Postpaid ARPU and Postpaid ARPA increased for the three and six months ended March 31,June 30, 2020, when compared to the same period last year, due primarily to (i) having proportionately more handsetfewer tablet connections, which on a per-unit basis contribute moreless revenue than connectedsmartphone devices, (ii) an increase in regulatory recovery revenues, and (iii) an increase in device protection plan revenues. These increases were partially offset by the impact of waiving overage charges, a measure U.S. Cellular has taken to assist customers during the COVID-19 pandemic.

Retail service revenues increaseddecreased for the three months ended March 31,June 30, 2020, primarily as a result of a decline in the average number of subscribers compared to the second quarter of 2019, partially offset by the increase in Postpaid ARPU as previously discussed in the Operational Overview section. Retail service revenues increased for the six months ended June 30, 2020, primarily as a result of the increase in Postpaid ARPU, partially offset by a decline in subscribers.

Inbound roaming revenues increaseddecreased for the three and six months ended March 31,June 30, 2020, primarily driven by lower data revenues, with higher usagelower rates partially offset by lower rates.higher usage.

Equipment sales revenues decreasedincreased for the three months ended March 31, 2020. ContributingJune 30, 2020, due primarily to this decreasean increase in device sales volumes. This was partially offset by lower average revenue per device and a decrease in volume ofaccessory sales. Equipment sales revenues decreased for the six months ended June 30, 2020, due primarily to lower average revenue per device sales to retail customers, agents, and third-party distributors year over year,a decrease in accessory sales, partially offset by an increase in volume of used device sales to service providers. In addition, the average revenue per device decreased year over year, primarily resulting from a decrease in the average price of used devices.volumes.

Cost of equipment sold decreased for the three and six months ended March 31, 2020. ContributingJune 30, 2020, due primarily to this decrease was(i) lower average cost per device, (ii) a shift in mix from new device sales to used device sales, (iii) a decrease in volume of deviceaccessory sales and (iv) a decrease in charges recorded to retail customers, agents, and third-party distributors year over year,reduce inventory to its net realizable value. These decreases were partially offset by an increase in volume of used device sales to service providers. In addition, the average cost per device decreased year over year, primarily resulting from a decrease in the average cost of used devices.devices sold.

Depreciation, amortization, and accretion increased for the threesix months ended March 31,June 30, 2020, due to accelerated depreciation of certain assets due to changes in network technology, which will continue throughout 2020 and beyond.

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 using the equity method. U.S. Cellular’s investment in the Los Angeles SMSA Limited Partnership (LA Partnership) contributed pretax income of $22$20 million and $21$19 million in earnings of unconsolidated entities for the three months ended March 31,June 30, 2020 and 2019, respectively, and $42 million and $40 million for the six months ended June 30, 2020 and 2019, respectively. See Note 8 — Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.

The effective tax rate on Income before income taxes for the three months ended March 31,June 30, 2020 and 2019, was 5.0%5.5% and 31.4%30.1%, respectively. The effective tax rate on Income before income taxes for the six months ended June 30, 2020 and 2019, was 5.2% and 31.0%, respectively. The lower effective tax rate in 2020 as compared to 2019 is due primarily to the income tax benefits of the CARES Act enacted on March 27, 2020.

The CARES Act provides retroactive eligibility of bonus depreciation on qualified improvement property put into service after December 31, 2017 and a 5-year carryback of net operating losses generated in years 2018-2020. As the statutory federal tax rate applicable to certain years within the carryback period is 35%, carryback to those years provides a tax benefit in excess of the current federal statutory rate of 21%, resulting in a reduction of income tax expense. U.S. Cellular projects that the income tax effects of the CARES Act will result in a reduction of income tax expense recognized throughout the 2020 tax year as part of the estimated annual effective tax rate, and a cash refund in 2021 of taxes paid in prior years.

U.S. Cellular operates a capital-intensive business. Historically, U.S. Cellular has used internally-generated funds and also has obtained substantial funds from external sources for general corporate purposes. In the past, U.S. Cellular’s existing cash and investment balances, funds available under its revolving credit and receivables securitization agreements, funds from other financing sources, including a term loan and other long-term debt, and cash flows from operating and certain investing and financing activities, including sales of assets or businesses, provided sufficient liquidity and financial flexibility for U.S. Cellular to meet its normal day-to-day operating needs and debt service requirements, to finance the build-out and enhancement of markets and to fund acquisitions, primarily of wireless spectrum licenses. There is no assurance that this will be the case in the future. See Market Risk for additional information regarding maturities of long-term debt.

U.S. Cellular has incurred negative free cash flow at times in the past and this could occur in the future, and forecasting future cash flow is more challenging with the various risks and uncertainties related to COVID-19. However, U.S. Cellular believes that existing cash and investment balances, funds available under its revolving credit, term loan and receivables securitization agreements, and expected cash flows from operating and investing activities will provide sufficient liquidity for U.S. Cellular to meet its normal day-to-day operating needs and debt service requirements for the coming year. U.S. Cellular will continue to monitor the rapidly changing business and market conditions and plans to take appropriate actions, as necessary, to meet its liquidity needs.

U.S. Cellular may require substantial additional capital for, among other uses, funding day-to-day operating needs including working capital, acquisitions of providers of wireless telecommunications services, wireless spectrum license or system acquisitions, capital expenditures, debt service requirements, the repurchase of shares, or making additional investments. It may be necessary from time to time to increase the size of the existing revolving credit agreement, to put in place new credit agreements, or to obtain other forms of financing in order to fund potential expenditures. U.S. Cellular made payments related to a wireless spectrum auctionauctions in 2020 (see Regulatory Matters - Spectrum Auctions). U.S. Cellular also expects annual capital expenditures in 2020 to be higher than in 2019, due primarily to investments to enhance network speed and capacity and to continue deploying VoLTE and 5G technology in its network. U.S. Cellular’s liquidity would be adversely affected if, among other things, U.S. Cellular is unable to obtain financing on acceptable terms, U.S. Cellular makes significant wireless spectrum license purchases, distributions from unconsolidated entities are discontinued or significantly reduced compared to historical levels, or Federal USF and/or other regulatory support payments decline. 

U.S. Cellular’s credit rating currently is sub-investment grade. There can be no assurance that sufficient funds will continue to be available to U.S. Cellular or its subsidiaries on terms or at prices acceptable to U.S. Cellular. Insufficient cash flows from operating activities, changes in U.S. Cellular's credit ratings, defaults of the terms of debt or credit agreements, uncertainty of access to capital, deterioration in the capital markets, reduced regulatory capital at banks which in turn limits their ability to borrow and lend, other changes in the performance of U.S. Cellular or in market conditions or other factors could limit or restrict the availability of financing on terms and prices acceptable to U.S. Cellular, which could require U.S. Cellular to reduce its acquisition, capital expenditure and business development programs, reduce the acquisition of wireless spectrum licenses, and/or reduce or cease share repurchases. Any of the foregoing developments would have an adverse impact on U.S. Cellular’s business, financial condition or results of operations. U.S. Cellular cannot provide assurance that circumstances that could have a material adverse effect on its liquidity or capital resources will not occur.

In March 2020, U.S. Cellular entered into a new $300 million unsecured revolving credit agreement with certain lenders and other parties. Amounts under the new revolving credit agreement are available for general corporate purposes, including wireless spectrum license purchases and capital expenditures, and may be borrowed, repaid and reborrowed from time to time until maturity in March 2025. As a result of the new agreement, U.S. Cellular's previous revolving credit agreement due to expire in May 2023 was terminated. As of March 31,June 30, 2020, there were no outstanding borrowings under the revolving credit agreement, except for letters of credit, and the unused borrowing capacity was $298 million.

U.S. Cellular, through its subsidiaries, also has a receivables securitization agreement to permit securitized borrowings for general corporate purposes using its equipment installment plan receivables. In April 2020, U.S. Cellular borrowed $125 million under its receivables securitization agreement. The unused capacity under this agreement was $200$75 million as of March 31,June 30, 2020, subject to sufficient collateral to satisfy the asset borrowing base provisions of the agreement. As of March 31, 2020, the USCC Master Note Trust held $289 million of assets available to be pledged as collateral for the receivables securitization agreement. In April 2020, U.S. Cellular borrowed $125 million under its receivables securitization agreement.

U.S. Cellular believes that it was in compliance with all of the financial covenants and requirements set forth in its revolving credit agreement, senior term loan credit agreement and receivables securitization agreement as of March 31,June 30, 2020.

U.S. Cellular has an effective shelf registration statement on Form S-3 to issue senior or subordinated debt securities.

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 threesix months ended March 31,June 30, 2020 and 2019, were as follows:

U.S. Cellular consolidates certain “variable interest entities” as defined under GAAP. See Note 910 — Variable 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.

During the threesix months ended March 31,June 30, 2020, U.S. Cellular repurchased 803,836 Common Shares for $23 million at an average cost per share of $29.00. As of March 31,June 30, 2020, the total cumulative amount of U.S. Cellular Common Shares authorized to be repurchased is 4,506,713.4,507,000. For additional information related to the current repurchase authorization, see Unregistered Sales of Equity Securities and Use of Proceeds.

There were no material changes outside the ordinary course of business between December 31, 2019 and March 31,June 30, 2020, to the Contractual and Other Obligations disclosed in MD&A included in U.S. Cellular’s Form 10-K for the year ended December 31, 2019. In April 2020, U.S. Cellular borrowed $125 million under its receivables securitization agreement.

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, results of operations, liquidity, capital expenditures or capital resources.

U.S. Cellular’s Cash, cash equivalents and restricted cash decreased $24increased $145 million. Net cash provided by operating activities was $342$692 million due to net income of $72$141 million adjusted for non-cash items of $228$441 million, distributions received from unconsolidated entities of $24$90 million including $43 million in distributions from the LA Partnership, and changes in working capital items which increased net cash by $18$20 million. The working capital changes were primarily influenced by timing of vendor payments and collections of customer and agent receivables, partially offset by annual employee bonus payments, an increase in inventory and tax impacts from the CARES Act.Act and annual employee bonus payments.

Cash flows used for investing activities were $342$631 million. Cash paid for additions to property, plant and equipment totaled $315$471 million. Cash payments for wireless spectrum license acquisitions were $26$144 million.

U.S. Cellular’s Cash, cash equivalents and restricted cash increased $69decreased $51 million. Net cash provided by operating activities was $287$476 million due to net income of $58$90 million plus non-cash items of $174$366 million and distributions received from unconsolidated entities of $18$76 million, andincluding $33 million in distributions from the LA Partnership. This was offset by changes in working capital items which increaseddecreased net cash by $37$56 million. The primary working capital changes were primarily influenced by timing of vendor payments and collections of customer and agent receivables, partially offset bya reduction in accrued compensation reflecting annual employee bonus payments.payments and a decline in the amounts due to agents driven by lower sales volume.

Cash flows used for investing activities were $212$506 million. Cash paid for additions to property, plant and equipment totaled $107$282 million. AdvanceCash payments for wireless spectrum license acquisitions were $135$255 million. These were partially offset by Cash received from divestitures and exchanges of $31$32 million.

The following discussion addresses certain captions in the consolidated balance sheet and changes therein. This discussion is intended to highlight the significant changes and is not intended to fully reconcile the changes. Changes in financial condition during 2020 were as follows:

U.S. Cellular sometimes uses information derived from consolidated financial information but not presented in its financial statements prepared in accordance with GAAP to evaluate the performance of its business. Specifically, U.S. Cellular has referred to the following measures in this Form 10-Q Report:

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. U.S. Cellular 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.

Management uses Adjusted EBITDA and Adjusted OIBDA as measurements of profitability, and therefore reconciliations to Net income and Operating 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 below 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 following table reconciles EBITDA, Adjusted EBITDA and Adjusted OIBDA to the corresponding GAAP measures, Net income and Operating income.

The following table presents Free cash flow, which is defined as Cash flows from operating activities less Cash paid 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 liquidity, specifically, the amount of net cash generated by business operations after deducting Cash paid for additions to property, plant and equipment. 

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 1 — Summary of Significant Accounting Policies and Recent Accounting Pronouncements, Note 2 — Revenue Recognition and Note 10 — Leases in the Notes to Consolidated Financial Statements and U.S. Cellular’s Application of Critical Accounting Policies and Estimates is discussed in detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are included in U.S. Cellular’s Form 10-K for the year ended December 31, 2019. 

See Note 1 — Basis of Presentation in the Notes to Consolidated Financial Statements for information on recent accounting pronouncements.

 

This Form 10-Q, including exhibits, contains statements that are not based on historical facts and represent forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, that address activities, events or developments that U.S. Cellular intends, expects, projects, believes, estimates, plans or anticipates will or may occur in the future are forward-looking statements. The words “believes,” “anticipates,” “estimates,” “expects,” “plans,” “intends,” “projects” and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. 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, those set forth below, as more fully described under “Risk Factors” in U.S. Cellular’s Form 10-K for the year ended December 31, 2019 and in this Form 10-Q. Each of the following risks could have a material adverse effect on U.S. Cellular’s business, financial condition or results of operations. However, such factors are not necessarily all of the important factors that could cause actual results, performance or achievements to differ materially from those expressed in, or implied by, the forward-looking statements contained in this document. Other unknown or unpredictable factors also could have material adverse effects on future results, performance or achievements. U.S. Cellular undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. You should carefully consider the Risk Factors in U.S. Cellular’s Form 10-K for the year ended December 31, 2019, the following factors and other information contained in, or incorporated by reference into, this Form 10-Q to understand the material risks relating to U.S. Cellular’s business, financial condition or results of operations.

In addition to the information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in U.S. Cellular’s Annual Report on Form 10-K for the year ended December 31, 2019, which could materially affect U.S. Cellular’s business, financial condition or future results. The risks described in this Form 10-Q and the Form 10-K for the year ended December 31, 2019, may not be the only risks that could affect U.S. Cellular. Additional unidentified or unrecognized risks and uncertainties could materially adversely affect U.S. Cellular’s business, financial condition and/or operating results. Subject to the foregoing and other than the risk factor set forth below, U.S. Cellular has not identified for disclosure any material changes to the risk factors as previously disclosed in U.S. Cellular’s Annual Report on Form 10-K for the year ended December 31, 2019.

The impact of the recent global spread of COVID-19 on U.S. Cellular's future operations is uncertain. Public health emergencies, such as COVID-19, pose the risk that U.S. Cellular or its associates, agents, partners and suppliers may be unable to conduct business activities for an extended period of time and/or provide the level of service expected. U.S. Cellular's ability to attract customers, maintain an adequate supply chain and execute on its business strategies and initiatives could be negatively impacted by this outbreak. Additionally, COVID-19 has caused and could continue to cause increased unemployment, economic downturn and credit market deterioration, all of which could negatively impact U.S. Cellular. The extent of the impact of COVID-19 on U.S. Cellular's business, financial condition and results of operations will depend on future circumstances, including the severity of the disease, the duration of the outbreak, actions taken by governmental authorities and other possible direct and indirect consequences, all of which are uncertain and cannot be predicted.

Refer to the disclosure under Market Risk in U.S. Cellular’s Form 10-K for the year ended December 31, 2019, for additional information, including information regarding required principal payments and the weighted average interest rates related to U.S. Cellular’s Long-term debt. There have been no material changes to such information between December 31, 2019 and March 31,June 30, 2020. In April 2020, U.S. Cellular borrowed $125 million under its receivables securitization agreement.

See Note 3 — Fair Value Measurements in the Notes to Consolidated Financial Statements for additional information related to the fair value of U.S. Cellular’s Long-term debt as of March 31,June 30, 2020.