The following discussion and analysis compares United States Cellular Corporation’s (UScellular) financial results for the three and six months ended March 31,June 30, 2022, to the three and six months ended March 31,June 30, 2021. 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, 2021. Certain numbers included herein are rounded to millions for ease of presentation; however, certain calculated amounts and percentages are determined using the unrounded numbers. 

This report contains statements that are not based on historical facts, including the words “believes,” “anticipates,” “estimates,” “expects,” “plans,” “intends,” “projects” and similar expressions. 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. See Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement for additional information.

UScellular uses certain “non-GAAP financial measures” and each such measure is identified in the MD&A. A discussion of the reasonreasons UScellular determines these metrics to be useful and reconciliations of these measures to their most directly comparable measures determined in accordance with accounting principles generally accepted in the United States of America (GAAP) are included in the Supplemental Information Relating to Non-GAAP Financial Measures section within the MD&A of this Form 10-Q Report.

UScellular owns, operates, and invests in wireless markets throughout the United States. UScellular is an 83%-owned subsidiary of Telephone and Data Systems, Inc. (TDS).

UScellular’s mission is to provide exceptional wireless communication services which enhance consumers’ lives, increase the competitiveness of local businesses, and improve the efficiency of government operations in the markets UScellular serves.

UScellular's strategy is to attract and retain customers through a value proposition comprising a high-quality network, outstanding customer service, and competitive devices, plans and pricing - all provided with a community focus. Strategic efforts include:

The following is a list of definitions of certain industry terms that are used throughout this document:

Total postpaid handset net losses increased for the three and six months ended March 31,June 30, 2022, when compared to the same period last year due to lower gross additions and higher defections resulting from aggressive industry-wide competition.competition and an increase in non-pay defections.

Total postpaid connected device net additions decreasedlosses increased for the three and six months ended March 31,June 30, 2022, when compared to the same period last year due primarily to lower demand for internet-related products as a result of a reduction in COVID-related funding vehicles.connected watches and lower tablet additions.

Postpaid ARPU and Postpaid ARPA increased for the three and six months ended March 31,June 30, 2022, when compared to the same period last year, due to (i) favorable plan and product offering mix, (ii) an increase in cost recovery surcharges (ii) favorable plan and product offering mix and (iii) an increase in device protection plan revenues. These increases were partially offset by an increase in promotional discounts.

Retail service revenues increased for the three and six months ended March 31,June 30, 2022, primarily as a result of an increase in Postpaid ARPU as previously discussed in the Operational Overview section.section, partially offset by a decrease in average postpaid connections.

Inbound roaming revenues decreased for the three and six months ended March 31,June 30, 2022, primarily driven by lower data revenues resulting from lower usage and lower rates. UScellular expects inbound roaming revenues to continue to decline during 2022 relative to prior year levels.

Other service revenues increased for the three and six months ended March 31,June 30, 2022, resulting from increases in tower rental revenues and miscellaneous other serviceIoT revenues.

Equipment sales revenues increased for the three months ended June 30, 2022, due primarily to an increase in average price per unit of new smartphone sales, partially offset by higher promotional activity. Equipment sales revenues decreased for the threesix months ended March 31,June 30, 2022 due primarily to higher promotional activity and a decrease in the volume of new smartphone and accessory sales, and higher promotional activity.sales.

In recent periods, wireless service providers have increased promotional aggressiveness to attract new customers and retain existing customers. Operating revenues and Operating income may be negatively impacted in future periods by the competitive needresponse to offer increased promotional discounts to new and existing customers.

Cost of equipment sold decreasedincreased for the three months ended March 31,June 30, 2022, due primarily to an increase in average cost per unit of new smartphone sales. Cost of equipment sold was flat for the six months ended June 30, 2022 as an increase in average cost per unit was offset by a decrease in the volume of new smartphonesmartphones and accessory sales.accessories.

Selling, general and administrative expenses increased for the three and six months ended March 31,June 30, 2022, due primarily to increases in bad debts expense.

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 $18$16 million and $19$22 million for the three months ended March 31,June 30, 2022 and 2021, respectively and $34 million and $41 million for the six months ended June 30, 2022 and 2021, respectively. See Note 78 — 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, 2022 and 2021 was 38.4%43.7% and 30.4%(42.0)%, respectively. The effective tax ratesrate on Income before income taxes for the six months ended June 30, 2022 and 2021 was 40.1% and 14.5%, respectively. The increase to the effective tax rates in the three month periods reflect a combined rateand six months ended June 30, 2022 is due primarily to the 2021 reduction of federal andtax accruals resulting from expiration of state taxes, adjusted for impactsstatute of nondeductible expenses.limitations of prior tax years, which did not recur in 2022.

During the threesix months ended March 31,June 30, 2022, UScellular received a federal income tax refund of $123 million related to the 2020 net operating loss carryback enabled by the CARES Act.

UScellular operates a capital-intensive business. In the past, UScellular’s existing cash and investment balances, funds available under its financing agreements, and cash flows from operating and certain investing and financing activities, including sales of assets or businesses, provided sufficient liquidity and financial flexibility for UScellular 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.

UScellular has incurred negative free cash flow at times in the past and this could occur in the future. However, UScellular believes that existing cash and investment balances, funds available under its financing agreements and expected cash flows from operating and investing activities will provide sufficient liquidity for UScellular to meet its normal day-to-day operating needs and debt service requirements for the foreseeable future. UScellular will continue to monitor the rapidly changing business and market conditions and plans to take appropriate actions, as necessary, to meet its liquidity needs.

UScellular 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 acquisitions, capital expenditures, agreements to purchase goods or services, leases, debt service requirements, repurchases 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.

In addition to Cash and cash equivalents, UScellular had undrawn borrowing capacity from existingthe following debt facilities of $590 million at March 31,June 30, 2022. See the Financing section below for further details.

UScellular has an unsecured revolving credit agreement with a maximum borrowing capacity of $300 million. Amounts under the revolving credit agreement may be borrowed, repaid and reborrowed from time to time until maturity in July 2026. During the threesix months ended March 31,June 30, 2022, UScellular borrowed and repaid $75 million under its revolving credit agreement. As of March 31,June 30, 2022, there were no outstanding borrowings under the revolving credit agreement, and UScellular's unused borrowing capacity was $300 million.

UScellular has term loan agreements with maximum borrowing capacities of $800 million. The maturity dates for the term loan agreements range from July 2026 to July 2031. During the threesix months ended March 31,June 30, 2022, UScellular borrowed $400 million under its term loan credit agreements. As of March 31,June 30, 2022, UScellular's outstanding borrowings under the term loan agreements were $699$698 million and UScellular's unused borrowing capacity was $100 million. In July 2022, UScellular borrowed the remaining $100 million under the term loan agreement.

In December 2021, UScellular entered into a $150 million term loan credit facility with Export Development Canada to finance (or refinance) equipment imported from Canada, including equipment purchased prior to entering the term loan credit facility agreement. During the threesix months ended March 31,June 30, 2022, UScellular borrowed $150 million, which is the full amount available under the agreement and is due in January 2027.

UScellular, through its subsidiaries, has a receivables securitization agreement to permit securitized borrowings using its equipment installment plan receivables. In March 2022, UScellular amended the agreement to extend the maturity date to March 2024. Amounts under the agreement may be borrowed, repaid and reborrowed from time to time until March 2024.the maturity date. During the threesix months ended March 31,June 30, 2022, UScellular repaid $50$150 million under the agreement. As of March 31,June 30, 2022, the outstanding borrowings under the agreement were $400$300 million and the unused borrowing capacity under the agreement was $50$150 million, subject to sufficient collateral to satisfy the asset borrowing base provisions of the agreement.

In January 2022, UScellular, through a subsidiary (the repo subsidiary), entered into a repurchase agreement to borrow up to $200 million, subject to the availability of eligible equipment installment plan receivables and the agreement of the lender. The transaction is accounted for as a one-month secured borrowing. The expiration date of the repurchase agreement is in January 2023. During the threesix months ended March 31,June 30, 2022, the repo subsidiary borrowed $60 million under the repurchase agreement. As of March 31,June 30, 2022, the outstanding borrowings under the agreement were $60 million and the unused borrowing capacity was $140 million. In July 2022, UScellular repaid $50 million under its repurchase agreement.

UScellular believes that it was in compliance with all of the financial covenants and requirements set forth in its revolving credit agreement, term loan credit agreements, export credit financing agreement and receivables securitization agreement as of March 31,June 30, 2022.

UScellular has an effective shelf registration statement on Form S-3 to issue senior or subordinated debt securities, preferred shares and depositary shares.

See Note 89 — Debt in the Notes to Consolidated Financial Statements for additional information related to the financing agreements.

Macroeconomic factors may impact the acquisition or cost of products and materials as well as contribute to internal and external labor shortages.

UScellular intends to finance its capital expenditures for 2022 using primarily Cash flows from operating activities, existing cash balances and, as required, additional debt financing from its existing agreements and/or other forms of financing.

UScellular may be engaged from time to time in negotiations (subject to all applicable regulations) relating to the acquisition, divestiture or exchange of companies, properties or wireless spectrum licenses (including pursuant to FCC auctions). In general, UScellular may not disclose such transactions until there is a definitive agreement.

UScellular will require capital for future spending on existing contractual obligations, including long-term debt obligations; lease commitments; commitments for device purchases, network facilities and transport services; agreements for software licensing; long-term marketing programs; commitments for wireless spectrum licenses acquired through FCC auctions; and other agreements to purchase goods or services.

UScellular 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. UScellular 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, 2022, UScellular repurchased 363,821658,542 Common Shares for $10$19 million at an average cost per share of $28.64.$28.87. As of March 31,June 30, 2022, the total cumulative amount of UScellular Common Shares authorized to be repurchased is 3,153,000.2,858,000. For additional information related to the current repurchase authorization, see Unregistered Sales of Equity Securities and Use of Proceeds.

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 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-saving upgrades to UScellular’s networks. 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 threesix months ended March 31,June 30, 2022 and 2021.

UScellular’s Cash, cash equivalents and restricted cash increased $145$156 million. Net cash provided by operating activities was $311$578 million due to net income of $52$74 million adjusted for non-cash items of $182$370 million, distributions received from unconsolidated entities of $19$80 million, including $37 million in distributions from the LA Partnership, and changes in working capital items which increased net cash by $58$54 million. The working capital changes were primarily driven by a federal income tax refund of $123 million received during the first quarter, partially offset by an increase in customer and agent receivables, increases in inventory and the payment of annual associate bonuses and timing of vendor payments.bonuses.

Cash flows used for investing activities were $710$851 million, which included payments for wireless spectrum licenses of $563 million and payments for property, plant and equipment of $150 million and$288 million. Cash payments for wireless spectrum licensesproperty, plant and equipment are lower than the total capital expenditures in the six months ended June 30, 2022 due primarily to future obligations of $561 million.certain software license agreements that are recorded as current year capital expenditures but are paid over time.

Cash flows provided by financing activities were $544$429 million, due primarily to $400 million borrowed under the term loans,loan facilities, $150 million borrowed under the export credit financing agreement, $75 million borrowed under the revolving credit agreement, and $60 million borrowed under the EIP receivables repurchase agreement. These were partially offset by $150 million of repayments on the receivables securitization agreement, a $75 million repayment on the revolving credit agreement, a $50 million repayment on the receivables securitization agreement, and the repurchase of Common Shares.

UScellular’s Cash, cash equivalents and restricted cash decreased $779$994 million. Net cash provided by operating activities was $124$363 million due to net income of $62$97 million adjusted for non-cash items of $167$355 million and distributions received from unconsolidated entities of $22 million.$79 million, including $32 million in distributions from the LA Partnership. This was partially offset by changes in working capital items which decreased net cash by $127$168 million. The working capital changes were primarily influenced by the timing of vendor payments, increases in inventory, and the payment of annual associate bonus payments.bonuses.

Cash flows used for investing activities were $1,388$1,534 million, which included payments for property, plant and equipment of $133$281 million and payments for wireless spectrum licenses of $1,256$1,259 million.

Cash flows provided by financing activities were $485$177 million, due primarily to the issuance of $500 million of 5.5% Senior Notes, $275 million borrowed under the receivables securitization agreement, and $217 million borrowed under the term loan. These were partially offset by the redemption of $575 million of UScellular Senior Notes and a $200 million repayment on the receivables securitization agreement.

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. Notable balance sheet changes during 2022 were as follows:

Income taxes receivable decreased $123 million due primarily to a federal income tax refund received related to the 2020 net operating loss carryback enabled by the CARES Act.

Accrued compensation decreased $41$27 million due primarily to associate bonus payments in March 2022.

Other current liabilities increased $75$119 million due primarily to accruals related to software license agreements and $60 million borrowed under the EIP receivables repurchase agreement. See Note 89 — Debt in the Notes to Consolidated Financial Statements for additional information.

The following table presents the components of the $492$390 million increase in Long-term debt, net:

UScellular 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, UScellular has referred to the following measures in this Form 10-Q Report:

Certain of these measures are considered “non-GAAP financial measures” under U.S. Securities and Exchange Commission Rules. Following are explanations of each of these measures.

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.

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 UScellular’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 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, 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 UScellular 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. 

UScellular prepares its consolidated financial statements in accordance with GAAP. UScellular’s significant accounting policies are discussed in detail in Note 1 — Summary of Significant Accounting Policies, Note 2 — Revenue Recognition and Note 10 — Leases in the Notes to Consolidated Financial Statements and UScellular’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 UScellular’s Form 10-K for the year ended December 31, 2021. 

On March 2, 2020, the FCC released a Public Notice establishing procedures for an auction offering wireless spectrum licenses in the 3.5 GHz band (Auction 105). On September 2, 2020, the FCC announced by way of public notice that UScellular was the provisional winning bidder for 243 wireless spectrum licenses for a purchase price of $14 million, of which upmillion. On July 15, 2022, the FCC released a Consent Decree related to $5 million relates to licenses which are subject to the FCC'sits spectrum aggregation and ownership attribution rules for Auction 105. None of thein which UScellular agreed to relinquish its rights to 27 wireless spectrum licenses have beenawarded in Auction 105 and is expecting a full refund. The remaining 216 wireless spectrum licenses were granted yet by the FCC.FCC on July 26, 2022.

On August 7, 2020, the FCC released a Public Notice establishing procedures for an auction offering wireless spectrum licenses in the 3.7-3.98 GHz bands (Auction 107). On February 24, 2021, the FCC announced by way of public notice that UScellular was the provisional winning bidder for 254 wireless spectrum licenses for $1,283 million. UScellular paid $30 million of this amount in 2020 and the remainder in March 2021. The wireless spectrum licenses from Auction 107 were granted by the FCC in July 2021. Additionally, UScellular expects to be obligated to pay approximately $187 million in total from 2021 through 2024 related to relocation costs and accelerated relocation incentive payments. Such additional costs were accrued and capitalized at the time the licenses were granted. In October 2021, UScellular paid $36 million related to the additional costs. The spectrum must be cleared by incumbent providers before UScellular can access it. UScellular does not expect to have access to this spectrum until late 2023.

On June 9, 2021, the FCC released a Public Notice establishing procedures for an auction offering wireless spectrum licenses in the 3.45-3.55 GHz band (Auction 110). On January 14, 2022, the FCC announced by way of public notice that UScellular was the provisional winning bidder for 380 wireless spectrum licenses for $580 million. UScellular paid $20 million of this amount in 2021 and the remainder in January and February 2022. The wireless spectrum licenses from Auction 110 were granted by the FCC on May 4, 2022.

On March 21, 2022, the FCC released a Public Notice establishing procedures for an auction offering wireless spectrum licenses in the 2.5 GHz band (Auction 108). UScellular filed an application to participate in Auction 108 on May 9, 2022, and on July 11, 2022, the FCC announced that UScellular was a qualified bidder. Bidding in Auction 108 began on July 29, 2022.

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 UScellular 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 UScellular’s Form 10-K for the year ended December 31, 2021 and in this Form 10-Q. Each of the following risks could have a material adverse effect on UScellular’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. UScellular 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 UScellular’s Form 10-K for the year ended December 31, 2021, the following factors and other information contained in, or incorporated by reference into, this Form 10-Q to understand the material risks relating to UScellular’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 UScellular’s Form 10-K for the year ended December 31, 2021, which could materially affect UScellular’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, 2021, may not be the only risks that could affect UScellular. Additional unidentified or unrecognized risks and uncertainties could materially adversely affect UScellular’s business, financial condition and/or operating results. Subject to the foregoing, UScellular has not identified for disclosure any material changes to the risk factors as previously disclosed in UScellular’s Form 10-K for the year ended December 31, 2021.

As of March 31,June 30, 2022, approximately 60% of UScellular's long-term debt was in fixed-rate senior notes and approximately 40% in variable-rate debt. Fluctuations in market interest rates can lead to volatility in the fair value of fixed-rate notes and interest expense on variable-rate debt.

The following table presents the scheduled principal payments on long-term debt, lease obligations, and the related weighted average interest rates by maturity dates at March 31,June 30, 2022.

See Note 3 — Fair Value Measurements in the Notes to Consolidated Financial Statements for additional information related to the fair value of UScellular’s Long-term debt as of March 31,June 30, 2022.