Business context and reporting period
The supplied filing is United States Cellular Corporation’s unaudited Form 10-Q for the quarter ended June 30, 2013, filed August 2, 2013. This differs from the request metadata naming Array Digital Infrastructure, Inc.; the figures below are for U.S. Cellular. U.S. Cellular, an 84%-owned subsidiary of Telephone and Data Systems, provided wireless service to approximately 5.0 million customers. Comparisons are affected by the May sale of markets to Sprint and the April deconsolidation of two New York partnerships.
Financial and operating metrics
| Metric | Three months ended June 30, 2013 | Six months ended June 30, 2013 | Comparable 2012 period |
|---|---|---|---|
| Total operating revenue | $995.1 million, down 10% | $2,076.9 million, down 5% | $1,104.4 million and $2,196.5 million |
| Operating income | $219.1 million | $220.6 million, up 30% | $84.2 million and $169.4 million |
| Net income attributable to U.S. Cellular shareholders | $143.4 million; diluted EPS $1.69 | $148.3 million; diluted EPS $1.75, up 29% | $52.7 million / $0.62 and $115.2 million / $1.35 |
| Cash from operating activities | Not provided for the quarter | $448.6 million | $412.2 million |
| Cash used for property and equipment additions | Not provided for the quarter | $323.2 million | $430.2 million |
| Free cash flow (company-defined non-GAAP) | Not provided for the quarter | $125.4 million | $(18.0) million |
- Reported operating margin was approximately 22.0% for Q2 and 10.6% for the first half; both include divestiture-related gains and are not directly indicative of underlying operating performance.
- At June 30, cash and cash equivalents were $467.4 million, short-term investments $110.4 million, and long-term investments $40.1 million. Long-term debt was $879.1 million, with $0.1 million current; there were no revolving-credit borrowings. The $300 million revolving facility had $282.4 million available after letters of credit.
- Current assets were $1,245.8 million and current liabilities $901.9 million. Total assets were $6,329.8 million and total equity $3,405.6 million.
- First-half service revenue fell 7% to $1,907.3 million; equipment sales rose 19% to $169.6 million. Depreciation, amortization and accretion increased 33% to $392.4 million.
Material changes versus the prior comparable period
- First-half operating income rose $51.2 million and shareholder net income rose $33.1 million, but the reported improvement was substantially influenced by the Sprint transaction gain. U.S. Cellular reported a $266.4 million pre-tax gain on the sale, within a net $242.1 million gain on sale of business and other exit costs for the first half ($249.0 million in Q2).
- Service revenue declined with fewer average customers, the divestiture and deconsolidation, lower inbound roaming rates and reduced universal-service support. Inbound roaming revenue fell 21% for the first half; retail service revenue fell 5%.
- Customer acquisition and retention costs remained significant: the first-half equipment loss widened to $289.2 million from $235.8 million, as higher-priced smartphones increased average device costs. Smartphone share of devices sold rose to 63.7% from 53.0%.
- For Core Markets, first-half retail customer net losses worsened to 47,000 from 22,000; postpaid losses were 86,000 versus 50,000. Postpaid churn increased to 1.6% from 1.4%. Billed ARPU increased to $50.97 from $50.44, while service revenue ARPU declined to $57.52 from $58.50.
- Cash from investing activities was $146.7 million, versus cash used of $396.2 million in the prior-year half, mainly reflecting $480 million proceeds from the Sprint sale. Financing outflows included a $482.3 million special dividend and $18.4 million of share repurchases.
Outlook, management commentary, risks and unusual items
- Management’s current 2013 consolidated estimates were service revenue of $3.615–$3.715 billion, adjusted income before tax of $600–$700 million, and capital expenditures of approximately $735 million. Adjusted income before tax is non-GAAP and excludes specified items; estimates exclude the reported divestiture gain, investment gain and expected gains on pending license sales.
- Management cited competitive pressure, customer losses, service-plan pricing, lower roaming and universal-service revenues, higher smartphone subsidies, and the cost of network capacity and 4G LTE deployment. It expects growth to depend on data services, additional products and multi-device use, while continuing cost-reduction efforts.
- The company paid a one-time $5.75-per-share special dividend ($482.3 million total) on June 25. The NY1/NY2 deconsolidation generated a non-cash pre-tax investment gain of $18.5 million and increased the first-half effective tax rate to 45.3%, versus 32.0% in 2012. A $128.9 million current tax liability related to the Sprint sale remained unpaid at quarter-end.
- A definitive agreement to sell most of the Mississippi Valley non-operating license for $308 million was pending regulatory approval; closing was expected by year-end, with an estimated $252.2 million gain. The company also approved sale of a St. Louis-area unbuilt license.
- Other commitments and contingencies include an estimated $1.2 billion iPhone purchase commitment over three years, an Amdocs billing-system implementation expected to run through Q3 2013, and up to $200 million of Sprint cost reimbursements subject to specified costs. Legal proceedings accruals were $1.7 million; management did not believe excess contingent losses would be material.
- Risks highlighted include intense competition, continued customer and roaming revenue pressure, device economics and purchase commitments, successful 4G LTE and billing-system deployment, regulatory changes and access to financing. Management said disclosure controls were effective and reported no material change in risk factors from its 2012 Form 10-K.
Important facts for investors to verify
- Confirm issuer identity: this filing is for United States Cellular Corporation, not Array Digital Infrastructure, Inc.
- Assess earnings excluding the Sprint sale gain and the NY1/NY2 investment gain, and account for accelerated depreciation and related exit costs.
- Track postpaid customer losses, churn, ARPU, smartphone subsidy levels, and whether data growth can offset service-revenue declines.
- Verify completion and economics of the pending $308 million license sale, including regulatory approval and expected tax consequences.
- Review the sustainability of cash generation after the special dividend, planned capital spending, tax payments and device-purchase commitments.