ARRAY DIGITAL INFRASTRUCTURE, INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Index to Management's Discussions and Analysis of Financial Condition and Results of Operations (MD&A) Page No. Executive Overview 20 Terms used by UScellular 23 Operational Overview 24 Financial Overview 25 Liquidity and Capital Resources 28 Consolidated Cash Flow Analysis 33 Consolidated Balance Sheet Analysis 34 Applications of Critical Accounting Policies and Estimates 35 Regulatory Matters 36 Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement 37 Market Risk 39 Supplemental Information Relating to Non-GAAP Financial Measures 40 19 Index to MD&A United States Cellular Corporation Management’s Discussion and Analysis of Financial Condition and Results of Operations Executive Overview The following Management’s Discussion and Analysis (MD&A) should be read in conjunction with the audited consolidated financial statements and notes of United States Cellular Corporation (UScellular) for the year ended December 31, 2021, and with the description of UScellular’s business included herein. 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 reason 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-K Report. The following MD&A omits discussion of 2020 compared to 2019. Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations in UScellular's Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 18, 2021, for that discussion. 20 Index to MD&A General UScellular owns, operates, and invests in wireless markets throughout the United States. UScellular is an 82%-owned subsidiary of Telephone and Data Systems, Inc. (TDS). OPERATIONS ▪ Serves customers with 5.0 million connections including 4.4 million postpaid, 0.5 million prepaid and 0.1 million reseller and other connections ▪ Operates in 21 states ▪ Employs approximately 4,800 associates ▪ 4,301 owned towers ▪ 6,898 cell sites in service 21 Index to MD&A COVID-19 considerations The coronavirus (COVID-19) pandemic did not have a material impact on UScellular's financial results in 2021. The impact of COVID-19 on UScellular's future financial results is uncertain, but is not projected to have a material impact. However, there are many factors, including the severity and duration of the pandemic, as well as other direct and indirect impacts, that could negatively impact UScellular. UScellular Mission and Strategy 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: ▪ UScellular offers economical and competitively priced service plans and devices to its customers and is focused on increasing revenues from sales of related products such as device protection plans and from new services such as fixed wireless home internet. In addition, UScellular is focused on increasing revenues from prepaid plans and expanding its solutions available to business and government customers. ▪ UScellular continues to devote efforts to enhance its network capabilities, including by deploying 5G technology. 5G technology helps address customers’ growing demand for data services and creates opportunities for new services requiring high speed and reliability as well as low latency. UScellular's 5G deployment is initially focused on mobility services using its low band spectrum. UScellular has acquired high-band and mid-band spectrum, deployed high-band spectrum on a limited basis, and will further deploy high-band and mid-band in the future to further enable the delivery of 5G services. UScellular has launched commercial 5G services in portions of substantially all of UScellular’s markets and will continue to launch in additional areas in the coming years. ▪ UScellular assesses its existing wireless interests on an ongoing basis with a goal of improving the competitiveness of its operations and maximizing its long-term return on capital. As part of this strategy, UScellular actively seeks attractive opportunities to acquire wireless spectrum, including pursuant to FCC auctions. 22 Index to MD&A Terms Used by UScellular The following is a list of definitions of certain industry terms that are used throughout this document: ▪ 4G LTE – fourth generation Long-Term Evolution, which is a wireless technology that enables more network capacity for more data per user as well as faster access to data compared to third generation (3G) technology. ▪ 5G – fifth generation wireless technology that helps address customers’ growing demand for data services and creates opportunities for new services requiring high speed and reliability as well as low latency. ▪ Account – represents an individual or business financially responsible for one or multiple associated connections. An account may include a variety of types of connections such as handsets and connected devices. ▪ Auctions 105, 107 and 110 – Auction 105 was an FCC auction of 3.5 GHz wireless spectrum licenses that started in July 2020 and concluded in September 2020. Auction 107 was an FCC auction of 3.7-3.98 GHz wireless spectrum licenses that started in December 2020 and concluded in February 2021. Auction 110 was an FCC auction of 3.45-3.55 GHz wireless spectrum licenses that started in October 2021 and concluded in January 2022. ▪ 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. ▪ Connections – individual lines of service associated with each device activated by a customer. Connections are associated with all types of devices that connect directly to the UScellular network. ▪ Connected Devices – non-handset devices that connect directly to the UScellular network. Connected devices include products such as tablets, wearables, modems, and hotspots. ▪ Coronavirus Aid, Relief, and Economic Security (CARES) Act – economic relief package signed into law on March 27, 2020 to address the public health and economic impacts of COVID-19, including a variety of tax provisions. ▪ EBITDA – refers to earnings before interest, taxes, depreciation, amortization and accretion and is used in the non-GAAP metric Adjusted EBITDA throughout this document. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information. ▪ Eligible Telecommunications Carrier (ETC) – designation by states for providing specified services in “high cost” areas which enables participation in universal service support mechanisms. ▪ Free Cash Flow – non-GAAP metric defined as Cash flows from operating activities less Cash paid for additions to property, plant and equipment. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information. ▪ Gross Additions – represents the total number of new connections added during the period, without regard to connections that were terminated during that period. ▪ Net Additions (Losses) – represents the total number of new connections added during the period, net of connections that were terminated during that period. ▪ OIBDA – refers to operating income before depreciation, amortization and accretion and is used in the non-GAAP metric Adjusted OIBDA throughout this document. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information. ▪ Postpaid Average Revenue per Account (Postpaid ARPA) – metric which is calculated by dividing total postpaid service revenues by the average number of postpaid accounts and by the number of months in the period. ▪ Postpaid Average Revenue per User (Postpaid ARPU) – metric which is calculated by dividing total postpaid service revenues by the average number of postpaid connections and by the number of months in the period. ▪ Retail Connections – the sum of postpaid connections and prepaid connections. ▪ 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. ▪ VoLTE – Voice over Long-Term Evolution is a technology specification that defines the standards and procedures for delivering voice communications and related services over 4G LTE networks. 23 Index to MD&A Operational Overview As of December 31, 2021 2020 Retail Connections – End of Period Postpaid 4,380,000 4,412,000 Prepaid 513,000 499,000 Total 4,893,000 4,911,000 Year Ended December 31, 2021 2020 2021 vs. 2020 Postpaid Activity and Churn Gross Additions Handsets 434,000 397,000 9 % Connected Devices 159,000 203,000 (22) % Total Gross Additions 593,000 600,000 (1) % Net Additions (Losses) Handsets (11,000) (13,000) 15 % Connected Devices (21,000) 39,000 N/M Total Net Additions (Losses) (32,000) 26,000 N/M Churn Handsets 0.96 % 0.89 % Connected Devices 2.72 % 2.58 % Total Churn 1.18 % 1.09 % N/M - Percentage change not meaningful Total postpaid handset net losses decreased in 2021 due primarily to an increase in gross additions as a result of higher consumer switching activity, partially offset by an increase in postpaid handset churn. Total postpaid connected device net additions decreased in 2021 due primarily to lower demand for internet related products as a result of a reduction in COVID-related funding vehicles, many of which are connected to government subsidies. Macroeconomic factors, including the continuing impacts of the ongoing COVID-19 pandemic, have caused some supply chain disruption and delays, including constraints on certain devices. These supply constraints are due primarily to component availability, resulting in extended lead times and additional uncertainty, which may negatively impact UScellular in future periods. Postpaid Revenue Year Ended December 31, 2021 2020 2021 vs. 2020 Average Revenue Per User (ARPU) $ 48.03 $ 47.01 2% Average Revenue Per Account (ARPA) $ 125.92 $ 122.93 2% Postpaid ARPU and Postpaid ARPA increased in 2021, due primarily to (i) favorable plan and product offering mix, (ii) an increase in regulatory recovery revenues and (iii) an increase in device protection plan revenues. These increases were partially offset by an increase in promotional discounts. 2021 Postpaid ARPU and ARPA amounts exclude $9 million of postpaid revenue related to an out-of-period error recorded in the third quarter. See Note 2 — Revenue Recognition in the Notes to Consolidated Financial Statements for additional information. 24 Index to MD&A Financial Overview Year Ended December 31, 2021 2020 2021 vs. 2020 (Dollars in millions) Retail service $ 2,765 $ 2,686 3 % Inbound roaming 110 152 (27) % Other 240 229 5 % Service revenues 3,115 3,067 2 % Equipment sales 1,007 970 4 % Total operating revenues 4,122 4,037 2 % System operations (excluding Depreciation, amortization and accretion reported below) 790 782 1 % Cost of equipment sold 1,118 1,011 11 % Selling, general and administrative 1,345 1,368 (2) % Depreciation, amortization and accretion 678 683 (1) % (Gain) loss on asset disposals, net 23 25 (9) % (Gain) loss on sale of business and other exit costs, net (2) — N/M (Gain) loss on license sales and exchanges, net — (5) N/M Total operating expenses 3,952 3,864 2 % Operating income $ 170 $ 173 (2) % Net income $ 160 $ 233 (31) % Adjusted OIBDA (Non-GAAP) 1 $ 869 $ 876 (1) % Adjusted EBITDA (Non-GAAP) 1 $ 1,054 $ 1,063 (1) % Capital expenditures 2 $ 780 $ 940 (17) % N/M - Percentage change not meaningful 1 Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure. 2 Refer to Liquidity and Capital Resources within this MD&A for additional information on Capital expenditures. 25 Index to MD&A Operating Revenues (Dollars in millions) Service revenues consist of: ▪ Retail Service – Charges for voice, data and value added services and recovery of regulatory costs ▪ Inbound Roaming – Charges to other wireless carriers whose customers use UScellular’s wireless systems when roaming ▪ Other Service – Amounts received from the Federal USF, tower rental revenues, and miscellaneous other service revenues Equipment revenues consist of: ▪ Sales of wireless devices and related accessories to new and existing customers, agents, and third-party distributors Key components of changes in the statement of operations line items were as follows: Total operating revenues Retail service revenues increased in 2021, primarily as a result of an increase in Postpaid ARPU as previously discussed in the Operational Overview section as well as an increase in the average number of postpaid subscribers. Inbound roaming revenues decreased in 2021, 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 in 2021, resulting from increases in tower rental revenues and miscellaneous other service revenues. Equipment sales revenues increased in 2021, due primarily to an increase in the volume of new smartphone and accessory sales, partially offset by higher promotional activity. 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 need to continue to offer significant promotional discounts to new and existing customers. System operations expenses System operations expenses increased in 2021, due primarily to higher circuit costs and an increase in cell site rent expense, partially offset by a decrease in roaming expense driven by lower rates. Cost of equipment sold Cost of equipment sold increased in 2021, due primarily to an increase in the volume of new smartphone and accessory sales. Selling, general and administrative expenses Selling, general and administrative expenses decreased in 2021, due primarily to decreases in (i) bad debts expense driven by fewer non-pay customers as a result of better credit mix and improved customer payment behavior and (ii) advertising expense due to reduced media spend. 26 Index to MD&A Components of Other Income (Expense) Year Ended December 31, 2021 2020 2021 vs. 2020 (Dollars in millions) Operating income $ 170 $ 173 (2) % Equity in earnings of unconsolidated entities 179 179 – Interest and dividend income 6 8 (27) % Gain (loss) on investments — 2 N/M Interest expense (175) (112) (55) % Total investment and other income 10 77 (87) % Income before income taxes 180 250 (28) % Income tax expense 20 17 26 % Net income 160 233 (31) % Less: Net income attributable to noncontrolling interests, net of tax 5 4 14 % Net income attributable to UScellular shareholders $ 155 $ 229 (32) % N/M - Percentage change not meaningful Equity in earnings of unconsolidated entities 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 u sing the equity method. UScellular’s investment in the Los Angeles SMSA Limited Partnership (LA Partnership) contributed pre-tax income of $82 million for both 2021 and 2020. See Note 8 — Investments in Unconsolidated Entities in the Notes to Consolid ated Financial Statements for additional information. Interest expense Interest expense increased in 2021, primarily as a result of (i) the issuance of $500 million of 6.25% Senior Notes in August 2020 and $500 million of 5.50% Senior Notes in both December 2020 and May 2021 and (ii) the write off of $31 million of unamortized debt issuance costs related to Senior Notes that were redeemed in 2021. These increases were partially offset by a reduction in interest expense due to the redemptions of Senior Notes with higher interest rates. See Note 12 — Debt in the Notes to Consolidated Financial Statements for additional information. Income tax expense The effective tax rate on Income before income taxes was 11.4 % for 2021, compared to 6.6% in 2020. The higher effective tax rate in 2021 as compared to 2020 is due primarily to the income tax benefits of the CARES Act included in the 2020 tax rate, which do not recur as benefits in the 2021 tax rate. The 2021 tax rate includes a state tax benefit due primarily to the reductions of tax accruals from expirations of state statute of limitations for prior tax years. In January 2022, UScellular received an income tax refund of $123 million related to the 2020 net operating loss carryback enabled by the CARES Act. See Note 5 — Income Taxes in the Notes to Consolidated Financial Statements for additional information. 27 Index to MD&A Liquidity and Capital Resources Sources of Liquidity UScellular operates a capital-intensive business. In the past, UScellular’s existing cash and investment balances, funds available under its revolving credit and receivables securitization agreements, funds from other financing sources, including term loans 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 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 revolving credit, term loan and receivables securitization 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, 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. Cash and Cash Equivalents Cash and cash equivalents include cash and money market investments. The primary objective of UScellular's Cash and cash equivalents investment activities is to preserve principal. Cash and Cash Equivalents (Dollars in millions) The majority of UScellular’s Cash and cash equivalents are held in bank deposit accounts and in money market funds that purchase only debt issued by the U.S. Treasury or U.S. government agencies. Refer to the Consolidated Cash Flow Analysis for additional information related to changes in Cash and cash equivalents. In addition to Cash and cash equivalents, UScellular had undrawn borrowing capacity from existing debt facilities of $950 million at December 31, 2021. Additional financing activity subsequent to December 31, 2021 reduced the undrawn borrowing capacity to $615 million at February 17, 2022. See the Financing section below for further details. Financing Revolving Credit Agreement In July 2021, UScellular entered into an amended and restated $300 million unsecured revolving credit agreement with certain lenders and other parties. Amounts under the amended and restated revolving credit agreement may be borrowed, repaid and reborrowed from time to time until maturity in July 2026. As of December 31, 2021, there were no outstanding borrowings under the revolving credit agreement, and UScellular’s unused borrowing capacity was $300 million. In January 2022, UScellular borrowed $75 million under its revolving credit agreeme nt and in February 2022, repaid the entire borrowing. 28 Index to MD&A Term Loan Agreements In July 2021, UScellular amended and restated its term loan agreement to allow for additional borrowing capacity of $200 million, to allow for total borrowing capacity of $500 million. The additional borrowing capacity may be drawn in one or more advances by the one-year anniversary of the date of the agreement; amounts not drawn by that time will cease to be available. The maturity date for the existing borrowings is in July 2028 and for any additional borrowings is in July 2031. As of December 31, 2021, the outstanding borrowings under the agreement were $299 million and the unused borrowing capacity was $200 million. In January 2022, UScellular borrowed $100 million under the term loan agreement. In December 2021, UScellular entered into an additional $300 million term loan agreement. The agreement may be drawn in one or more advances by the three-month anniversary of the date of the agreement; amounts not drawn by that time will cease to be available. The maturity date for the agreement is in July 2026. As of December 31, 2021, there were no outstanding borrowings under the term loan agreement and the unused borrowing capacity was $300 million. In February 2022, UScellular borrowed $225 million under the term loan agreement. Export Credit Financing 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. The agreement may be drawn in one or more advances by the three-month anniversary of the date of the agreement; amounts not drawn by that time will cease to be available. The maturity date of the agreement is the five-year anniversary of the first borrowing, which is in January 2027. As of December 31, 2021, there were no outstanding borrowings under the credit facility and the unused borrowing capacity was $150 million. In January 2022, UScellular borrowed $150 million under the agreement. Receivables Securitization Agreement UScellular, through its subsidiaries, has a receivables securitization agreement to permit securitized borrowings using its equipment installment plan receivables. In June 2021, UScellular increased the borrowing capacity under the receivables securitization agreement to $450 million. Amounts under the receivables securitization agreement may be borrowed, repaid and reborrowed from time to time until December 2022. Unless the agreement is amended to extend the maturity date, repayments based on receivable collections commence in January 2023. As of December 31, 2021, UScellular has borrowed the full amount available under the agreement of $450 million. Repurchase 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. In February 2022, the repo subsidiary borrowed $60 million under the repurchase agreement. Financial Covenants The revolving credit agreement, senior term loan agreement and receivables securitization and export credit financing agreements require UScellular to comply with certain affirmative and negative covenants, which include certain financial covenants. In particular, under these agreements, UScellular is 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 also was required to maintain the Consolidated Leverage Ratio at a level not to exceed 3.75 to 1.00 as of the end of any fiscal quarter. UScellular believes that it was in compliance as of December 31, 2021 with all such financial covenants. Other Long-Term Financing In August 2020, UScellular issued $500 million of 6.25% Senior Notes due in 2069 and in December 2020, UScellular issued $500 million of 5.5% Senior Notes due in March 2070. The proceeds from both issuances were for general corporate purposes, including but not limited to, the purchase of additional wireless spectrum licenses acquired in Auction 107, funding of capital expenditures, including in connection with 5G buildout projects and retirement of existing debt. In May 2021, UScellular issued $500 million of 5.5% Senior Notes due in June 2070. The proceeds from the issuance were used for general corporate purposes, including but not limited to, the repayment of other debt, the purchase of additional spectrum and the funding of capital expenditures, including in connection with 5G buildout projects. In May 2021, UScellular redeemed its outstanding $275 million of 7.25% Senior Notes due 2063. At time of redemption, $9 million of interest expense was recorded related to unamortized debt issuance costs for these notes. The notes were redeemed at a price of 100% of the principal amount, including accrued and unpaid interest to the redemption date. In June 2021, UScellular redeemed its outstanding $300 million of 7.25% Senior Notes due 2064. At time of redemption, $10 million of interest expense was recorded related to unamortized debt issuance costs for these notes. The notes were redeemed at a price of 100% of the principal amount, including accrued and unpaid interest to the redemption date. 29 Index to MD&A In September 2021, UScellular redeemed its outstanding $342 million of 6.95% Senior Notes due 2060. At time of redemption, $11 million of interest expense was recorded related to unamortized debt issuance costs related to the notes. The notes were redeemed at a price of 100% of the principal amount, including accrued and unpaid interest to the redemption date. UScellular has an effective shelf registration statement on Form S-3 to issue senior or subordinated debt securities, preferred shares and depositary shares. The proceeds from any such issuance may be used for general corporate purposes, including the possible reduction of other short-term or long-term debt; spectrum purchases; capital expenditures; acquisition, construction and development programs; working capital; additional investments in subsidiaries; or the repurchase of shares. The UScellular shelf registration statement permits UScellular to issue at any time and from time to time senior or subordinated debt securities, preferred shares and depositary shares in one or more offerings, up to the amount registered, which is currently $1 billion. The ability of UScellular to complete an offering pursuant to such shelf registration statement is subject to market conditions and other factors at the time. UScellular believes that it was in compliance as of December 31, 2021, with all covenants and other requirements set forth in the UScellular long-term debt indentures. UScellular has not failed to make nor does it expect to fail to make any scheduled payment of principal or interest under such indentures. Refer to Market Risk — Long-Term Debt for additional information regarding required principal payments and the weighted average interest rates related to UScellular’s Long-term debt. UScellular, at its discretion, may from time to time seek to retire or purchase its outstanding debt through cash purchases and/or exchanges for other securities, in open market purchases, privately negotiated transactions, tender offers, exchange offers or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. See Note 12 — Debt in the Notes to Consolidated Financial Statements for additional information regarding the revolving credit agreement, senior term loan agreement, receivables securitization and export credit financing agreements, Senior Notes and other long-term financing. Credit Ratings In certain circumstances, UScellular’s interest cost on its revolving credit and term loan agreements may be subject to increase if its current credit ratings from nationally recognized credit rating agencies are lowered, and may be subject to decrease if the ratings are raised. UScellular’s agreements do not cease to be available nor do the maturity dates accelerate solely as a result of a downgrade in credit rating. However, a downgrade in UScellular’s credit rating could adversely affect its ability to renew the agreements or obtain access to other credit agreements in the future. UScellular is rated as a sub-investment grade issuer. The UScellular issuer credit ratings as of December 31, 2021, and the dates such ratings were re-affirmed were as follows: Rating Agency Rating Outlook Moody's (re-affirmed August 2021) Ba1 stable outlook Standard & Poor's (re-affirmed October 2021) BB stable outlook Fitch Ratings (re-affirmed February 2021) BB+ stable outlook 30 Index to MD&A Capital Requirements The discussion below is intended to highlight some of the significant cash outlays expected during 2022 and beyond and to highlight the spending incurred in current and prior years for these items. This discussion does not include cash required to fund normal operations, and is not a comprehensive list of capital requirements. Significant cash requirements that are not routine or in the normal course of business could arise from time to time. Capital Expenditures UScellular makes substantial investments to acquire, construct and upgrade wireless telecommunications networks and facilities to remain competitive and as a basis for creating long-term value for shareholders. In recent years, rapid changes in technology and new opportunities (such as 5G and VoLTE technology) have required substantial investments in potentially revenue‑enhancing and cost-saving upgrades of UScellular’s networks to remain competitive; this is expected to continue in 2022 and future years with the continued deployment of 5G technology. 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, in 2021 and 2020 were as follows: Capital Expenditures (Dollars in millions) In 2021, UScellular's capital expenditures were used for the following purposes: ▪ Continue network modernization and 5G deployment; ▪ Enhance and maintain UScellular's network coverage, including providing additional speed and capacity to accommodate increased data usage by current customers; and ▪ Invest in information technology to support existing and new services and products. UScellular’s capital expenditures for 2022 are expected to be between $700 million and $800 million. These expenditures are expected to be used for similar purposes as those listed above. Macroeconomic factors, including the continuing impacts of the ongoing COVID-19 pandemic, have caused some supply chain disruption and delays. These factors may impact the acquisition of certain products and materials and 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 revolving credit, term loan and receivables securitization agreements and/or other forms of financing. Acquisitions, Divestitures and Exchanges 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. In January and February 2022, UScellular paid $560 million for wireless spectrum licenses won in Auction 110. This amount was paid using the funds available under UScellular's various financing agreements as described above. Other Obligations 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. 31 Index to MD&A Variable Interest Entities UScellular consolidates certain “variable interest entities” as defined under GAAP. See Note 14 — 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. Common Share Repurchase Program During 2021, UScellular repurchased 989,988 Common Shares for $31 million at an average cost per share of $31.37. At December 31, 2021 , the total cumulative amount of UScellular Common Shares authorized to be repurchased is 3,517,000 . Depending on its future financial performance, construction, development and acquisition programs, and available sources of financing, UScellular may not have sufficient liquidity or capital resources to make share repurchases. Therefore, there is no assurance that UScellular will make any share repurchases in the future. For additional information related to the current repurchase authorization, see Note 16 — Common Shareholders’ Equity in the Notes to Consolidated Financial Statements. 32 Index to MD&A Consolidated Cash Flow Analysis 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 in 2021 and 2020. 2021 Commentary UScellular’s Cash, cash equivalents and restricted cash decreased $1,092 million. Net cash provided by operating activities was $802 million due to net income of $160 million adjusted for non-cash items of $677 million and distributions received from unconsolidated entities of $176 million including $76 million in distributions from the LA Partnership. This was partially offset by changes in working capital items which decreased net cash by $211 million. The working capital changes were primarily influenced by an increase in customer and agent receivables, a decrease to accrued taxes and the timing of vendor payments. Cash flows used for investing activities were $2,036 million. Cash paid for additions to property, plant and equipment totaled $724 million. Cash payments for wireless spectrum licenses, including advance payments, were $1,322 million. Cash flows provided by financing activities were $142 million, reflecting the issuance of $500 million of 5.50% Senior Notes, $625 million borrowed under the receivables securitization agreement, and $217 million borrowed under the term loan. These were partially offset by the redemption of $917 million of UScellular Senior Notes, a $200 million repayment on the receivables securitization agreement, the repurchase of $31 million of Common Shares and payment of debt issuance costs of $22 million. 2020 Commentary UScellular’s Cash, cash equivalents and restricted cash increased $1,000 million. Net cash provided by operating activities was $1,237 million due to net income of $233 million adjusted for non-cash items of $758 million, distributions received from unconsolidated entities of $189 million including $89 million in distributions from the LA Partnership, and changes in working capital items which increased net cash by $57 million. The working capital changes were primarily influenced by the timing of vendor payments partially offset by tax impacts from the CARES Act and the timing of collections of customer and agent receivables. Cash flows used for investing activities were $1,163 million. Cash paid for additions to property, plant and equipment totaled $989 million. Cash payments for wireless spectrum licenses, including advance payments, were $201 million. Cash flows provided by financing activities were $926 million, reflecting the issuance of $500 million of 5.50% Senior Notes, $500 million of 6.25% Senior Notes, and $125 million borrowed under the receivables securitization agreement. These were partially offset by a $100 million repayment on the receivables securitization agreement, payment of debt issuance costs of $38 million and the repurchase of $23 million of Common Shares. 33 Index to MD&A Consolidated Balance Sheet Analysis 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 2021 were as follows: Inventory, net Inventory, net increased $27 million due primarily to an increase in the volume of inventory. Licenses Licenses increased $1,459 million due primarily to wireless spectrum licenses acquired through Auction 107. See Note 7 — Intangible Assets in the Notes to Consolidated Financial Statements for additional information. Customer deposits and deferred revenues Customer deposits and deferred revenues increased $40 million due primarily to an increase in contract liabilities resulting from higher promotional activity in the current year. Other deferred liabilities and credits Other deferred liabilities and credits increased $197 million due primarily to relocation and acceleration fees related to wireless spectrum licenses acquired through Auction 107 and an increase in asset retirement obligations. Long-term debt, net The following table presents the components of the $239 million increase in Long-term debt, net: Long-term debt, net (Dollars in millions) Balance at December 31, 2020 $ 2,489 Borrowings under Term Loan Agreements 217 Borrowings under Receivables Securitization Agreement 625 Issuance of Senior Notes, net of debt issuance costs 484 Repayments under Receivables Securitization Agreement (200) Repayments under Term Loan Agreements (1) Redemptions of Senior Notes (917) Debt issuance costs charged to interest expense 32 Other (1) Balance at December 31, 2021 $ 2,728 34 Index to MD&A Application of Critical Accounting Policies and Estimates 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. Management believes the application of the following critical accounting policies and the estimates required by such application reflect its most significant judgments and estimates used in the preparation of UScellular’s consolidated financial statements. Wireless Spectrum Licenses Wireless spectrum licenses represent a significant component of UScellular’s consolidated assets. Wireless spectrum licenses are considered to be indefinite-lived assets and, therefore, are not amortized but rather are tested at least annually for impairment. Significant negative events, such as changes in any of the assumptions described below as well as decreases in forecasted cash flows, could result in an impairment in future periods. Wireless spectrum licenses are tested for impairment at the level of reporting referred to as a unit of accounting. For purposes of its impairment testing, UScellular separates its FCC wireless spectrum licenses into eight units of accounting, which consist of one unit of accounting for developed operating market wireless spectrum licenses (built wireless spectrum licenses) and seven geographic non-operating market wireless spectrum licenses (unbuilt wireless spectrum licenses). A qualitative assessment of the license values was completed as of November 1, 2021 and November 1, 2020. The qualitative assessment considered several factors, including analyst estimates of wireless spectrum license values which contemplated recent spectrum auction results, recent UScellular and other market participant transactions and other industry and market factors. Based on these assessments, UScellular concluded that it was more likely than not that the fair value of the wireless spectrum licenses in each unit of accounting exceeded their respective carrying values. Therefore, no quantitative impairment evaluation was completed. See Note 7 — Intangible Assets in the Notes to Consolidated Financial Statements for information related to wireless spectrum licenses activity in 2021 and 2020. Income Taxes UScellular is included in a consolidated federal income tax return with other members of the TDS consolidated group. TDS and UScellular are parties to a Tax Allocation Agreement which provides that UScellular and its subsidiaries be included with the TDS affiliated group in a consolidated federal income tax return and in state income or franchise tax returns in certain situations. For financial statement purposes, UScellular and its subsidiaries calculate their income, income tax and credits as if they comprised a separate affiliated group. Under the Tax Allocation Agreement between TDS and UScellular, UScellular remits its applicable income tax payments to TDS, and receives applicable tax refunds from TDS, consistent with when such payments would be paid or received if UScellular and its subsidiaries were a separate affiliated group. The amounts of income tax assets and liabilities, the related income tax provision and the amount of unrecognized tax benefits are critical accounting estimates because such amounts are significant to UScellular’s financial condition and results of operations. The preparation of the consolidated financial statements requires UScellular to calculate a provision for income taxes. This process involves estimating the actual current income tax liability together with assessing temporary differences resulting from the different treatment of items for tax purposes. These temporary differences result in deferred income tax assets and liabilities which are included on a net basis in UScellular’s Consolidated Balance Sheet. UScellular must then assess the likelihood that deferred income tax assets will be realized based on future taxable income and, to the extent management believes that realization is not likely, establish a valuation allowance. Management’s judgment is required in determining the provision for income taxes, deferred income tax assets and liabilities and any valuation allowance that is established for deferred income tax assets. UScellular recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on management’s judgment as to the possible outcome that has a greater than 50% cumulative likelihood of being realized upon ultimate resolution. See Note 5 — Income Taxes in the Notes to Consolidated Financial Statements for additional information. 35 Index to MD&A Regulatory Matters 5G Fund On October 27, 2020, the FCC adopted rules creating the 5G Fund for Rural America, which will distribute up to $9 billion over ten years to bring 5G wireless broadband connectivity to rural America. The 5G Fund will be implemented through a two-phase competitive process, using multi-round auctions to award support. The winning bidders will be required to meet certain minimum speed requirements and interim and final deployment milestones. The order provides that the 5G Fund be in lieu of the previously proposed fund (the Phase II Connect America Mobility Fund) for the development of 4G LTE. The order also provides that over time a growing percentage of the legacy support a carrier receives must be used for 5G deployment. UScellular cannot predict at this time when the 5G fund auction will occur, when the phase down period for its existing legacy support from the Federal USF will commence, or whether the 5G fund auction will provide opportunities to UScellular to offset any loss in existing support. Spectrum Auctions 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 up to $5 million relates to licenses which are subject to the FCC's spectrum aggregation and ownership attribution rules for Auction 105. None of the wireless spectrum licenses have been granted yet by the FCC. 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 $181 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. Combined with prior mid-band purchases in Auction 105, UScellular will have mid-band spectrum in nearly all of its operating footprint, covering approximately 95% of subscribers. 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 are expected to be granted by the FCC in 2022. 36 Index to MD&A Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Annual Report contain statements that are not based on historical facts 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. See “Risk Factors” in UScellular’s Annual Report on Form 10-K for the year ended December 31, 2021, for a further discussion of these risks. 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. Readers should evaluate any statements in light of these important factors. Operational Risk Factors ▪ Intense competition involving products, services, pricing, promotions and network speed and technologies could adversely affect UScellular’s revenues or increase its costs to compete. ▪ Changes in roaming practices or other factors could cause UScellular's roaming revenues to decline from current levels, roaming expenses to increase from current levels and/or impact UScellular's ability to service its customers in geographic areas where UScellular does not have its own network, which could have an adverse effect on UScellular's business, financial condition or results of operations. ▪ A failure by UScellular to obtain access to adequate radio spectrum to meet current or anticipated future needs and/or to accurately predict future needs for radio spectrum could have an adverse effect on UScellular’s business, financial condition or results of operations. ▪ An inability to attract people of outstanding talent throughout all levels of the organization, to develop their potential through education and assignments, and to retain them by keeping them engaged, challenged and properly rewarded could have an adverse effect on UScellular's business, financial condition or results of operations. ▪ UScellular’s smaller scale relative to larger competitors that may have greater financial and other resources than UScellular could cause UScellular to be unable to compete successfully, which could adversely affect its business, financial condition or results of operations. ▪ Changes in various business factors, including changes in demand, consumer preferences and perceptions, price competition, churn from customer switching activity and other factors, could have an adverse effect on UScellular’s business, financial condition or results of operations. ▪ Advances or changes in technology could render certain technologies used by UScellular obsolete, could put UScellular at a competitive disadvantage, could reduce UScellular’s revenues or could increase its costs of doing business. ▪ Complexities associated with deploying new technologies present substantial risk and UScellular investments in unproven technologies may not produce the benefits that UScellular expects. ▪ Costs, integration problems or other factors associated with acquisitions, divestitures or exchanges of properties or wireless spectrum licenses and/or expansion of UScellular’s business could have an adverse effect on UScellular’s business, financial condition or results of operations. ▪ A failure by UScellular to complete significant network construction and systems implementation activities as part of its plans to improve the quality, coverage, capabilities and capacity of its network, support and other systems and infrastructure could have an adverse effect on its operations. ▪ Difficulties involving third parties with which UScellular does business, including changes in UScellular's relationships with or financial or operational difficulties, including supply chain disruptions, of key suppliers or independent agents and third-party national retailers who market UScellular’s services, could adversely affect UScellular's business, financial condition or results of operations. ▪ A failure by UScellular to maintain flexible and capable telecommunication networks or information technologies, or a material disruption thereof, could have an adverse effect on UScellular’s business, financial condition or results of operations. 37 Index to MD&A Financial Risk Factors ▪ Uncertainty in UScellular’s future cash flow and liquidity or the inability to access capital, deterioration in the capital markets, changes in interest rates, other changes in UScellular’s performance or market conditions, changes in UScellular’s credit ratings or other factors could limit or restrict the availability of financing on terms and prices acceptable to UScellular, which could require UScellular to reduce its construction, development or acquisition programs, reduce the amount of wireless spectrum licenses acquired, and/or reduce or cease share repurchases. ▪ UScellular has a significant amount of indebtedness which could adversely affect its financial performance and in turn adversely affect its ability to make payments on its indebtedness, comply with terms of debt covenants and incur additional debt. ▪ UScellular’s assets and revenue are concentrated in the U.S. wireless telecommunications industry. Consequently, its operating results may fluctuate based on factors related primarily to conditions in this industry. ▪ UScellular has significant investments in entities that it does not control. Losses in the value of such investments could have an adverse effect on UScellular’s financial condition or results of operations. Regulatory, Legal and Governance Risk Factors ▪ Failure by UScellular to timely or fully comply with any existing applicable legislative and/or regulatory requirements or changes thereto could adversely affect UScellular’s business, financial condition or results of operations. ▪ 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. ▪ Settlements, judgments, restraints on its current or future manner of doing business and/or legal costs resulting from pending and future litigation could have an adverse effect on UScellular’s business, financial condition or results of operations. ▪ The possible development of adverse precedent in litigation or conclusions in professional studies to the effect that radio frequency emissions from wireless devices and/or cell sites cause harmful health consequences, including cancer or tumors, or may interfere with various electronic medical devices or frequencies used by other industries, could have an adverse effect on UScellular's business, financial condition or results of operations. ▪ Claims of infringement of intellectual property and proprietary rights of others, primarily involving patent infringement claims, could prevent UScellular from using necessary technology to provide products or services or subject UScellular to expensive intellectual property litigation or monetary penalties, which could have an adverse effect on UScellular’s business, financial condition or results of operations. ▪ There are potential conflicts of interests between TDS and UScellular. ▪ Certain matters, such as control by TDS and provisions in the UScellular Restated Certificate of Incorporation, may serve to discourage or make more difficult a change in control of UScellular or have other consequences. General Risk Factors ▪ UScellular has experienced, and in the future expects to experience, cyber-attacks or other breaches of network or information technology security of varying degrees on a regular basis, which could have an adverse effect on UScellular's business, financial condition or results of operations. ▪ Disruption in credit or other financial markets, a deterioration of U.S. or global economic conditions or other events could, among other things, impede UScellular’s access to or increase the cost of financing its operating and investment activities and/or result in reduced revenues and lower operating income and cash flows, which would have an adverse effect on UScellular’s business, financial condition or results of operations. ▪ The impact of public health emergencies, such as the COVID-19 pandemic, on UScellular's business is uncertain, but depending on duration and severity could have a material adverse effect on UScellular's business, financial condition or results of operations. 38 Index to MD&A Market Risk Long-Term Debt As of December 31, 2021, the majority of UScellular’s long-term debt was in the form of fixed-rate notes with remaining maturities ranging up to 49 years. UScellular also holds variable-rate debt. Fluctuations in market interest rates can lead to fluctuations in the fair value of fixed-rate notes and interest paid 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 December 31, 2021: Principal Payments Due by Period Long-Term Debt Obligations 1 Weighted-Avg. Interest Rates on Long-Term Debt Obligations 2 (Dollars in millions) 2022 $ 3 2.4 % 2023 3 2.4 % 2024 3 2.5 % 2025 3 2.4 % 2026 3 2.4 % Thereafter 2,331 5.5 % Total 3 $ 2,346 5.5 % 1 The total long-term debt obligation differs from Long-term debt in the Consolidated Balance Sheet due to unamortized debt issuance costs on all non-revolving debt instruments and unamortized discounts related to the 6.7% Senior Notes. See Note 12 — Debt in the Notes to Consolidated Financial Statements for additional information. 2 Represents the weighted average stated interest rates at December 31, 2021, for debt maturing in the respective periods. 3 Excludes $450 million of outstanding borrowings under the receivables securitization agreement. If the maturity date of the facility is not extended, principal repayments begin in January 2023. Principal repayments are not scheduled but are instead based on actual receivable collections. UScellular intends to extend the maturity date of the facility. Fair Value of Long-Term Debt At December 31, 2021 and 2020, the estimated fair value of long-term debt obligations, excluding lease obligations, the current portion of such long-term debt and debt financing costs, was $2,999 million and $2,775 million, respectively, and the book value was $2,781 million and $2,558 million, respectively. See Note 3 — Fair Value Measurements in the Notes to Consolidated Financial Statements for additional information. Other Market Risk Sensitive Instruments The substantial majority of UScellular’s other market risk sensitive instruments (as defined in Item 305 of SEC Regulation S-K) are short-term, including Cash and cash equivalents. Accordingly, UScellular believes that a significant change in interest rates would not have a material effect on such other market risk sensitive instruments. 39 Index to MD&A Supplemental Information Relating to Non-GAAP Financial Measures 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. Certain of these measures are considered “non-GAAP financial measures” under U.S. Securities and Exchange Commission Rules. Specifically, UScellular has referred to the following measures in this Form 10-K Report: ▪ EBITDA ▪ Adjusted EBITDA ▪ Adjusted OIBDA ▪ Free cash flow Following are explanations of each of these measures: EBITDA, Adjusted EBITDA and Adjusted OIBDA 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. 2021 2020 (Dollars in millions) Net income (GAAP) $ 160 $ 233 Add back: Income tax expense 20 17 Interest expense 175 112 Depreciation, amortization and accretion 678 683 EBITDA (Non-GAAP) 1,033 1,045 Add back or deduct: (Gain) loss on asset disposals, net 23 25 (Gain) loss on sale of business and other exit costs, net (2) — (Gain) loss on license sales and exchanges, net — (5) (Gain) loss on investments — (2) Adjusted EBITDA (Non-GAAP) 1,054 1,063 Deduct: Equity in earnings of unconsolidated entities 179 179 Interest and dividend income 6 8 Adjusted OIBDA (Non-GAAP) 869 876 Deduct: Depreciation, amortization and accretion 678 683 (Gain) loss on asset disposals, net 23 25 (Gain) loss on sale of business and other exit costs, net (2) — (Gain) loss on license sales and exchanges, net — (5) Operating income (GAAP) $ 170 $ 173 40 Index to MD&A Free Cash Flow 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. 2021 2020 (Dollars in millions) Cash flows from operating activities (GAAP) $ 802 $ 1,237 Less: Cash paid for additions to property, plant and equipment 724 989 Free cash flow (Non-GAAP) $ 78 $ 248 41 Table of Contents Item 7A. Quantitative and Qualitative Disclosures About Market Risk See section entitled “Market Risk” in Item 7 of this Form 10-K. 42 Table of Contents