Business context and reporting period
The supplied filing is United States Cellular Corporation’s unaudited Form 10-Q for the quarter ended September 30, 2019, filed October 31, 2019. This does not match the request metadata naming Array Digital Infrastructure, Inc.; the financial information below is for U.S. Cellular. U.S. Cellular, an 82%-owned subsidiary of Telephone and Data Systems, provides wireless services and reported approximately 5.0 million connections across 21 states.
Financial and operating highlights
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $1.031 billion | $1.001 billion | $2.970 billion | $2.916 billion |
| Operating income | $20 million | $34 million | $115 million | $155 million |
| Net income | $24 million | $37 million | $115 million | $143 million |
| Net income attributable to U.S. Cellular shareholders | $23 million | $36 million | $109 million | $129 million |
| Diluted EPS | $0.27 | $0.41 | $1.24 | $1.49 |
| Adjusted EBITDA (non-GAAP) | $256 million | $243 million | $793 million | $750 million |
| Adjusted OIBDA (non-GAAP) | $208 million | $197 million | $651 million | $620 million |
Revenue rose 3% in Q3 and 2% year to date, while operating income fell 40% and 26%, respectively. Operating margin was approximately 1.9% in Q3 versus 3.4% a year earlier, and 3.9% year to date versus 5.3%. Higher depreciation and amortization, selling and administrative costs, and equipment costs weighed on earnings. Adjusted EBITDA increased despite lower GAAP operating income.
Service revenue was $774 million in Q3 (+2%) and $2.272 billion year to date (+2%). Equipment sales revenue increased 6% in Q3 to $257 million. Postpaid ARPU increased 2% to $46.16 in Q3 and to $45.82 year to date. At quarter-end, retail connections were 4.905 million, down from 4.994 million a year earlier. Q3 postpaid net losses were 19,000; total postpaid churn rose to 1.38% from 1.29%.
For the first nine months, operating cash flow was $687 million versus $600 million. Cash paid for property, plant and equipment was $439 million versus $277 million, resulting in reported free cash flow (non-GAAP) of $248 million versus $323 million. Capital expenditures, a broader measure including accruals and capitalized interest, were $467 million versus $274 million. Cash and cash equivalents were $570 million at September 30, 2019, compared with $580 million at year-end 2018. Long-term debt, net, was $1.592 billion; no cash borrowings were outstanding under the revolving credit or receivables securitization agreements. Unused capacity was $298 million under the revolver and $200 million under the securitization facility, subject to collateral availability.
Material changes, outlook and risks
- Management expected full-year 2019 capital expenditures of $625 million to $725 million, primarily for network coverage, speed and capacity, initial 5G deployment, and information technology. Commercial 5G service was expected in selected markets in 2020; VoLTE was available to 67% of subscribers, with further deployments expected in 2020 and 2021.
- The company paid substantially all of the $256 million purchase price for 690 provisional winning licenses in the FCC’s 28 GHz and 24 GHz auctions. The 28 GHz licenses were granted in October 2019; the 24 GHz licenses were expected later in Q4. U.S. Cellular applied to participate in another spectrum auction beginning in December 2019.
- In October 2019, after quarter-end, U.S. Cellular prepaid $100 million of senior term loan principal. The filing says the 2019 debt amendment reduced the loan’s interest rate without changing its maturity.
- ASC 842 adoption added $897 million in operating lease right-of-use assets and $968 million in operating lease liabilities at September 30, 2019. These accounting additions materially increased reported assets and liabilities, without a comparable restatement of prior periods.
- Q3 service revenue included a $5 million out-of-period tower-lease revenue adjustment attributable to 2009 through Q2 2019. Management said it was not material to any affected period. A new Amdocs agreement, effective October 1, commits the company to $241 million over five years.
- Management cited aggressive industry competition as a cause of lower gross additions and higher churn. Risks also include sub-investment-grade credit ratings, significant indebtedness, dependence on spectrum access and regulatory support, and potentially reduced liquidity if the LA Partnership cuts distributions or financing becomes less available.
- The Department of Justice is investigating U.S. Cellular and TDS under the False Claims Act concerning participation in certain FCC spectrum auctions and bid credits. The companies said they believe the arrangements complied with applicable requirements and are cooperating; the outcome is uncertain.
- U.S. Cellular repurchased 590,300 common shares for $21 million during the nine-month period. Management reported disclosure controls were effective and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for U.S. Cellular Corporation, not Array Digital Infrastructure, Inc.
- Review cash capital spending versus the broader reported capital-expenditure measure, and the projected 2019 spending range, for implications to free cash flow.
- Assess whether subscriber losses and higher churn persist, and whether higher ARPU can offset connection declines and competitive pressure.
- Track spectrum-license grant status, payments and future auction participation, along with planned 5G investment and launch timing.
- Evaluate debt, lease obligations, available borrowing capacity and the potential effects of the DOJ inquiry and other contingencies.