What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-16 compared with 2023-02-16 · 152 added, 151 removed, 422 unchanged (42% of the section changed)

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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.

This report contains statements that are not based on historical facts, which may be identified by words such as “believes,” “anticipates,” “estimates,” “expects,” “plans,” “intends,” “projects,” “will” 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.

See the disclosure under the heading Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement elsewhere in this report for additional information.

The accounting policies of UScellular conform to accounting principles generally accepted in the United States of America (GAAP).

However, UScellular uses certain “non-GAAP financial measures” in the MD&A.

A discussion of the reasons UScellular determines these metrics to be useful and reconciliations of these measures to their most directly comparable measures determined in accordance with GAAP are included in the disclosure under the heading Supplemental Information Relating to Non-GAAP Financial Measures within the MD&A of this report.

The following MD&A omits discussion of 2022 compared to 2021.

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▪ Employs approximately 4,300 associates

▪ 4,336 owned towers

▪ 6,945 cell sites in service

▪ Owns 4,373 towers

▪ Operates 7,000 cell sites in service

Index to MD&A

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This includes providing exceptional wireless communication services which enhance consumers’ lives, increase the competitiveness of local businesses, and improve the efficiency of government operations in the markets UScellular serves.

UScellular’s strategy is to attract and retain customers by providing 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, tower rent revenues and expanding its solutions available to business and government customers.

In addition, UScellular is focused on increasing tower rent revenues and expanding its solutions available to business and government customers.

▪ UScellular continues 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 5G services in portions of substantially all of its markets and will continue to expand to 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.

UScellular's initial 5G deployment has predominantly used low-band spectrum to launch 5G services in portions of substantially all of its markets.

During 2023, UScellular continued to invest in 5G with a focus on deployment of mid-band spectrum, which will largely overlap portions of areas already covered with low-band 5G service.

5G service deployed over mid-band spectrum will further enhance speed and capacity for UScellular's mobility and fixed wireless services.

▪ UScellular assesses its existing wireless interests on an ongoing basis with a goal of improving the competitiveness of its operations and maximizing its profitability.

As part of this strategy, UScellular may seek attractive opportunities to acquire and divest wireless spectrum as deemed necessary.

Recent Development

On August 4, 2023, TDS and UScellular announced that the Boards of Directors of both companies have decided to initiate a process to explore a range of strategic alternatives for UScellular.

During 2023, UScellular incurred third-party expenses of $8 million related to the strategic alternatives review.

At this time, UScellular cannot predict the ultimate outcome of such process or estimate the potential impact of such process on the financial statements.

Index to MD&A

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▪ 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.

Connected devices include products such as tablets, wearables, modems, fixed wireless, and hotspots.

▪ EBITDA – refers to earnings before interest, taxes, depreciation, amortization and accretion and is used in the non-GAAP metric Adjusted EBITDA throughout this document.

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Net Additions (Losses)

Handsets (110,000) (11,000) N/M

Connected Devices (23,000) (21,000) (10) %

Total Net Additions (Losses) (133,000) (32,000) N/M

Handsets (145,000) (110,000) (32) %

Connected Devices 7,000 (23,000) N/M

Total Net Additions (Losses) (138,000) (133,000) (4) %

Handsets 1.10 % 1.12 %

Connected Devices 2.77 % 2.95 %

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N/M - Percentage change not meaningful

Total postpaid handset net losses increased in 2022 due to lower gross additions and higher defections resulting from aggressive industry-wide competition and an increase in non-pay customers.

Total postpaid connected device net losses in 2022 were largely in-line with prior year, as lower demand for connected watches and tablets were offset by an increase in home internet net additions.

Total postpaid handset net losses increased in 2023 due primarily to lower gross additions resulting from aggressive industry-wide competition.

Total postpaid connected device net additions increased in 2023 due primarily to higher demand for fixed wireless home internet as well as decreases in tablet and mobile hotspot churn.

Postpaid Revenue

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Average Revenue Per Account (ARPA) $ 130.91 $ 130.39 –

Postpaid ARPU and Postpaid ARPA increased in 2022, due primarily to (i) favorable plan and product offering mix, (ii) an increase in cost recovery surcharges and (iii) an increase in device protection plan revenues.

These increases were partially offset by an increase in promotional discounts.

The higher ARPU plan mix in 2022 relative to 2021 was partially driven by device promotions that included requirements for customers to adopt higher rate plans that offer enhanced services and features.

UScellular expects the future growth rate of Postpaid ARPU and Postpaid ARPA to decline relative to the growth rate experienced in 2022 due to the impact of pricing and promotions in the continued highly competitive wireless services environment.

2021 Postpaid ARPU and ARPA amounts exclude $9 million of postpaid revenue related to an out-of-period error recorded in the third quarter of 2021.

See Note 2 — Revenue Recognition in the Notes to Consolidated Financial Statements for additional information.

Postpaid ARPU increased in 2023 due to favorable plan and product offering mix and an increase in device protection plan revenues, partially offset by an increase in promotional discounts.

Postpaid ARPA was relatively flat in 2023 due to the impacts to Postpaid ARPU, offset by a decrease in the number of connections per account.

Index to MD&A

Financial Overview

The following discussion and analysis compares financial results for the year ended December 31, 2023, to the year ended December 31, 2022.

Year Ended December 31, 2023 2022 2023 vs.

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Inbound roaming 32 67 (52) %

Other 270 265 2 %

Service revenues 3,044 3,125 (3) %

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System operations (excluding Depreciation, amortization and accretion reported below) 740 755 (2) %

755 790 (4) %

Cost of equipment sold 988 1,216 (19) %

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(Gain) loss on asset disposals, net 17 19 (9) %

(Gain) loss on sale of business and other exit costs, net (1) (2) 52 %

(Gain) loss on sale of business and other exit costs, net — (1) N/M

(Gain) loss on license sales and exchanges, net (2) — N/M

Total operating expenses 3,767 4,100 (8) %

Operating income $ 69 $ 170 (59) %

Operating income $ 139 $ 69 N/M

Net income $ 58 $ 35 67 %

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N/M - Percentage change not meaningful

1 For 2021, amounts have been adjusted to reclassify $8 million of Internet of Things (IoT) and Reseller revenues from Retail service to Other service.

1 UScellular recorded an adjustment to correct a prior period error related to the recognition of discounts for certain Prepaid customers, which decreased Service revenue by $5 million in 2023.

This adjustment was not material to any of the periods impacted.

2 Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.

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▪ Inbound Roaming – Consideration from other wireless carriers whose customers use UScellular’s wireless systems when roaming

▪ Other Service – Amounts received from the Federal USF, tower rental revenues, miscellaneous other service revenues and Internet of Things (IoT)

▪ Other Service – Amounts received from the Federal USF, third-party tower rental revenues, miscellaneous other service revenues and Internet of Things (IoT)

Equipment revenues consist of:

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Total operating revenues

Retail service revenues increased in 2022 primarily as a result of an increase in Postpaid ARPU, partially offset by a decrease in average postpaid connections, as well as a $9 million out-of-period error that increased revenue recognized in 2021.

See Note 2 - Revenue Recognition in the Notes to Consolidated Financial Statements for additional information.

Inbound roaming revenues decreased in 2022, primarily driven by lower data revenues resulting from lower rates and lower usage.

UScellular expects inbound roaming revenue to continue to decline during 2023 relative to prior year levels.

Other service revenues increased in 2022, resulting from increases in tower rental revenues, miscellaneous revenues, and IoT revenues.

Equipment sales revenues increased in 2022, due primarily to increased customer upgrades driven by more promotional activity, combined with a higher average price of new smartphone sales.

In recent periods, wireless service providers have increased promotional aggressiveness to attract new customers and retain existing customers.

This has included both traditional carriers and cable companies operating through mobile virtual network operators (MVNOs).

This increased aggressiveness has contributed to the loss of 133,000 postpaid connections in 2022.

It has also led to increased promotional spending, which negatively impacts both Equipment revenues and Retail service revenues.

UScellular expects promotional aggressiveness by its competitors to continue during 2023.

Operating revenues and Operating income may be negatively impacted by the competitive need to continue to offer significant promotional discounts and lower priced plan offerings to new and existing customers.

Retail service revenues decreased in 2023 primarily as a result of a decrease in average postpaid and prepaid connections, partially offset by an increase in Postpaid ARPU as previously discussed in the Operational Overview section.

Inbound roaming revenues decreased in 2023, primarily driven by lower data revenues resulting from lower rates.

Other service revenues increased in 2023, resulting from increases in tower rental revenues, partially offset by declines in miscellaneous revenues.

Equipment sales revenues decreased in 2023, due primarily to a decline in smartphone upgrades and gross additions, partially offset by a higher average price of new smartphone sales.

Wireless service providers have been aggressive promotionally and on price to attract and retain customers.

This includes both traditional carriers and cable companies operating as mobile virtual network operators (MVNOs).

UScellular expects promotional aggressiveness by traditional carriers and pricing pressures from cable companies to continue into the foreseeable future.

Operating revenues and Operating income have been negatively impacted in current and prior periods, and may be negatively impacted in future periods, by competitive promotional offers to new and existing customers.

Total operating expenses

Total operating expenses in 2023 include $9 million of severance and related expenses associated with a reduction in workforce that was recorded in the first quarter of 2023.

These severance expenses are included in System operations expenses and Selling, general and administrative expenses.

System operations expenses

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Cost of equipment sold

Cost of equipment sold increased in 2022, due primarily to increased customer upgrades driven by more promotional activity, combined with higher average cost per unit sold.

Cost of equipment sold decreased in 2023, due primarily to a decline in smartphone upgrades and gross additions, partially offset by a higher average cost per unit sold.

Index to MD&A

Selling, general and administrative expenses

Selling, general and administrative expenses increased in 2022, due primarily to increases in bad debts expense partially offset by a decrease in advertising expense.

Bad debts expense increased $76 million in 2022 as customer payment behavior and the corresponding rate of involuntary churn returned to pre-COVID-19 pandemic trends in 2022.

Involuntary churn had been favorable in the prior year due to the impacts of the pandemic which included government stimulus payments and higher consumer savings rates.

In addition, customers have purchased higher priced devices in recent periods, which has resulted in higher write-off amounts per uncollectible account in 2022 relative to 2021.

Selling, general and administrative expenses decreased in 2023, due primarily to decreases in bad debts expense, commissions, facilities and employee-related expenses, partially offset by an increase in advertising expenses as well as $8 million of expenses related to the strategic alternatives review.

Depreciation, amortization and accretion

Depreciation, amortization and accretion expenses decreased in 2023 due primarily to enhancements that extended the useful life of a software platform.

Components of Other Income (Expense)

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(Dollars in millions)

Operating income $ 69 $ 170 (59) %

Operating income $ 139 $ 69 N/M

Investment and other income (expense)

Equity in earnings of unconsolidated entities 158 158 –

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Interest expense (196) (163) (21) %

Total investment and other income 3 10 (73) %

Total investment and other income (expense) (28) 3 N/M

Income before income taxes 111 72 54 %

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Net income attributable to UScellular shareholders $ 54 $ 30 80 %

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 or the net asset value practical expedient.

UScellular’s investment in the Los Angeles SMSA Limited Partnership (LA Partnership) contributed pre-tax income of $65 million and $82 million for 2022 and 2021, respectively.

UScellular’s investment in the Los Angeles SMSA Limited Partnership (LA Partnership) contributed pre-tax income of $65 million for both 2023 and 2022.

See Note 8 — Investments in Unconsolidated Entities in the Notes to Consolid ated Financial Statements for additional information.

Interest expense

Interest expense decreased in 2022 due primarily to $31 million of unamortized debt issuance costs written off during 2021 related to the redemption of Senior Notes.

This was partially offset by an increase in interest expense due to additional borrowings and interest rate increases.

Interest expense increased in 2023 due primarily to interest rate increases on variable rate debt.

See Market Risk for additional information regarding maturities of long-term debt and weighted average interest rates.

Income tax expense

Income tax expense increased in 2022 due primarily to the 2021 reduction of tax accruals resulting from expiration of state statutes of limitations of prior tax years, which did not recur in 2022.

This was partially offset by the tax effect of the decrease in Income before income taxes.

In early 2022, UScellular received an income tax refund of $123 million related to the 2020 net operating loss carryback enabled by the CARES Act.

Income tax expense increased in 2023 due primarily to the increase in Income before income taxes.

See Note 5 — Income Taxes in the Notes to Consolidated Financial Statements for additional information.

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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.

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 day-to-day operating needs and debt service requirements, to finance the build-out and enhancement of markets and to fund wireless spectrum license acquisitions.

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 next several years.

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 credit facilities, to amend existing or put in place new credit agreements, or to obtain other forms of financing in order to fund potential expenditures.

UScellular has incurred negative free cash flow at times in past periods, and this could occur in future periods.

UScellular believes that existing cash and investment balances, funds available under its financing agreements, its ability to obtain future external financing, potential dispositions and expected cash flows from operating and investing activities will provide sufficient liquidity for UScellular to meet its day-to-day operating needs and debt service requirements.

UScellular may require substantial additional funding for, among other uses, capital expenditures, acquisitions of providers of wireless telecommunications services, wireless spectrum license acquisitions, agreements to purchase goods or services, leases, repurchases of shares, or making additional investments.

It may be necessary from time to time to increase the size of its existing credit facilities, to amend existing or put in place new credit agreements, to obtain other forms of financing, issue equity securities, or to divest assets in order to fund potential expenditures.

UScellular will continue to monitor the rapidly changing business and market conditions and is taking and intends to take appropriate actions, as necessary, to meet its liquidity needs.

Cash and Cash Equivalents

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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 the following debt facilities at December 31, 2022.

In addition to Cash and cash equivalents, UScellular had available undrawn borrowing capacity (taking into account debt covenant restrictions) from the following debt facilities at December 31, 2023.

See the Financing section below for further details.

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Total undrawn borrowing capacity 800

Debt covenant restrictions 1

Total available undrawn borrowing capacity $ 600

1 The capacity available under the Repurchase Agreement and the Debt covenant restrictions in the table above relate to the Repurchase Agreement facility that subsequently expired in January 2024.

Index to MD&A

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Amounts under the revolving credit agreement may be borrowed, repaid and reborrowed from time to time until maturity in July 2026.

During 2022, UScellular borrowed and repaid $75 million under its revolving credit agreement.

As of December 31, 2023, there were no outstanding borrowings under the revolving credit agreement, and UScellular’s unused borrowing capacity was $300 million.

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The maturity dates for the term loan agreements range from July 2026 to July 2031.

During 2022, UScellular borrowed an incremental $500 million under its term loan credit agreements.

As of December 31, 2023, UScellular has borrowed the full amount available under the agreements and the outstanding borrowings were $783 million.

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) imported equipment, including equipment purchased prior to entering the term loan credit facility agreement.

During 2022, UScellular borrowed $150 million, which is the full amount available under the agreement and is due in January 2027.

UScellular has a $150 million term loan credit facility with Export Development Canada to finance (or refinance) imported equipment, including equipment purchased prior to entering the term loan facility agreement.

The maturity date for the agreement is January 2027.

As of December 31, 2023, UScellular has borrowed the full amount available 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 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 the maturity date.

During 2022, UScellular repaid $250 million and borrowed $75 million under the agreement.

UScellular, through its subsidiaries, has a receivables securitization agreement that permits securitized borrowings using its equipment installment plan receivables.

In September 2023, UScellular amended the agreement to extend the maturity date to September 2025.

Amounts under the agreement may be borrowed, repaid and reborrowed from time to time until maturity.

Unless the agreement is amended to extend the maturity date, repayments based on receivable collections commence in October 2025.

During 2023, UScellular borrowed $315 million and repaid $440 million under the agreement.

As of December 31, 2023, the outstanding borrowings under the agreement were $150 million and the unused borrowing capacity was $300 million, subject to sufficient collateral to satisfy the asset borrowing base provisions of the agreement.

In February 2023, UScellular borrowed $25 million under the receivables securitization agreement.

In January 2024, UScellular repaid $50 million under the agreement.

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.

During 2022, the repo subsidiary borrowed $110 million and repaid $50 million under the repurchase agreement.

As of December 31, 2022, the outstanding borrowings under the agreement were $60 million and the unused borrowing capacity was $140 million.

UScellular, through a subsidiary (the repo subsidiary), had 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.

In January 2023, UScellular amended the repurchase agreement to extend the expiration date to January 2024.

The outstanding borrowings will bear interest at a rate of the lender's cost of funds (which has historically tracked closely to SOFR) plus 1.35%.

There were no significant changes to other terms of the repurchase agreement.

Financial Covenants

The revolving credit agreement, term loan agreements, export credit financing agreement and receivables securitization agreement require UScellular to comply with certain affirmative and negative covenants, which include certain financial covenants.

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 is 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.

During 2023, the repo subsidiary repaid $60 million under the repurchase agreement.

As of December 31, 2023, there were no outstanding borrowings under the repurchase agreement and the unused borrowing capacity was $200 million, which was restricted from being borrowed due to covenants within the TDS and UScellular credit agreements that limit secured borrowings on an enterprise-wide basis.

The repurchase agreement expired in January 2024.

Debt Covenants

In March 2023, the agreements were amended to require UScellular to maintain the Consolidated Leverage Ratio as of the end of any fiscal quarter at a level not to exceed the following:

4.25 to 1.00 from January 1, 2023 through March 31, 2024;

4.00 to 1.00 from April 1, 2024 through March 31, 2025;

3.75 to 1.00 from April 1, 2025 and thereafter.

UScellular is also required to maintain the Consolidated Interest Coverage Ratio at a level not lower than 3.00 to 1.00 as of the end of any fiscal quarter.

UScellular believes that it was in compliance as of December 31, 2023 with all such financial covenants.

UScellular believes that it was in compliance as of December 31, 2023, 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.

Other Long-Term Financing

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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, 2022, 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.

Index to MD&A

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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.

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.

See Note 12 — Debt in the Notes to Consolidated Financial Statements for additional information related to the financing agreements.

Credit Ratings

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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.

However, a downgrade in UScellular’s credit rating or TDS' credit rating could adversely affect UScellular's ability to renew the agreements, obtain consents, waivers, or amendments, or obtain access to other credit agreements in the future.

UScellular is rated as a sub-investment grade issuer.

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Moody's (re-affirmed October 2023) Ba1 stable outlook

Standard & Poor's (re-affirmed October 2022) BB stable outlook

Fitch Ratings (re-affirmed February 2022) BB+ stable outlook

Standard & Poor's (issued August 2023) BB watch-developing outlook

Fitch Ratings (re-affirmed March 2023) BB+ stable outlook

Following the announcement on August 4, 2023 related to the review of strategic alternatives for UScellular, Standard & Poor's placed the BB issuer credit rating for UScellular on CreditWatch with developing implications.

Per the release, this action reflects the potential for a higher or lower rating depending on the outcome of the strategic alternatives review.

Further, Standard & Poor's indicated they expect to resolve the CreditWatch placement once they have sufficient information following the conclusion of the strategic review process.

At the same time, Moody's issued a release indicating that UScellular's Ba1 issuer credit rating is not immediately impacted given the uncertainty around potential outcomes.

Fitch Ratings did not issue a public statement.

Capital Requirements

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Significant cash requirements that are not routine or in the normal course of business could arise from time to time.

Index to MD&A

Capital Expenditures

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In 2023, 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;

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

▪ Invest in information technology to support existing and new services and products.

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These expenditures are expected to be used for similar purposes as those listed above.

Index to MD&A

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 2023 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 intends to finance its capital expenditures for 2024 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 available 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).

UScellular may be engaged in negotiations (subject to all applicable regulations) relating to the acquisition, divestiture or exchange of companies, properties, assets, or wireless spectrum licenses (including pursuant to FCC auctions).

In general, UScellular may not disclose such transactions until there is a definitive agreement.

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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.

UScellular may elect to make additional capital contributions and/or advances to these variable interest entities in future periods to fund their operations.

Common Share Repurchase Program

During 2022, UScellular repurchased 1,589,784 Common Shares for $43 million at an average cost per share of $26.78.

There were no share repurchases during 2023.

At December 31, 2023 , the total cumulative amount of UScellular Common Shares authorized to be repurchased is 1,927,000 .

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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.

UScellular makes substantial investments to acquire wireless spectrum licenses and properties and to construct and upgrade wireless telecommunications networks and facilities with a goal of creating long-term value for shareholders.

In recent years, rapid changes in technology and new opportunities have required substantial investments in potentially revenue‑enhancing and cost-saving upgrades to UScellular’s networks.

Revenues from certain of these investments are long-term and in some cases are uncertain.

To meet its cash-flow needs, UScellular may need to delay or reduce certain investments or sell assets.

Refer to Liquidity and Capital Resources within this MD&A for additional information.

Cash flows may fluctuate from quarter to quarter and year to year due to seasonality, timing and other factors.

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2023 Commentary

UScellular’s Cash, cash equivalents and restricted cash decreased $129 million.

Net cash provided by operating activities was $866 million due to net income of $58 million adjusted for non-cash items of $693 million and distributions received from unconsolidated entities of $150 million including $69 million in distributions from the LA Partnership.

This was partially offset by changes in working capital items which decreased net cash by $35 million.

The working capital changes were primarily driven by the timing of vendor payments, partially offset by reduced inventory balances.

Cash flows used for investing activities were $721 million, which included payments for property, plant and equipment of $608 million and payments for wireless spectrum licenses of $130 million.

Cash flows used for financing activities were $274 million, due primarily to repayments of $440 million on the receivables securitization agreement, a $60 million repayment on the EIP receivables repurchase agreement and cash paid for software license agreements of $66 million, partially offset by $315 million borrowed under the receivables securitization agreement.

2022 Commentary

UScellular’s Cash, cash equivalents and restricted cash increased $109 million.

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This was partially offset by changes in working capital items which decreased net cash by $109 million.

The working capital changes were primarily influenced by an increase in customer and agent receivables and increases in inventory purchases, partially offset by a federal income tax refund of $123 million received during the first quarter.

The increase in customer receivables was driven by a high volume of equipment upgrades due to promotional activities and a longer contract term for equipment installment plans.

The working capital changes were primarily influenced by an increase in receivable and inventory balances, partially offset by a federal income tax refund of $123 million received during the first quarter of 2022.

The increase in receivables was driven by a high volume of equipment upgrades due to promotional activities and a longer contract term for equipment installment plans.

Cash flows used for investing activities were $1,179 million, which included payments for property, plant and equipment of $602 million and payments for wireless spectrum licenses of $585 million.

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These were partially offset by $250 million of repayments on the receivables securitization agreement, a $75 million repayment on the revolving credit agreement, a $50 million repayment on the EIP receivables repurchase agreement, the repurchase of $43 million of Common Shares and cash paid for software license agreements of $22 million.

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, which included payments for wireless spectrum licenses of $1,322 million, and payments for property, plant and equipment of $724 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.

Index to MD&A

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Notable balance sheet changes during 2023 were as follows:

Accounts receivable, other

Accounts receivable, other decreased $33 million due primarily to the collection of vendor credits from original equipment manufacturers.

Inventory, net

Inventory, net increased $88 million due primarily to increased inventory levels to support promotions and ensure adequate device supply.

Income taxes receivable

Income taxes receivable decreased $119 million due primarily to a federal income tax refund received related to the 2020 net operating loss carryback enabled by the CARES Act.

Customer deposits and deferred revenues

Customer deposits and deferred revenues increased $48 million due primarily to an increase in contract liabilities resulting from higher promotional activity in the current year.

Inventory, net decreased $62 million due primarily to efforts to reduce inventory on hand which was elevated due to lower than expected sales in the fourth quarter of 2022.

Accounts payable, trade

Accounts payable, trade decreased $103 million due primarily to the timing of vendor invoice payments related to inventory.

Other current liabilities

Other current liabilities increased $231 million due primarily to an increase in the short-term accrual for Auction 107 relocation fees, net borrowings under the EIP receivables repurchase agreement and accruals related to software license agreements.

See Note 7 — Intangible Assets in the Notes to Consolidated Financial Statements for additional information on the Auction 107 accrual.

Long-term debt, net

The following table presents the components of the $459 million increase in Long-term debt, net:

Long-term debt, net

(Dollars in millions)

Balance at December 31, 2021 $ 2,728

Borrowings under Revolving Credit Agreements 75

Borrowings under Term Loan Agreements 500

Borrowings under Export Credit Financing Agreement 150

Borrowings under Receivables Securitization Agreement 75

Repayments under Revolving Credit Agreements (75)

Repayments under Receivables Securitization Agreement (250)

Balance at December 31, 2022 $ 3,187

Treasury shares

Treasury shares increased $30 million due primarily to share repurchases.

Other current liabilities decreased $181 million due primarily to the payment of Auction 107 relocation fees and repayments on the EIP receivables repurchase agreement.

Index to MD&A

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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 considered to be indefinite-lived assets, and therefore are not amortized but 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.

Wireless spectrum licenses are tested for impairment at the level of reporting referred to as a unit of accounting.

For purposes of the 2022 impairment test, UScellular had one unit of accounting as a result of aggregating all developed operating market wireless spectrum licenses (built wireless spectrum licenses) and non-operating market wireless spectrum licenses (unbuilt wireless spectrum licenses), and for the 2021 test, UScellular had eight units of accounting, which consisted of one unit of accounting for built wireless spectrum licenses and seven unbuilt wireless spectrum licenses.

UScellular believes this change in units of accounting assessed for impairment better reflects the integrated use of licenses as part of its national interdependent network.

This change does not impact the results of the impairment assessment for the current or prior years.

A qualitative assessment of the license values was completed as of November 1, 2022 and November 1, 2021.

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.

For purposes of its impairment test, UScellular has one unit of accounting.

UScellular performed a quantitative impairment assessment in 2023 and a qualitative impairment assessment in 2022.

In 2023, a market approach was used to value the wireless spectrum license portfolio.

The wireless spectrum licenses were pooled by band, and a range of values was established using industry benchmarks, FCC auction data, and precedent transactions.

The midpoint of the range was established as the point estimate for the value of each band, and the sum of the band values was used as the point estimate value of UScellular's wireless spectrum license unit of accounting.

Based on this valuation, the fair value of the wireless spectrum licenses exceeded the respective carrying value by 17% and there was no impairment of wireless spectrum licenses.

In 2022, UScellular considered several qualitative factors, including analyst estimates of wireless spectrum license values, recent spectrum auction results, 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 unit of accounting exceeded its carrying value.

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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 5G Fund will be implemented through a two-phase competitive process, using multiround auctions to award support.

The winning bidders will be required to meet certain minimum speed requirements and interim and final deployment milestones.

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The order also provides that over time a growing percentage of the legacy support a carrier receives must be used for 5G deployment.

On September 22, 2023, the FCC adopted a Further Notice of Proposed Rulemaking (FNPRM) to continue implementation of the 5G Fund.

The FCC sought comment on, among other things, the definition of areas eligible for 5G Fund support, adjustment factors and metrics used to identify winning bids, and the potential inclusion of cybersecurity and supply chain management requirements for those receiving 5G Fund support.

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.

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The wireless spectrum licenses from Auction 107 were granted by the FCC in July 2021.

Additionally, UScellular expects to be obligated to pay approximately $185 million in total from 2021 through 2024 related to relocation costs and accelerated relocation incentive payments.

Additionally, UScellular was obligated to pay approximately $179 million in total from 2021 through 2025 related to relocation costs and accelerated relocation incentive payments.

Such additional costs were accrued and capitalized at the time the licenses were granted, and are adjusted as necessary as the estimated obligation changes.

UScellular paid $36 million and $8 million related to the additional costs in October 2021 and September 2022, respectively.

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.

UScellular paid $122 million, $8 million and $36 million related to the additional costs for the years ended December 31, 2023, 2022 and 2021, respectively.

UScellular received full access to the spectrum in the third quarter of 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.

UScellular paid $20 million of this amount in 2021 and the remainder in the first quarter of 2022.

The wireless spectrum licenses from Auction 110 were granted by the FCC on May 4, 2022.

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▪ 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 diverse 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.

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▪ 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.

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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.

▪ Uncertainty in UScellular’s or TDS' 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 or TDS' performance or market conditions, changes in UScellular’s or TDS' credit ratings or other factors could limit or restrict the availability of financing on terms and prices acceptable to UScellular, which has required and could in the future require UScellular to reduce or delay its construction, development or acquisition programs, reduce the amount of wireless spectrum licenses acquired, divest assets or businesses, 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.

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Regulatory, Legal and Governance Risk Factors

▪ TDS and UScellular have initiated a process to explore a range of strategic alternatives for UScellular and there can be no assurance that any strategic alternative will be successfully identified or completed, that any such strategic alternative will result in additional value for UScellular and its shareholders, or that the process will not have an adverse impact on UScellular's business or financial statements.

▪ 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.

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▪ 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.

▪ The possible development of adverse precedent in litigation or conclusions in professional or environmental studies to the effect that potentially harmful emissions from devices or network equipment, including but not limited to radio frequencies emitted by wireless signals, may cause harmful health or environmental consequences, including cancer, tumors or otherwise harmful impacts, 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.

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Management uses Adjusted EBITDA and Adjusted OIBDA as measurements of profitability, and therefore reconciliations to applicable GAAP income measures are deemed appropriate.

Management believes Adjusted EBITDA and Adjusted OIBDA are useful measures of UScellular’s operating results before significant recurring non-cash charges, 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.

Management believes Adjusted EBITDA and Adjusted OIBDA are useful measures of UScellular’s operating results before significant recurring non-cash charges, nonrecurring expenses, gains and losses, and other items as presented below as they provide additional relevant and useful information to investors and other users of UScellular’s financial data in evaluating the effectiveness of its operations and underlying business trends in a manner that is consistent with management’s evaluation of business performance.

Adjusted EBITDA shows adjusted earnings before interest, taxes, depreciation, amortization and accretion, gains and losses, and expenses related to the strategic alternatives review of UScellular, while Adjusted OIBDA reduces this measure further to exclude Equity in earnings of unconsolidated entities and Interest and dividend income in order to more effectively show the performance of operating activities excluding investment activities.

The following tables reconcile EBITDA, Adjusted EBITDA and Adjusted OIBDA to the corresponding GAAP measures, Net income and Operating income.

Index to MD&A

(Dollars in millions)

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Add back or deduct:

Expenses related to strategic alternatives review 8 —

Loss on impairment of licenses — 3

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(Gain) loss on sale of business and other exit costs, net

(Gain) loss on license sales and exchanges, net

Adjusted EBITDA (Non-GAAP) 986 956

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Depreciation, amortization and accretion

Expenses related to strategic alternatives review 8 —

Loss on impairment of licenses — 3

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(Gain) loss on sale of business and other exit costs, net

(Gain) loss on license sales and exchanges, net

Operating income (GAAP) $ 139 $ 69

Index to MD&A

Free Cash Flow

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis