Edgar Filing: UNITED STATES CELLULAR CORP

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-9712

UNITED STATES CELLULAR CORPORATION

(Exact name of Registrant as specified in its charter)

Delaware

62-1147325

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

8410 West Bryn Mawr, Chicago, Illinois 60631

(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code: (773) 399-8900

Indicate by check mark

Yes

• whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

• whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

• whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

• whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class

Outstanding at June 30, 2013

Common Shares, $1 par value

50,871,875 Shares

Series A Common Shares, $1 par value

33,005,877 Shares

United States Cellular Corporation

Quarterly Report on Form 10-Q
For the Quarterly Period Ended June 30, 2013

Index

				Page No.
Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited)		1

		Consolidated Statement of Operations		1
			Three and Six Months Ended June 30, 2013 and 2012

		Consolidated Statement of Cash Flows		2
			Six Months Ended June 30, 2013 and 2012

		Consolidated Balance Sheet		3
			June 30, 2013 and December 31, 2012

		Consolidated Statement of Changes in Equity		5
			Six Months Ended June 30, 2013 and 2012

		Notes to Consolidated Financial Statements		7

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		18

		Overview		18
		2013 Estimates		20
		Results of Operations		22
		Recent Accounting Pronouncements		30
		Financial Resources		31
		Liquidity and Capital Resources		33
		Application of Critical Accounting Policies and Estimates		35
		Safe Harbor Cautionary Statement		36

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		39

	Item 4.	Controls and Procedures		40

Part II.	Other Information			41

	Item 1.	Legal Proceedings		41

	Item 1A.	Risk Factors		41

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		41

	Item 5.	Other Information		42

	Item 6.	Exhibits		43

Signatures

Part I. Financial Information
Item 1. Financial Statements

United States Cellular Corporation

Consolidated Statement of Operations (Unaudited)

			Three Months Ended				Six Months Ended
			June 30,				June 30,
(Dollars and shares in thousands, except per share amounts)			2013		2012		2013		2012
Operating revenues
	Service		$	910,966	$	1,029,742	$	1,907,315	$	2,053,562
	Equipment sales			84,164		74,658		169,561		142,959
		Total operating revenues		995,130		1,104,400		2,076,876		2,196,521

Operating expenses
	System operations (excluding Depreciation, amortization and accretion reported below)			192,267		243,227		408,566		476,391
	Cost of equipment sold			217,070		191,700		458,761		378,736
	Selling, general and administrative (including charges from affiliates of $25.0 million and $25.9 million, respectively, for the three months, and $48.5 million and $51.9 million, respectively for the six months)			404,127		435,053		824,207		877,297
	Depreciation, amortization and accretion			202,580		147,555		392,425		294,240
	Loss on asset disposals, net			9,018		2,702		14,452		4,705
	(Gain) loss on sale of business and other exit costs, net			(249,024)		-		(242,093)		(4,213)
		Total operating expenses		776,038		1,020,237		1,856,318		2,027,156

Operating income				219,092		84,163		220,558		169,365

Investment and other income (expense)
	Equity in earnings of unconsolidated entities			35,602		25,154		62,437		46,768
	Interest and dividend income			969		845		1,872		1,888
	Gain (loss) on investments			18,527		(3,728)		18,527		(3,728)
	Interest expense			(10,154)		(12,360)		(21,064)		(25,771)
	Other, net			321		(229)		106		(27)
		Total investment and other income (expense)		45,265		9,682		61,878		19,130

Income before income taxes				264,357		93,845		282,436		188,495
	Income tax expense			120,682		34,597		128,051		60,235

Net income				143,675		59,248		154,385		128,260
	Less: Net income attributable to noncontrolling interests, net of tax			(284)		(6,563)		(6,080)		(13,083)
Net income attributable to U.S. Cellular shareholders			$	143,391	$	52,685	$	148,305	$	115,177

Basic weighted average shares outstanding				83,845		84,707		83,842		84,638
Basic earnings per share attributable to U.S. Cellular shareholders			$	1.71	$	0.62	$	1.77	$	1.36

Diluted weighted average shares outstanding				84,661		85,236		84,655		85,248
Diluted earnings per share attributable to U.S. Cellular shareholders			$	1.69	$	0.62	$	1.75	$	1.35

The accompanying notes are an integral part of these consolidated financial statements.

United States Cellular Corporation

Consolidated Statement of Cash Flows (Unaudited)
			Six Months Ended
			June 30,
(Dollars in thousands)			2013		2012
Cash flows from operating activities
	Net income		$	154,385	$	128,260
	Add (deduct) adjustments to reconcile net income to net cash flows from operating activities
		Depreciation, amortization and accretion		392,425		294,240
		Bad debts expense		32,715		30,659
		Stock-based compensation expense		6,530		11,057
		Deferred income taxes, net		(26,527)		30,479
		Equity in earnings of unconsolidated entities		(62,437)		(46,768)
		Distributions from unconsolidated entities		45,370		6,743
		Loss on asset disposals, net		14,452		4,705
		(Gain) loss on sale of business and other exit costs, net		(242,093)		(4,213)
		(Gain) loss on investments		(18,527)		3,728
		Noncash interest expense		526		902
		Other operating activities		489		321
	Changes in assets and liabilities from operations
		Accounts receivable		(1,544)		(13,383)
		Inventory		(7,644)		(56,039)
		Accounts payable - trade		67,457		(20,987)
		Accounts payable - affiliate		4,734		3,129
		Customer deposits and deferred revenues		8,663		21,131
		Accrued taxes		147,566		85,327
		Accrued interest		176		149
		Other assets and liabilities		(68,131)		(67,203)
				448,585		412,237

Cash flows from investing activities
	Cash used for additions to property, plant and equipment			(323,157)		(430,225)
	Cash paid for acquisitions and licenses			(14,150)		(12,647)
	Cash received from divestitures			480,000		49,786
	Cash paid for investments			-		(45,000)
	Cash received for investments			-		45,000
	Other investing activities			3,993		(3,097)
				146,686		(396,183)

Cash flows from financing activities
	Repayment of long-term debt			(71)		(45)
	Common shares reissued for benefit plans, net of tax payments			(2,206)		(2,465)
	Common shares repurchased			(18,425)		-
	Dividends paid			(482,270)		-
	Distributions to noncontrolling interests			(3,292)		(643)
	Other financing activities			56		568
				(506,208)		(2,585)

Net increase in cash and cash equivalents				89,063		13,469

Cash and cash equivalents
	Beginning of period			378,358		424,155
	End of period		$	467,421	$	437,624

The accompanying notes are an integral part of these consolidated financial statements.

United States Cellular Corporation

Consolidated Balance Sheet — Assets (Unaudited)
(Dollars in thousands)			June 30, 2013		December 31, 2012
Current assets
	Cash and cash equivalents		$	467,421	$	378,358
	Short-term investments			110,352		100,676
	Accounts receivable
		Customers and agents, less allowances of $24,984 and $24,290, respectively		289,281		349,424
		Roaming		34,460		31,782
		Affiliated		21		375
		Other, less allowances of $1,588 and $2,612, respectively		45,064		63,639
	Inventory			163,433		155,886
	Income taxes receivable			-		1,612
	Prepaid expenses			68,063		62,560
	Net deferred income tax asset			48,818		35,419
	Other current assets			18,845		16,745
				1,245,758		1,196,476

Assets held for sale				78,389		216,763

Investments
	Licenses			1,396,179		1,456,794
	Goodwill			387,360		421,743
	Customer lists, net of accumulated amortization of $50,224 and $96,809, respectively			33		102
	Investments in unconsolidated entities			276,363		144,531
	Long-term investments			40,120		50,305
				2,100,055		2,073,475
Property, plant and equipment
	In service and under construction			7,380,123		7,478,428
	Less: Accumulated depreciation			4,556,614		4,455,840
				2,823,509		3,022,588

Other assets and deferred charges				82,067		78,148

Total assets			$	6,329,778	$	6,587,450

The accompanying notes are an integral part of these consolidated financial statements.

United States Cellular Corporation

Consolidated Balance Sheet — Liabilities and Equity (Unaudited)
(Dollars and shares in thousands)					June 30, 2013		December 31, 2012
Current liabilities
	Current portion of long-term debt				$	100	$	92
	Accounts payable
		Affiliated				15,459		10,725
		Trade				341,581		310,936
	Customer deposits and deferred revenues					198,799		192,113
	Accrued taxes					183,312		35,834
	Accrued compensation					62,140		90,418
	Other current liabilities					100,500		114,881
						901,891		754,999

Liabilities held for sale						559		19,594

Deferred liabilities and credits
	Net deferred income tax liability					835,808		849,818
	Other deferred liabilities and credits					306,262		288,441

Long-term debt						879,121		878,858

Commitments and contingencies						-		-

Noncontrolling interests with redemption features						512		493

Equity
	U.S. Cellular shareholders' equity
		Series A Common and Common Shares
			Authorized 190,000 shares (50,000 Series A Common and 140,000 Common Shares)
			Issued 88,074 shares (33,006 Series A Common and 55,068 Common Shares)
			Outstanding 83,878 shares (33,006 Series A Common and 50,872 Common Shares) and 84,168 shares (33,006 Series A Common and 51,162 Common Shares), respectively
			Par Value ($1 per share) ($33,006 Series A Common and $55,068 Common Shares)			88,074		88,074
		Additional paid-in capital				1,418,428		1,412,453
		Treasury shares, at cost, 4,196 and 3,906 Common Shares, respectively				(177,173)		(165,724)
		Retained earnings				2,055,905		2,399,052
			Total U.S. Cellular shareholders' equity			3,385,234		3,733,855

	Noncontrolling interests					20,391		61,392

				Total equity		3,405,625		3,795,247

Total liabilities and equity					$	6,329,778	$	6,587,450

The accompanying notes are an integral part of these consolidated financial statements.

United States Cellular Corporation

Consolidated Statement of Changes in Equity (Unaudited)

	U.S. Cellular Shareholders
(Dollars in thousands)	Series A Common and Common Shares		Additional Paid-In Capital		Treasury Shares		Retained Earnings		Total U.S. Cellular Shareholders' Equity		Noncontrolling Interests		Total Equity
Balance, December 31, 2012	$	88,074	$	1,412,453	$	(165,724)	$	2,399,052	$	3,733,855	$	61,392	$	3,795,247
Add (Deduct)
Net income attributable to U.S. Cellular shareholders		-		-		-		148,305		148,305		-		148,305
Net income attributable to noncontrolling interests classified as equity		-		-		-		-		-		6,061		6,061
Common and Series A Common Shares dividends		-		-		-		(482,270)		(482,270)		-		(482,270)
Repurchase of Common Shares		-		-		(18,425)		-		(18,425)		-		(18,425)
Incentive and compensation plans		-		222		6,976		(9,182)		(1,984)		-		(1,984)
Stock-based compensation awards		-		6,530		-		-		6,530		-		6,530
Tax windfall (shortfall) from stock awards		-		(746)		-		-		(746)		-		(746)
Distributions to noncontrolling interests		-		-		-		-		-		(3,292)		(3,292)
Adjust investment in subsidiaries for noncontrolling interest purchases		-		(31)		-		-		(31)		-		(31)
Deconsolidation of partnerships		-		-		-		-		-		(43,770)		(43,770)
Balance, June 30, 2013	$	88,074	$	1,418,428	$	(177,173)	$	2,055,905	$	3,385,234	$	20,391	$	3,405,625

The accompanying notes are an integral part of these consolidated financial statements.

United States Cellular Corporation

Consolidated Statement of Changes in Equity (Unaudited)

	U.S. Cellular Shareholders
(Dollars in thousands)	Series A Common and Common Shares		Additional Paid-In Capital		Treasury Shares		Retained Earnings		Total U.S. Cellular Shareholders' Equity		Noncontrolling Interests		Total Equity
Balance, December 31, 2011	$	88,074	$	1,387,341	$	(152,817)	$	2,297,363	$	3,619,961	$	55,956	$	3,675,917
Add (Deduct)
Net income attributable to U.S. Cellular shareholders		-		-		-		115,177		115,177		-		115,177
Net income attributable to noncontrolling interests classified as equity		-		-		-		-		-		13,038		13,038
Incentive and compensation plans		-		165		6,760		(9,228)		(2,303)		-		(2,303)
Stock-based compensation awards		-		10,960		-		-		10,960		-		10,960
Tax windfall (shortfall) from stock awards		-		544		-		-		544		-		544
Distributions to noncontrolling interests		-		-		-		-		-		(643)		(643)
Balance, June 30, 2012	$	88,074	$	1,399,010	$	(146,057)	$	2,403,312	$	3,744,339	$	68,351	$	3,812,690

The accompanying notes are an integral part of these consolidated financial statements.

United States Cellular Corporation

Notes to Consolidated Financial Statements

1. Basis of Presentation

United States Cellular Corporation (“U.S. Cellular”), a Delaware Corporation, is an 84%-owned subsidiary of Telephone and Data Systems, Inc. (“TDS”).

The accounting policies of U.S. Cellular conform to accounting principles generally accepted in the United States of America (“GAAP”) as set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The consolidated financial statements include the accounts of U.S. Cellular, its majority-owned subsidiaries, general partnerships in which U.S. Cellular has a majority partnership interest and certain entities in which U.S. Cellular has a variable interest that require consolidation under GAAP. All material intercompany accounts and transactions have been eliminated.

The consolidated financial statements included herein have been prepared by U.S. Cellular, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, U.S. Cellular believes that the disclosures included herein are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in U.S. Cellular’s Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2012.

In April 2013, U.S. Cellular deconsolidated its investments in the St. Lawrence Seaway RSA Cellular Partnership (“NY1”) and New York RSA 2 Cellular Partnership (“NY2”) and thereafter reported them as equity method investments in its consolidated financial statements (“NY1 & NY2 Deconsolidation”). See Note 7 — Investments in Unconsolidated Entities for additional information.

The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items, unless otherwise disclosed) necessary for a fair statement of the financial position as of June 30, 2013 and December 31, 2012, and the results of operations, cash flows and changes in equity for the three and six months ended June 30, 2013 and 2012. The Consolidated Statement of Comprehensive Income was not included because comprehensive income for the three and six months ended June 30, 2013 and 2012 equaled net income. These results are not necessarily indicative of the results to be expected for the full year.

Recent Accounting Pronouncements

On July 18, 2013, the FASB issued Accounting Standards Update 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryfoward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 addresses the presentation of an unrecognized tax benefit when a net operating loss carryforward or tax credit carryforward exists. In such event, an unrecognized tax benefit, or portion of an unrecognized tax benefit, would be presented in the Consolidated Balance Sheet as a reduction to deferred tax assets unless the net operating loss carryforward or tax credit carryforward at the reporting date is not available under the tax law of the applicable jurisdiction. U.S. Cellular is required to adopt the provisions of ASU 2013-11 effective January 1, 2014. The adoption of ASU 2013-11 is not expected to have a significant impact on U.S. Cellular’s financial position or results of operations.

Agent Liabilities

U.S. Cellular has relationships with agents, which are independent businesses that obtain customers for U.S. Cellular. At June 30, 2013 and December 31, 2012, U.S. Cellular had accrued $66.7 million and $88.2 million, respectively, for amounts due to agents, including rebates and commissions. These amounts are included in Other current liabilities in the Consolidated Balance Sheet.

Amounts Collected from Customers and Remitted to Governmental Authorities

If a tax is assessed upon the customer and U.S. Cellular merely acts as an agent in collecting the tax on behalf of the imposing governmental authority, then amounts collected from customers and remitted to governmental authorities are recorded on a net basis within a tax liability account in the Consolidated Balance Sheet. If the tax is assessed upon U.S. Cellular, then amounts collected from customers as recovery of the tax are recorded in Service revenues and amounts remitted to governmental authorities are recorded in Selling, general and administrative expenses in the Consolidated Statement of Operations. The amounts recorded gross in revenues that are billed to customers and remitted to governmental authorities totaled $28.1 million and $60.2 million for the three and six months ended June 30, 2013, respectively, and $34.7 million and $69.9 for the three and six months ended June 30, 2012, respectively.

2. Fair Value Measurements

As of June 30, 2013 and December 31, 2012, U.S. Cellular did not have any financial assets or liabilities that were required to be recorded at fair value in its Consolidated Balance Sheet in accordance with GAAP. However, U.S. Cellular has applied the provisions of fair value accounting for purposes of computing the fair value of financial instruments for disclosure purposes as displayed below.

		Level within the Fair Value Hierarchy	June 30, 2013				December 31, 2012
		Level within the Fair Value Hierarchy	Book Value			Fair Value	Book Value		Fair Value
(Dollars in thousands)
Cash and cash equivalents		1	$	467,421	$	467,421	$	378,358	$	378,358
Short-term investments
	U.S. Treasury Notes	1		110,352		110,352		100,676		100,676
Long-term investments
	U.S. Treasury Notes	1		40,120		40,141		50,305		50,339
Long-term debt
	6.95% Senior Notes	1		342,000		345,967		342,000		376,610
	6.7% Senior Notes	2		532,319		529,204		532,194		582,744

Short-term investments and Long-term investments are both designated as held-to-maturity investments and recorded at amortized cost in the Consolidated Balance Sheet. Long-term investment maturities range between 17 and 18 months at June 30, 2013. Long-term debt excludes capital lease obligations and the current portion of Long-term debt.

The fair values of Cash and cash equivalents and Short-term investments approximate their book values due to the short-term nature of these financial instruments. The fair value of Long-term debt was estimated using market prices for the 6.95% Senior Notes, and discounted cash flow analysis using an estimated yield to maturity of 6.95% for the 6.7% Senior Notes at June 30, 2013.

As of June 30, 2013 and December 31, 2012, U.S. Cellular did not have nonfinancial assets or liabilities that required the application of fair value accounting for purposes of reporting such amounts in the Consolidated Balance Sheet.

3. Income Taxes

U.S. Cellular is included in a consolidated federal income tax return and in certain state income tax returns with other members of the TDS consolidated group. For financial statement purposes, U.S. Cellular and its subsidiaries compute their income tax expense as if they comprised a separate affiliated group and were not included in the TDS consolidated group.

U.S. Cellular’s overall effective tax rate on Income before income taxes for the three and six months ended June 30, 2013 was 45.7% and 45.3%, respectively, and for the three and six months ended June 30, 2012 was 36.9% and 32.0%, respectively.

The effective tax rate for the three months ended June 30, 2013 was higher than the rate for the three months ended June 30, 2012 primarily as a result of the deferred tax expense related to the NY1 & NY2 Deconsolidation in April 2013.

The effective tax rate for the six months ended June 30, 2013 was higher than the rate for the six months ended June 30, 2012 primarily as a result of the deferred tax expense related to the NY1 & NY2 Deconsolidation in April 2013, and tax benefits related to the expiration of the statute of limitations for certain tax years and the adjustment of deferred tax balances related to certain partnership investments in 2012.

U.S. Cellular incurred a federal net operating loss in 2011 largely attributable to 100% bonus depreciation applicable to qualified capital expenditures. U.S. Cellular carried back this federal net operating loss to prior tax years and received a $66.8 million federal income tax refund in 2012 for carrybacks to 2009 and 2010 tax years. Of this amount, $58.2 million was received in the six months ended June 30, 2012.

The Divestiture Transaction (as described in Note 5 — Acquisitions, Divestitures and Exchanges) closed on May 16, 2013, and resulted in a current tax liability of $128.9 million which had not been paid as of June 30, 2013. This amount is included in Accrued taxes in the June 30, 2013 Consolidated Balance Sheet.

4. Earnings Per Share

Basic earnings per share attributable to U.S. Cellular shareholders is computed by dividing Net income attributable to U.S. Cellular shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share attributable to U.S. Cellular shareholders is computed by dividing Net income attributable to U.S. Cellular shareholders by the weighted average number of common shares outstanding during the period adjusted to include the effects of potentially dilutive securities. Potentially dilutive securities primarily include incremental shares issuable upon exercise of outstanding stock options and the vesting of restricted stock units.

The amounts used in computing earnings per common share and the effects of potentially dilutive securities on the weighted average number of common shares were as follows:



		Three Months Ended June 30,				Six Months Ended June 30,
		2013		2012		2013		2012
(Dollars and shares in thousands, except per share amounts)
Net income attributable to U.S. Cellular shareholders		$	143,391	$	52,685	$	148,305	$	115,177

Weighted average number of shares used in basic earnings per share			83,845		84,707		83,842		84,638
Effects of dilutive securities:
	Stock options		226		163		201		202
	Restricted stock units		590		366		612		408
Weighted average number of shares used in diluted earnings per share			84,661		85,236		84,655		85,248

Basic earnings per share attributable to U.S. Cellular shareholders		$	1.71	$	0.62	$	1.77	$	1.36

Diluted earnings per share attributable to U.S. Cellular shareholders		$	1.69	$	0.62	$	1.75	$	1.35

Certain Common Shares issuable upon the exercise of stock options or vesting of restricted stock units were not included in average diluted shares outstanding for the calculation of Diluted earnings per share attributable to U.S. Cellular shareholders because their effects were antidilutive. The number of such Common Shares excluded, if any, is shown in the table below.


	Three Months Ended June 30,		Six Months Ended June 30,
	2013	2012	2013	2012
(Shares in thousands)
Stock options	2,437	2,498	2,041	2,005

Restricted stock units	208	223	221	242

On June 25, 2013, U.S. Cellular paid a special cash dividend of $5.75 per share, for an aggregate amount of $482.3 million, to all holders of U.S. Cellular Common Shares and Series A Common Shares. Outstanding U.S. Cellular stock options and restricted stock unit awards were equitably adjusted for the special cash dividend. The impact of such adjustments on the earnings per share calculation was reflected in the three and six months ended June 30, 2012.

5. Acquisitions, Divestitures and Exchanges

U.S. Cellular 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 investment. As part of this strategy, U.S. Cellular reviews attractive opportunities to acquire additional operating markets and wireless spectrum. In addition, U.S. Cellular may seek to divest outright or include in exchanges for other wireless interests those interests that are not strategic to its long-term success.

Acquisitions did not have a material impact on U.S. Cellular’s consolidated financial statements for the periods presented and pro forma results, assuming acquisitions had occurred at the beginning of each period presented, would not be materially different from the results reported.

Divestiture Transaction

On November 6, 2012, U.S. Cellular entered into a Purchase and Sale Agreement with subsidiaries of Sprint Nextel Corporation (“Sprint”). Pursuant to the Purchase and Sale Agreement, on May 16, 2013, U.S. Cellular transferred customers and certain PCS license spectrum to Sprint in U.S. Cellular's Chicago, central Illinois, St. Louis and certain Indiana/Michigan/Ohio markets (“Divestiture Markets”) in consideration for $480 million in cash. The Purchase and Sale Agreement also contemplated certain other agreements, together with the Purchase and Sale Agreement collectively referred to as the “Divestiture Transaction.”

U.S. Cellular has retained other assets and liabilities related to the Divestiture Markets, including network assets, retail stores and related equipment, and other buildings and facilities. The transaction does not affect spectrum licenses held by U.S. Cellular or variable interest entities (“VIEs”) that are not currently used in the operations of the Divestiture Markets. Pursuant to the Purchase and Sale Agreement, U.S. Cellular and Sprint also entered into certain other agreements, including customer and network transition services agreements, which require U.S. Cellular to provide customer, billing and network services to Sprint for a period of up to 24 months after the May 16, 2013 closing date. Sprint will reimburse U.S. Cellular for providing such services at an amount equal to U.S. Cellular's cost, including applicable overhead allocations. In addition, these agreements require Sprint to reimburse U.S. Cellular up to $200 million (the “Sprint Cost Reimbursement”) for certain network decommissioning costs, network site lease rent and termination costs, network access termination costs, and employee termination benefits for specified engineering employees. It is estimated that up to $160 million of the Sprint Cost Reimbursement will be recorded in (Gain) loss on sale of business and other exit costs, net and up to $40 million of the Sprint Cost Reimbursement will be recorded in System operations in the Consolidated Statement of Operations.

Financial impacts of the Divestiture Transaction are classified in the Consolidated Statement of Operations within Operating income. The table below describes the amounts U.S. Cellular has recognized and expects to recognize in the Consolidated Statement of Operations between the date the Purchase and Sale Agreement was signed and the end of the transition services period.

(Dollars in thousands)

Expected Period of Recognition

Projected Range

Cumulative Amount Recognized as of June 30, 2013

Actual Amount Recognized Six Months Ended June 30, 2013

Actual Amount Recognized Three Months Ended June 30, 2013

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