Filing identity and period
The supplied filing is United States Cellular Corporation’s unaudited Form 10-Q for the quarter ended June 30, 2015, not a filing identified in the request metadata as ARRAY DIGITAL INFRASTRUCTURE, INC. Figures below are for U.S. Cellular; investors should confirm the intended issuer.
U.S. Cellular, an 84%-owned subsidiary of Telephone and Data Systems, operated wireless markets in 23 states and served approximately 4.8 million customers.
Financial results and liquidity
Amounts are in millions of dollars except per-share data and operating statistics.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total operating revenue | $975.7 | $957.8 | $1,940.9 | $1,883.6 |
| Operating income (loss) | $8.5 | $(50.3) | $258.8 | $(42.5) |
| Net income (loss) attributable to U.S. Cellular shareholders | $19.4 | $(18.8) | $179.4 | $0.7 |
| Diluted EPS | $0.23 | $(0.22) | $2.11 | $0.01 |
Q2 operating margin was approximately 0.9% versus negative 5.3% a year earlier; six-month margin was approximately 13.3% versus negative 2.3%. Six-month 2015 operating income included substantial gains from asset and license transactions, so reported margins and earnings are not solely reflective of ongoing operations.
- Revenue mix: Q2 service revenue declined 2% to $824.4 million, while equipment sales rose 32% to $151.3 million. For the first half, service revenue fell 3% to $1,652.6 million and equipment sales increased 55% to $288.3 million.
- Cash flow: First-half operating cash flow was $424.0 million, compared with $212.9 million; investing cash outflow was $256.2 million, compared with $142.9 million. Adjusted free cash flow, a company-defined non-GAAP measure, was $187.9 million versus negative $15.4 million.
- Capital spending: First-half capital expenditures were $200.1 million. Cash additions to property, plant and equipment were $259.2 million.
- Liquidity and debt: June 30 cash was $362.3 million. Long-term debt was $1,152.0 million, with $0.1 million current. The company reported $282.5 million of unused revolving capacity and $225 million of unused term-loan capacity at June 30. It borrowed the full $225 million term loan in July 2015.
Material changes versus the prior period
- First-half total revenue increased 3%, but service revenue declined, reflecting lower retail ARPU and inbound roaming revenue. Equipment sales growth was driven partly by installment-plan sales, which contributed $136.9 million of first-half equipment revenue versus $33.6 million in 2014.
- Retail customer net additions improved to 46,000 from a loss of 110,000; postpaid net additions were 26,000 versus a loss of 119,000. Postpaid churn improved to 1.4% from 2.0%, and prepaid churn to 5.5% from 6.7%.
- First-half operating income benefited from $122.9 million of net license-sale and exchange gains and $113.2 million of net business-sale and exit-cost gains. The comparable 2014 gains were $91.4 million and $17.4 million, respectively. The 2015 figures include a $125.2 million gain on a March license exchange and a $107.7 million gain on the January tower sale.
- System operations expense increased 5% to $387.0 million, primarily due to increased data roaming costs. Selling, general and administrative expense decreased 8% to $731.9 million, and depreciation, amortization and accretion decreased 6% to $297.7 million.
Outlook, commentary, and risks
- Management expected 2015 capital expenditures of approximately $600 million, principally for network coverage and capacity, 4G LTE deployment, retail stores, and systems.
- Management anticipated continuing pressure on retail service revenue from competition and plan pricing, and expected system operations costs to rise with network and data usage, partly offset by migration of traffic to 4G LTE.
- In March 2015, Advantage Spectrum, a consolidated partnership, paid for 124 provisional AWS-3 spectrum licenses with an aggregate winning bid of $338.3 million after a 25% designated-entity discount. FCC grant was expected in the second half of 2015. U.S. Cellular provided $280.6 million in loans and capital contributions to the relevant entities during the first half; future funding needs could require cash or additional borrowing.
- The company said a 5.5% investment in the LA Partnership would make no cash distribution in 2015; it might receive a distribution in the latter half of 2016, but the amount was uncertain. It may still owe taxes on its share of partnership income.
- Risks include competitive pricing and customer retention, equipment-installment-plan credit and trade-in obligations, lower roaming revenue, spectrum acquisition and funding needs, regulatory uncertainty, and execution or vendor risks affecting the billing and operational support system. New FCC net-neutrality rules took effect in June 2015 and were subject to litigation; the company could not predict the outcome or business impact.
- The company recorded out-of-period equipment-installment-plan adjustments attributable to 2014, reducing first-half 2015 equipment sales revenue by $6.2 million and pretax income by $5.8 million. Management stated these adjustments were not material to the prior periods or current-period results.
Important facts for investors to verify
- Confirm that U.S. Cellular, rather than ARRAY DIGITAL INFRASTRUCTURE, INC., is the intended issuer for this summary.
- Separate recurring operating performance from the significant tower-sale and license-exchange gains when assessing earnings and margins.
- Review the July 2015 $225 million term-loan draw, repayment schedule, interest terms, and resulting liquidity after quarter-end.
- Monitor installment-plan receivables and the related $80.2 million trade-in guarantee liability, as well as the effect of plan adoption on service revenue and equipment economics.
- Assess the timing and funding of AWS-3 license development, regulatory outcomes, and the expected $600 million 2015 capital expenditure program.