Filing summary: United States Cellular Corporation
Identity note: The supplied filing is U.S. Cellular Corporation’s Form 10-Q, not a filing identifying Array Digital Infrastructure, Inc. It covers the quarter ended September 30, 2014; the financial statements are unaudited.
Business context and reporting period
U.S. Cellular, an approximately 84%-owned subsidiary of Telephone and Data Systems, provides wireless service in 23 states and reported about 4.7 million customers. The filing presents results for the three and nine months ended September 30, 2014, compared with 2013. Changes in the customer base and reported results reflect the 2013 Sprint divestiture and deconsolidation of the NY1 and NY2 partnerships.
Financial and operating metrics
- Third quarter: Revenue was $1.000 billion, up 6.5% from $939.2 million. Service revenue was $851.1 million, down 1.3%; equipment sales were $149.4 million, up 94%. Operating loss was $51.4 million versus $43.2 million; net loss attributable to U.S. Cellular shareholders was $22.2 million, or $0.26 per share, compared with a $9.9 million loss, or $0.12 per share.
- First nine months: Revenue was $2.884 billion, down 4.4%. Operating loss was $93.8 million versus operating income of $177.4 million in 2013. Net loss attributable to shareholders was $21.5 million, or $0.25 per share, versus net income of $138.4 million, or $1.65 per share.
- Margins: Operating margin was approximately -5.1% for the quarter and -3.3% for the nine months. Lower service revenue and higher equipment costs weighed on results; equipment sales grew alongside a larger equipment loss, which was $514.5 million for the nine-month period.
- Cash flow and investment: Nine-month operating cash flow was $330.6 million. Cash used for property, plant and equipment was $424.8 million; reported capital expenditures, including accrual effects and system development, were $376.0 million. Adjusted free cash flow, a company-defined non-GAAP measure, was negative $42.1 million.
- Liquidity and debt: At September 30, cash and cash equivalents were $273.8 million and short-term investments were $40.0 million. Long-term debt was $876.8 million, excluding capital leases; the filing reports only $46,000 of current long-term debt. The $300 million revolving facility had no borrowings, $17.5 million of letters of credit, and $282.5 million available. The reported leverage ratio was 2.28x against a temporary 3.75x covenant limit.
- Customer indicators: Quarter-end customers totaled 4.674 million. Third-quarter retail net additions were 50,000, including 52,000 postpaid additions; postpaid churn was 1.6%. Billed ARPU was $53.24 versus $50.92 a year earlier, while smartphone penetration reached 57.9% versus 47.1%.
Material changes versus the prior comparable period
- Nine-month operating results deteriorated substantially, with a $271.2 million year-over-year decline in operating income. The comparison includes $119.1 million of 2014 gains on license sales and exchanges versus $243.6 million of gains on business sales and exit costs in 2013. Excluding those items, management said operating income declined $146.7 million, principally from lower service revenue and higher equipment subsidies.
- Service revenue declined 8% for the nine months, partly reflecting the smaller reported customer base after the divestiture and partnership deconsolidation. Billed ARPU rose, supported by smartphone adoption and data-related revenue.
- Equipment revenue increased 36% for the nine months, while equipment cost rose 30%. Equipment installment plans contributed $111.8 million of equipment revenue and $160.9 million of equipment cost.
- Operating cash flow increased from $296.2 million to $330.6 million, but investing cash flow shifted from positive $11.2 million to negative $308.1 million, mainly reflecting lower divestiture proceeds and continued investment. Cash declined $68.3 million during the 2014 nine-month period.
Outlook, commentary, risks and unusual items
- Management expected 2014 capital expenditures of approximately $600 million, for network coverage and capacity, 4G LTE deployment, retail locations, and systems. It anticipated continued pressure on service revenue from competition and expected equipment subsidies to remain significant.
- In September 2014, the company agreed to exchange certain non-operating licenses for operating-market licenses and $145 million cash, subject to regulatory approval and expected to close in 2015. The company expected a gain at closing.
- U.S. Cellular paid $91.5 million to related-party Airadigm, controlled by TDS, for spectrum licenses and tower assets recorded at $15.2 million net book value. The transaction was reviewed and approved by an independent special committee; the difference was recorded principally as a reduction to retained earnings, with a related deferred tax asset increasing additional paid-in capital.
- For the St. Louis license sale and Milwaukee license exchange, the company recorded gains totaling $91.4 million in the first quarter. It also received $52.0 million of Sprint cost reimbursements in the first nine months; further reimbursement and transition-related accounting remained subject to the transaction terms.
- Credit-rating downgrades in 2014 raised the revolving facility’s commitment fee by 0.075 percentage point and borrowing rate by 0.25 percentage point. Two rating agencies rated the company below investment grade; management reported covenant compliance.
- Risks highlighted include intense competition, customer churn and device subsidies, the credit and bad-debt implications of installment plans, network and technology investment needs, roaming and regulatory changes, spectrum access and auction funding, and possible problems with the new billing system. Management said billing-system service and sales response times had improved, but future issues could adversely affect results.
- U.S. Cellular participated indirectly in the FCC’s scheduled Auction 97 through Advantage Spectrum. The amount of any potential additional funding was unknown and could be substantial. The filing also noted possible sale of 588 towers outside Core Markets.
Important facts for investors to verify
- Confirm the issuer: this filing is for U.S. Cellular Corporation, not the company named in the request metadata.
- Review the composition and sustainability of operating cash flow, capital spending, and the negative adjusted free cash flow, including the treatment of Sprint reimbursements.
- Assess the economics and customer-credit, churn, and revenue effects of equipment installment plans as adoption grows.
- Track closing, regulatory approval, cash proceeds, and gain recognition for the proposed license exchange, as well as remaining Sprint transaction reimbursements and costs.
- Monitor credit ratings, covenant headroom, and any funding commitments for spectrum auctions or consolidated variable-interest entities.
- Compare reported earnings with underlying operating trends, particularly the material gains in both 2014 and 2013 and the effects of the divestiture and partnership deconsolidation.