U.S. Cellular reports second quarter 2019 results

5G and network modernization initiatives progressing

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Aug 01, 2019, 16:05 ET

CHICAGO, Aug. 1, 2019 /PRNewswire/ --

As previously announced, U.S. Cellular will hold a teleconference August 2, 2019, at 9:00 a.m. CDT. Listen to the call live via the Events & Presentations page of investors.uscellular.com.

United States Cellular Corporation (NYSE:USM) reported total operating revenues of $973 million for the second quarter of 2019, versus $974 million for the same period one year ago. Net income attributable to U.S. Cellular shareholders and related diluted earnings per share declined to $31 million and $0.35, respectively, for the second quarter of 2019 compared to $49 million and $0.56, respectively, in the same period one year ago.

"Our number one focus is to strengthen our customer base," said Kenneth R. Meyers, U.S. Cellular president and CEO. "In the quarter, we delivered on our customer satisfaction strategy and postpaid handset churn remained low. However, phone sales came in below expectations as customers continue to hold their phones longer and gross additions declined. We have aggressive plans and strategies in place to attract new customers in the second half of the year. Service revenues continue to meet our expectation and show the positive impact of higher ARPU which helped to increase Adjusted EBITDA 3.4 percent to $257 million.

"We continue to believe excellent customer service coupled with an outstanding network is what differentiates us from our competitors. U.S. Cellular was once again recognized for highest wireless network quality in the North Central Region by the J. D. Power 2019 U.S. Wireless Network Quality Performance Study - Vol. 2. Our deployment of Voice over LTE continues with plans to deploy VoLTE in our New England and Mid-Atlantic markets in the third quarter. I am also very excited about the progress on our 5G and network modernization initiatives. We are making significant investments to bring LTE advanced capabilities to our customers that will improve coverage and capacity and support future 5G deployments. In addition, we acquired new licenses during the FCC's recent millimeter wave auctions, giving us access to high frequency spectrum required to deliver high speed and low latency capabilities of 5G to our current and future customers. Together, the millimeter wave spectrum we acquired provides at least 300 MHz of spectrum in markets that serve 97% of our customer base. We expect to begin commercial launch of 5G services in 2020."

2019 Estimated Results

U.S. Cellular's current estimates of full-year 2019 results are shown below. Such estimates represent management's view as of August 1, 2019 and should not be assumed to be current as of any future date. U.S. Cellular undertakes no duty to update such estimates, whether as a result of new information, future events or otherwise. There can be no assurance that final results will not differ materially from estimated results.

	2019 Estimated Results
	Previous	Current
(Dollars in millions)
Total operating revenues	$4,000-$4,200	$3,900-$4,100*
Adjusted OIBDA ⁽¹⁾	$725-$875	Unchanged
Adjusted EBITDA ⁽¹⁾	$900-$1,050	Unchanged
Capital expenditures	$625-$725	Unchanged

* Change represents lower equipment sales revenues.

The following table provides a reconciliation of Net income to Adjusted OIBDA and Adjusted EBITDA for 2019 estimated results, actual results for the six months ended June 30, 2019, and actual results for the year ended December 31, 2018. In providing 2019 estimated results, U.S. Cellular has not completed the below reconciliation to Net income because it does not provide guidance for income taxes. Although potentially significant, U.S. Cellular believes that the impact of income taxes cannot be reasonably predicted; therefore, U.S. Cellular is unable to provide such guidance.

			Actual Results
	2019 Estimated Results	Six Months Ended June 30, 2019			Year Ended December 31, 2018
(Dollars in millions)
Net income (GAAP)	N/A		$	90		$	164
Add back or deduct:
Income tax expense	N/A		41			51
Income before income taxes (GAAP)	$70-$220		$	131		$	215
Add back:
Interest expense	115		58			116
Depreciation, amortization and accretion expense	700		345			640
EBITDA (Non-GAAP) ⁽¹⁾	$885-$1,035		$	534		$	971
Add back or deduct:
(Gain) loss on asset disposals, net	15		7			10
(Gain) loss on sale of business and other exit costs, net	—		(2)			—
(Gain) loss on license sales and exchanges, net	—		(2)			(18)
Adjusted EBITDA (Non-GAAP) ⁽¹⁾	$900-$1,050		$	537		$	963
Deduct:
Equity in earnings of unconsolidated entities	155		84			159
Interest and dividend income	20		11			15
Other, net	—		(1)			(1)
Adjusted OIBDA (Non-GAAP) ⁽¹⁾	$725-$875		$	443		$	790

(1)

EBITDA, Adjusted EBITDA and Adjusted OIBDA are defined as net income adjusted for the items set forth in the reconciliation above. EBITDA, Adjusted EBITDA and Adjusted OIBDA are not measures of financial performance under Generally Accepted Accounting Principles in the United States (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. U.S. Cellular does not intend to imply that any such items set forth in the reconciliation above are non-recurring, infrequent or unusual; such items may occur in the future. Management uses Adjusted EBITDA and Adjusted OIBDA as measurements of profitability, and therefore reconciliations to Net income are deemed appropriate. Management believes Adjusted EBITDA and Adjusted OIBDA are useful measures of U.S. Cellular's operating results before significant recurring non-cash charges, gains and losses, and other items as presented above as they provide additional relevant and useful information to investors and other users of U.S. Cellular'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, and gains and losses, 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 table above reconciles EBITDA, Adjusted EBITDA and Adjusted OIBDA to the corresponding GAAP measure, Net income or Income before income taxes. Additional information and reconciliations related to Non-GAAP financial measures for June 30, 2019, can be found on U.S. Cellular's website at investors.uscellular.com.

Conference Call Information
U.S. Cellular will hold a conference call on August 2, 2019 at 9:00 a.m. Central Time.

Access the live call on the Events & Presentations page of investors.uscellular.com or at https://www.webcaster4.com/Webcast/Page/1145/31221
Access the call by phone at 877-273-7192 (US/Canada), conference ID: 1458138.

Before the call, certain financial and statistical information to be discussed during the call will be posted to investors.uscellular.com. The call will be archived on the Events & Presentations page of investors.uscellular.com.

About U.S. Cellular
United States Cellular Corporation provides a comprehensive range of wireless products and services, excellent customer support, and a high-quality network to customers with 5.0 million connections in 21 states. The Chicago-based company had 5,600 full- and part-time associates as of June 30, 2019. At the end of the second quarter of 2019, Telephone and Data Systems, Inc. owned 82 percent of U.S. Cellular. For more information about U.S. Cellular, visit uscellular.com.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: All information set forth in this news release, except historical and factual information, represents forward-looking statements. This includes all statements about the company's plans, beliefs, estimates, and expectations. These statements are based on current estimates, projections, and assumptions, which involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Important factors that may affect these forward-looking statements include, but are not limited to: intense competition; the ability to execute U.S. Cellular's business strategy; uncertainties in U.S. Cellular's future cash flows and liquidity and access to the capital markets; the ability to make payments on U.S. Cellular indebtedness or comply with the terms of debt covenants; impacts of any pending acquisitions/divestitures/exchanges of properties and/or licenses, including, but not limited to, the ability to obtain regulatory approvals, successfully complete the transactions and the financial impacts of such transactions; the ability of the company to successfully manage and grow its markets; the access to and pricing of unbundled network elements; the ability to obtain or maintain roaming arrangements with other carriers on acceptable terms; the state and federal telecommunications regulatory environment; the value of assets and investments; adverse changes in the ratings of U.S. Cellular debt securities by accredited ratings organizations; industry consolidation; advances in telecommunications technology; pending and future litigation; changes in income tax rates, laws, regulations or rulings; changes in customer growth rates, average monthly revenue per user, churn rates, roaming revenue and terms, the availability of wireless devices, or the mix of services and products offered by U.S. Cellular. Investors are encouraged to consider these and other risks and uncertainties that are discussed in the Form 8-K Current Report used by U.S. Cellular to furnish this press release to the Securities and Exchange Commission, which are incorporated by reference herein.

For more information about U.S. Cellular, visit:
U.S. Cellular: www.uscellular.com

United States Cellular Corporation
Summary Operating Data (Unaudited)
As of or for the Quarter Ended	6/30/2019			3/31/2019			12/31/2018			9/30/2018			6/30/2018
Retail Connections
Postpaid
Total at end of period	4,414,000			4,440,000			4,472,000			4,466,000			4,468,000
Gross additions	137,000			137,000			179,000			172,000			146,000
Feature phones	5,000			4,000			4,000			3,000			5,000
Smartphones	97,000			98,000			132,000			130,000			106,000
Connected devices	35,000			35,000			43,000			39,000			35,000
Net additions (losses)	(26,000)			(32,000)			6,000			(1,000)			(13,000)
Feature phones	(10,000)			(13,000)			(11,000)			(14,000)			(12,000)
Smartphones	(1,000)			(1,000)			31,000			29,000			17,000
Connected devices	(15,000)			(18,000)			(14,000)			(16,000)			(18,000)
ARPU ⁽¹⁾	$	45.90		$	45.44		$	45.58		$	45.31		$	44.74
ARPA ⁽²⁾	$	119.46		$	118.84		$	119.60		$	119.42		$	118.57
Churn rate ⁽³⁾	1.23		%	1.26		%	1.29		%	1.29		%	1.19		%
Handsets	0.97		%	0.99		%	1.00		%	1.02		%	0.92		%
Connected devices	3.01		%	3.08		%	3.20		%	3.04		%	2.85		%
Prepaid
Total at end of period	500,000			503,000			516,000			528,000			527,000
Gross additions	61,000			61,000			66,000			80,000			78,000
Net additions (losses)	(2,000)			(13,000)			(12,000)			1,000			2,000
ARPU ⁽¹⁾	$	34.43		$	33.44		$	32.80		$	32.09		$	32.32
Churn rate ⁽³⁾	4.20		%	4.92		%	4.98		%	4.98		%	4.83		%
Total connections at end of period ⁽⁴⁾	4,967,000			4,995,000			5,041,000			5,050,000			5,051,000
Market penetration at end of period
Consolidated operating population	31,310,000			31,310,000			31,469,000			31,469,000			31,469,000
Consolidated operating penetration ⁽⁵⁾	16		%	16		%	16		%	16		%	16		%
Capital expenditures (millions)	$	195		$	102		$	242		$	118		$	86
Total cell sites in service	6,535			6,506			6,531			6,506			6,478
Owned towers	4,116			4,106			4,129			4,119			4,105


(1)	Average Revenue Per User (ARPU) - metric is calculated by dividing a revenue base by an average number of connections and by the number of months in the period. These revenue bases and connection populations are shown below:

	• Postpaid ARPU consists of total postpaid service revenues and postpaid connections.
	• Prepaid ARPU consists of total prepaid service revenues and prepaid connections.

(2)	Average Revenue Per Account (ARPA) - metric is calculated by dividing total postpaid service revenues by the average number of postpaid accounts and by the number of months in the period.

(3)	Churn rate represents the percentage of the connections that disconnect service each month. These rates represent the average monthly churn rate for each respective period.

(4)	Includes reseller and other connections.

(5)	Market penetration is calculated by dividing the number of wireless connections at the end of the period by the total population of consolidated operating markets as estimated by Nielsen.

United States Cellular Corporation
Consolidated Statement of Operations Highlights
(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019		2018		2019 vs. 2018		2019		2018		2019 vs. 2018
(Dollars and shares in millions, except per share amounts)
Operating revenues
Service	$	757	$	741	2	%	$	1,498	$	1,465	2	%
Equipment sales	216		233		(7)	%	441		450		(2)	%
Total operating revenues	973		974		–		1,939		1,915		1	%

Operating expenses
System operations (excluding Depreciation, amortization and accretion reported below)	193		187		3	%	369		365		1	%
Cost of equipment sold	224		240		(6)	%	458		459		–
Selling, general and administrative	344		342		1	%	669		668		–
Depreciation, amortization and accretion	177		159		11	%	345		317		8	%
(Gain) loss on asset disposals, net	5		1		N/M		7		2		N/M
(Gain) loss on sale of business and other exit costs, net	—		—		N/M		(2)		—		N/M
(Gain) loss on license sales and exchanges, net	—		(11)		N/M		(2)		(17)		88	%
Total operating expenses	943		918		3	%	1,844		1,794		3	%

Operating income	30		56		(45)	%	95		121		(21)	%

Investment and other income (expense)
Equity in earnings of unconsolidated entities	40		40		1	%	84		78		8	%
Interest and dividend income	5		3		63	%	11		7		60	%
Interest expense	(29)		(29)		1	%	(58)		(58)		–
Other, net	—		—		N/M		(1)		(1)		N/M
Total investment and other income	16		14		10	%	36		26		36	%

Income before income taxes	46		70		(34)	%	131		147		(11)	%
Income tax expense	14		18		(24)	%	41		40		–
Net income	32		52		(38)	%	90		107		(15)	%
Less: Net income attributable to noncontrolling interests, net of tax	1		3		(76)	%	4		14		(66)	%
Net income attributable to U.S. Cellular shareholders	$	31	$	49	(35)	%	$	86	$	93	(8)	%

Basic weighted average shares outstanding	87		86		1	%	87		85		1	%
Basic earnings per share attributable to U.S. Cellular shareholders	$	0.36	$	0.57	(36)	%	$	0.99	$	1.09	(9)	%

Diluted weighted average shares outstanding	88		86		2	%	88		86		2	%
Diluted earnings per share attributable to U.S. Cellular shareholders	$	0.35	$	0.56	(37)	%	$	0.97	$	1.08	(10)	%

N/M - Percentage change not meaningful

United States Cellular Corporation
Consolidated Statement of Cash Flows
(Unaudited)
	Six Months Ended June 30,
	2019		2018
(Dollars in millions)
Cash flows from operating activities
Net income	$	90	$	107
Add (deduct) adjustments to reconcile net income to net cash flows from operating activities
Depreciation, amortization and accretion	345		317
Bad debts expense	48		40
Stock-based compensation expense	25		17
Deferred income taxes, net	27		9
Equity in earnings of unconsolidated entities	(84)		(78)
Distributions from unconsolidated entities	76		70
(Gain) loss on asset disposals, net	7		2
(Gain) loss on sale of business and other exit costs, net	(2)		—
(Gain) loss on license sales and exchanges, net	(2)		(17)
Other operating activities	2		2
Changes in assets and liabilities from operations
Accounts receivable	3		43
Equipment installment plans receivable	(11)		(47)
Inventory	(4)		(3)
Accounts payable	(7)		(35)
Customer deposits and deferred revenues	8		(23)
Accrued taxes	3		6
Other assets and liabilities	(48)		(45)
Net cash provided by operating activities	476		365

Cash flows from investing activities
Cash paid for additions to property, plant and equipment	(282)		(173)
Cash paid for licenses	(255)		(2)
Cash received from investments	11		50
Cash paid for investments	(11)		—
Cash received from divestitures and exchanges	32		21
Other investing activities	(1)		3
Net cash used in investing activities	(506)		(101)

Cash flows from financing activities
Repayment of long-term debt	(10)		(10)
Common Shares reissued for benefit plans, net of tax payments	(8)		—
Distributions to noncontrolling interests	(2)		(4)
Other financing activities	(1)		(5)
Net cash used in financing activities	(21)		(19)

Net increase (decrease) in cash, cash equivalents and restricted cash	(51)		245

Cash, cash equivalents and restricted cash
Beginning of period	583		352
End of period	$	532	$	597

United States Cellular Corporation
Consolidated Balance Sheet Highlights
(Unaudited)

ASSETS

	June 30, 2019 ⁽¹⁾		December 31, 2018
(Dollars in millions)
Current assets
Cash and cash equivalents	$	528	$	580
Short-term investments	18		17
Accounts receivable	959		976
Inventory, net	146		142
Prepaid expenses	48		63
Other current assets	36		34
Total current assets	1,735		1,812

Assets held for sale	—		54

Licenses	2,469		2,186

Investments in unconsolidated entities	450		441

Property, plant and equipment, net	2,154		2,202

Operating lease right-of-use assets	888		—

Other assets and deferred charges	527		579

Total assets	$	8,223	$	7,274

United States Cellular Corporation
Consolidated Balance Sheet Highlights
(Unaudited)

LIABILITIES AND EQUITY

	June 30, 2019 ⁽¹⁾		December 31, 2018
(Dollars in millions, except per share amounts)
Current liabilities
Current portion of long-term debt	$	19	$	19
Accounts payable	321		313
Customer deposits and deferred revenues	164		157
Accrued taxes	32		30
Accrued compensation	45		78
Short-term operating lease liabilities	101		—
Other current liabilities	65		94
Total current liabilities	747		691

Liabilities held for sale	—		1

Deferred liabilities and credits
Deferred income tax liability, net	538		510
Long-term operating lease liabilities	858		—
Other deferred liabilities and credits	299		389

Long-term debt, net	1,596		1,605

Noncontrolling interests with redemption features	10		11

Equity
U.S. Cellular shareholders' equity
Series A Common and Common Shares, par value $1 per share	88		88
Additional paid-in capital	1,615		1,590
Treasury shares	(50)		(65)
Retained earnings	2,509		2,444
Total U.S. Cellular shareholders' equity	4,162		4,057

Noncontrolling interests	13		10

Total equity	4,175		4,067

Total liabilities and equity	$	8,223	$	7,274


(1)	As of January 1, 2019, U.S. Cellular adopted the new lease accounting standard, ASC 842. Under this method, the new accounting standard is applied only to the most recent period presented. As a result, 2019 amounts include the impacts of ASC 842, but 2018 amounts remain as previously reported.

United States Cellular Corporation Financial Measures and Reconciliations (Unaudited) Free Cash Flow

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
(Dollars in millions)
Cash flows from operating activities (GAAP)	$	189	$	178	$	476	$	365
Less: Cash paid for additions to property, plant and equipment	175		98		282		173
Free cash flow (Non-GAAP) ⁽¹⁾	$	14	$	80	$	194	$	192


(1)	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 liquidity, specifically, the amount of net cash generated by business operations after deducting Cash paid for additions to property, plant and equipment.

EBITDA, Adjusted EBITDA and Adjusted OIBDA

The following table reconciles EBITDA, Adjusted EBITDA and Adjusted OIBDA to the corresponding GAAP measures, Net Income and Operating income.

	Three Months Ended June 30,
	2019		2018
(Dollars in millions)
Net income (GAAP)	$	32	$	52
Add back:
Income tax expense	14		18
Interest expense	29		29
Depreciation, amortization and accretion	177		159
EBITDA (Non-GAAP)	252		258
Add back or deduct:
(Gain) loss on asset disposals, net	5		1
(Gain) loss on license sales and exchanges, net	—		(11)
Adjusted EBITDA (Non-GAAP)	257		248
Deduct:
Equity in earnings of unconsolidated entities	40		40
Interest and dividend income	5		3
Adjusted OIBDA (Non-GAAP)	212		205
Deduct:
Depreciation, amortization and accretion	177		159
(Gain) loss on asset disposals, net	5		1
(Gain) loss on license sales and exchanges, net	—		(11)
Operating income (GAAP)	$	30	$	56