overview section.

Previous wording

Equipment sales revenues decreased for the three months ended March 31, 2024, due primarily to a decline in smartphone devices sold due to lower gross additions and upgrades, partially offset by a higher average price of new smartphone sales.

Current wording

Equipment sales revenues decreased for the three and six months ended June 30, 2024, due primarily to a decline in smartphone devices sold due to lower upgrade and gross additions, partially offset by a higher average price of new smartphone sales.

Previous wording

Wireless service providers have been aggressive promotionally and on price to attract and retain customers. This includes both traditional carriers and cable wireless companies. UScellular expects promotional aggressiveness by traditional carriers and pricing pressures from cable wireless companies to continue into the foreseeable future. Operating revenues and Operating income have been negatively impacted in current and prior periods, and are expected to be negatively impacted in future periods, by competitive promotional offers to new and existing customers.

Current wording

Wireless service providers have been aggressive promotionally and on price to attract and retain customers. This includes both traditional carriers and cable wireless companies. UScellular expects promotional aggressiveness by traditional carriers and pricing pressures from cable wireless companies to continue into the foreseeable future. Operating revenues and Operating income have been negatively impacted in current and prior periods, and are expected to be negatively impacted in future periods.

Previous wording

Total operating expenses for the three months ended March 31, 2023, include $10 million of severance and related expenses associated with the second quarter of 2023 reduction in workforce. These severance expenses are included in System operations expenses and Selling, general and administrative expenses.

Current wording

Total operating expenses for the six months ended June 30, 2023 include $9 million of severance and related expenses associated with a reduction in workforce that was recorded in the first quarter of 2023. These severance expenses are included in System operations expenses and Selling, general and administrative expenses.

Previous wording

System operations expenses were flat for the three months ended March 31, 2024, due primarily to decreases in customer usage and employee expenses, which include the second quarter of 2023 reduction in workforce, partially offset by an increase in roaming expense. The increase in roaming expense was driven by an increase in usage partially offset by a decrease in roaming rates.

Current wording

System operations expenses decreased for the three and six months ended June 30, 2024, due primarily to decreases in customer usage and maintenance, utilities, and cell site expenses, partially offset by an increase in roaming expense primarily driven by an increase in outbound roaming usage.

Previous wording

Cost of equipment sold decreased for the three months ended March 31, 2024, due primarily to a decline in smartphone upgrades and gross additions, partially offset by a higher average cost per unit sold.

Current wording

Cost of equipment sold decreased for the three and six months ended June 30, 2024, due primarily to a decline in smartphone upgrades and gross additions, partially offset by a higher average cost per unit sold.

Previous wording

Selling, general and administrative expenses decreased for the three months ended March 31, 2024, due primarily to decreases in employee-related expenses, which include the impact of the second quarter of 2023 reduction in workforce, commissions, and advertising expense, partially offset by a $7 million increase related to the strategic alternatives review expenses.

Current wording

Selling, general and administrative expenses decreased for the three and six months ended June 30, 2024, due to decreases in various general and administrative expenses, sales related expenses and bad debts expense, partially offset by an increase related to the strategic alternatives review expenses of $12 million and $20 million, respectively.

Previous wording

UScellular believes that existing cash and investment balances, funds available under its financing agreements, its ability to obtain future external financing, potential dispositions and expected cash flows from operating and investing activities will provide sufficient liquidity for UScellular to meet its day-to-day operating needs and debt service requirements. UScellular may require substantial additional funding for, among other uses, capital expenditures, acquisitions of providers of wireless telecommunications services, wireless spectrum license acquisitions, agreements to purchase goods or services, leases, repurchases of shares, or making additional investments. It may be necessary from time to time to increase the size of its existing credit facilities, to amend existing or put in place new credit agreements, to obtain other forms of financing, issue equity securities, or to divest assets in order to fund potential expenditures. UScellular will continue to monitor the rapidly changing business and market conditions and is taking and intends to take appropriate actions, as necessary, to meet its liquidity needs.

Current wording

UScellular believes that existing cash and investment balances, funds available under its financing agreements, its ability to obtain future external financing, potential dispositions and expected cash flows from operating and investing activities will provide sufficient liquidity for UScellular to meet its day-to-day operating needs and debt service requirements. UScellular may require substantial additional funding for, among other uses, capital expenditures, agreements to purchase goods or services, leases, repurchases of shares, or making additional investments. It may be necessary from time to time to increase the size of its existing credit facilities, to amend existing or put in place new credit agreements, to obtain other forms of financing, issue equity securities, or to divest assets in order to fund potential expenditures. UScellular will continue to monitor the rapidly changing business and market conditions and is taking and intends to take appropriate actions, as necessary, to meet its liquidity needs.

Previous wording

UScellular, through its subsidiaries, has a receivables securitization agreement that permits securitized borrowings using its equipment installment plan receivables. Amounts under the agreement may be borrowed, repaid and reborrowed from time to time until September 2025. Unless the agreement is amended to extend the maturity date, repayments based on receivable collections commencein October 2025. During the three months ended March 31, 2024, UScellular borrowed $40 million and repaid $50 million under the agreement. As of March 31, 2024, the outstanding borrowings under the agreement were $140 million and the unused borrowing capacity was $310 million, subject to sufficient collateral to satisfy the asset borrowing base provisions of the agreement.

Current wording

UScellular, through its subsidiaries, has a receivables securitization agreement that permits securitized borrowings using its equipment installment plan receivables. Amounts under the agreement may be borrowed, repaid and reborrowed from time to time until September 2025. Unless the agreement is amended to extend the maturity date, repayments based on receivable collections commencein October 2025. During the six months ended June 30, 2024, UScellular borrowed $40 million and repaid $188 million under the agreement. As of June 30, 2024, the outstanding borrowings under the agreement were $2 million and the unused borrowing capacity was $448 million, subject to sufficient collateral to satisfy the asset borrowing base provisions of the agreement.

Previous wording

The revolving credit agreement, term loan agreements, export credit financing agreement and receivables securitization agreement require UScellular to comply with certain affirmative and negative covenants, which include certain financial covenants that may restrict the borrowing capacity available. UScellular is required to maintain the Consolidated Leverage Ratio as of the end of any fiscal quarter at a level not to exceed the following: 4.25 to 1.00 from January 1, 2023 through March 31, 2024; 4.00 to 1.00 from April 1, 2024 through March 31, 2025; 3.75 to 1.00 from April 1, 2025 and thereafter. UScellular is also required to maintain the Consolidated Interest Coverage Ratio at a level not lower than 3.00 to 1.00 as of the end of any fiscal quarter. UScellular believes that it was in compliance as of March 31, 2024 with all such financial covenants.

Current wording

The revolving credit agreement, term loan agreements, export credit financing agreement and receivables securitization agreement require UScellular to comply with certain affirmative and negative covenants, which include certain financial covenants that may restrict the borrowing capacity available. UScellular is required to maintain the Consolidated Leverage Ratio as of the end of any fiscal quarter at a level not to exceed the following: 4.00 to 1.00 from April 1, 2024 through March 31, 2025; 3.75 to 1.00 from April 1, 2025 and thereafter. UScellular is also required to maintain the Consolidated Interest Coverage Ratio at a level not lower than 3.00 to 1.00 as of the end of any fiscal quarter. UScellular believes that it was in compliance as of June 30, 2024 with all such financial covenants.

Previous wording

Capital expenditures (i.e., additions to property, plant and equipment and system development expenditures; excludes wireless spectrum license additions), which include the effects of accruals and capitalized interest, for the three months ended March 31, 2024 and 2023, were as follows:

Current wording

Capital expenditures (i.e., additions to property, plant and equipment and system development expenditures; excludes wireless spectrum license additions), which include the effects of accruals and capitalized interest, for the six months ended June 30, 2024 and 2023, were as follows:

Previous wording

▪Enhance and maintain UScellular's network capacity and coverage, including continued deployment of 5G with a focus on mid-band spectrum to provide additional speed and capacity to accommodate increased data usage by current customers; and

Current wording

▪Enhance and maintain UScellular's network capacity and coverage, including continued deployment of 5G with a focus on network deployment that uses mid-band spectrum to provide additional speed and capacity to accommodate increased data usage by current customers; and

Previous wording

UScellular operates a capital-intensive business. UScellular makes substantial investments to acquire wireless spectrum licenses and properties and to construct and upgrade wireless telecommunications networks and facilities with a goal of creating long-term value for shareholders. In recent years, rapid changes in technology and new opportunities have required substantial investments in potentially revenue‑enhancing and cost-saving upgrades to UScellular’s networks. Revenues from certain of these investments are long-term and in some cases are uncertain. To meet its cash-flow needs, UScellular may need to delay or reduce certain investments or sell assets. Refer to Liquidity and Capital Resources within this MD&A for additional information. Cash flows may fluctuate from quarter to quarter and year to year due to seasonality, timing and other factors. The following discussion summarizes UScellular's cash flow activities for the three months ended March 31, 2024 and 2023.

Current wording

UScellular operates a capital-intensive business. UScellular makes substantial investments to acquire wireless spectrum licenses and properties and to construct and upgrade wireless telecommunications networks and facilities with a goal of creating long-term value for shareholders. In recent years, rapid changes in technology and new opportunities have required substantial investments in potentially revenue‑enhancing and cost-saving upgrades to UScellular’s networks. Revenues from certain of these investments are long-term and in some cases are uncertain. To meet its cash-flow needs, UScellular may need to delay or reduce certain investments or sell assets. Refer to Liquidity and Capital Resources within this MD&A and Note 7 — Divestitures in the Notes to Consolidated Financial Statements for additional information. Cash flows may fluctuate from quarter to quarter and year to year due to seasonality, timing and other factors. The following discussion summarizes UScellular's cash flow activities for the six months ended June 30, 2024 and 2023.

Previous wording

UScellular’s Cash, cash equivalents and restricted cash increased $31 million. Net cash provided by operating activities was $203 million due to net income of $24 million adjusted for non-cash items of $175 million, distributions received from unconsolidated entities of $22 million, and changes in working capital items which decreased net cash by $18 million. The working capital changes were primarily driven by payment of associate bonuses and timing of vendor payments, partially offset by reduced receivable and inventory balances and the timing of future tax payments.

Current wording

UScellular’s Cash, cash equivalents and restricted cash increased $36 million. Net cash provided by operating activities was $516 million due to net income of $42 million adjusted for non-cash items of $352 million, distributions received from unconsolidated entities of $80 million, including $37 million in distributions from the LA Partnership, and changes in working capital items which increased net cash by $42 million. The working capital changes were primarily driven by reduced inventory balances and the timing of future tax payments, partially offset by payment of associate bonuses.

Previous wording

Cash flows used for investing activities were $144 million, due primarily to payments for property, plant and equipment of $133 million.

Current wording

Cash flows used for investing activities were $284 million, due primarily to payments for property, plant and equipment of $270 million.

Previous wording

Cash flows used for financing activities were $28 million, due primarily to $55 million in repayments on the receivables securitization agreement and term loan agreements and cash paid for software license agreements of $9 million, partially offset by a borrowing of $40 million on the receivables securitization agreement.

Current wording

Cash flows used for financing activities were $196 million, due primarily to $188 million in repayments on the receivables securitization agreement and cash paid for software license agreements of $20 million, partially offset by a borrowing of $40 million on the receivables securitization agreement.

Previous wording

UScellular’s Cash, cash equivalents and restricted cash decreased $108 million. Net cash provided by operating activities was $41 million due to net income of $14 million adjusted for non-cash items of $171 million, distributions received from unconsolidated entities of $20 million, and changes in working capital items which decreased net cash by $164 million. The working capital changes were primarily driven by timing of vendor payments and payment of associate bonuses, partially offset by a decrease in customer and agent receivable balances.

Current wording

UScellular’s Cash, cash equivalents and restricted cash decreased $84 million. Net cash provided by operating activities was $390 million due to net income of $20 million adjusted for non-cash items of $345 million, distributions received from unconsolidated entities of $78 million, including $37 million in distributions from the LA Partnership, and changes in working capital items which decreased net cash by $53 million. The working capital changes were primarily driven by timing of vendor payments and payment of associate bonuses, partially offset by reduced inventory purchases and timing of collection on receivables.

Previous wording

Cash flows used for investing activities were $192 million, which included payments for property, plant and equipment of $196 million.

Current wording

Cash flows used for investing activities were $345 million, due primarily to payments for property, plant and equipment of $351 million.

Previous wording

Cash flows provided by financing activities were $43 million, due primarily to $115 million borrowed under the receivables securitization agreement, partially offset by a $60 million repayment on the EIP receivables repurchase agreement and cash paid for software license agreements of $7 million.

Current wording

Cash flows used for financing activities were $129 million, due primarily to a repayment of $150 million on the receivables securitization agreement, a $60 million repayment on the EIP receivables repurchase agreement and cash paid for software license agreements of $19 million, partially offset by $115 million borrowed under the receivables securitization agreement.

Previous wording

The gross basis of Property, plant and equipment as well as the related Accumulated depreciation and amortization, decreased by $1,239 million and $1,203 million, respectively, due primarily to the decommissioning of fully depreciated assets no longer in service related to the CDMA network shutdown.

Current wording

The gross basis of Property, plant and equipment as well as the related Accumulated depreciation and amortization, decreased by $1,266 million and $1,230 million, respectively, due primarily to the decommissioning of fully depreciated assets no longer in service related to the CDMA network shutdown.

Previous wording

Accrued compensation decreased $51 million due primarily to associate bonus payments in March 2024.

Current wording

Accrued compensation decreased $26 million due primarily to associate bonus payments in March 2024.

Previous wording

EBITDA, Adjusted EBITDA and Adjusted OIBDA are defined as Net income (loss) adjusted for the items set forth in the reconciliation below. EBITDA, Adjusted EBITDA and Adjusted OIBDA are not measures of financial performance under GAAP and should not be considered as alternatives to Net income (loss) or Cash flows from operating activities, as indicators of cash flows or as measures of liquidity. UScellular does not intend to imply that any such items set forth in the reconciliation below are infrequent or unusual; such items may occur in the future.

Current wording

EBITDA, Adjusted EBITDA and Adjusted OIBDA are defined as Net income adjusted for the items set forth in the reconciliation below. EBITDA, Adjusted EBITDA and Adjusted OIBDA are not measures of financial performance under GAAP and should not be considered as alternatives to Net income or Cash flows from operating activities, as indicators of cash flows or as measures of liquidity. UScellular does not intend to imply that any such items set forth in the reconciliation below are non-recurring, infrequent or unusual; such items may occur in the future.

Previous wording

Management uses Adjusted EBITDA and Adjusted OIBDA as measurements of profitability, and therefore reconciliations to applicable GAAP income measures are deemed appropriate. Management believes Adjusted EBITDA and Adjusted OIBDA are useful measures of UScellular’s operating results before significant recurring non-cash charges, nonrecurring expenses, gains and losses, and other items as presented below as they provide additional relevant and useful information to investors and other users of UScellular’s financial data in evaluating the effectiveness of its operations and underlying business trends in a manner that is consistent with management’s evaluation of business performance. Adjusted EBITDA shows adjusted earnings before interest, taxes, depreciation, amortization and accretion, gains and losses, and expenses related to the strategic alternatives review of UScellular, while Adjusted OIBDA reduces this measure further to exclude Equity in earnings of unconsolidated entities and Interest and dividend income in order to more effectively show the performance of operating activities excluding investment activities. The following table reconciles EBITDA, Adjusted EBITDA and Adjusted OIBDA to the corresponding GAAP measures, Net income and Operating income.

Current wording

Management uses Adjusted EBITDA and Adjusted OIBDA as measurements of profitability, and therefore reconciliations to applicable GAAP income measures are deemed appropriate. Management believes Adjusted EBITDA and Adjusted OIBDA are useful measures of UScellular’s operating results before significant recurring non-cash charges, nonrecurring expenses, gains and losses, and other items as presented below as they provide additional relevant and useful information to investors and other users of UScellular’s financial data in evaluating the effectiveness of its operations and underlying business trends in a manner that is consistent with management’s evaluation of business performance. Adjusted EBITDA shows adjusted earnings before interest, taxes, depreciation, amortization and accretion, gains and losses, and expenses related to the strategic alternatives review of UScellular, while Adjusted OIBDA reduces this measure further to exclude Equity in earnings of unconsolidated entities and Interest and dividend income in order to more effectively show the performance of operating activities excluding investment activities. The following tables reconcile EBITDA, Adjusted EBITDA and Adjusted OIBDA to the corresponding GAAP measures, Net income and/or Operating income. Income and expense items below Operating income are not provided at the individual segment level for Wireless and Towers; therefore, the reconciliations begin with EBITDA and the most directly comparable GAAP measure is Operating income rather than Net income at the segment level.

Previous wording

▪UScellular receives significant regulatory support, and is also subject to numerous surcharges and fees from federal, state and local governments – the applicability and the amount of the support and fees are subject to great uncertainty, including the ability to pass through certain fees to customers, and this uncertainty could have an adverse effect on UScellular’s business, financial condition or results of operations.

Current wording

▪UScellular receives significant regulatory support, and is also subject to numerous surcharges and fees from federal, state and local governments – the applicability and the amount of the support and fees are subject to uncertainty, including the ability to pass through certain fees to customers, and this uncertainty could have an adverse effect on UScellular’s business, financial condition or results of operations.