Business Context and Reporting Period
Company: United States Cellular Corporation (USM)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2002
Business Overview: The Company owns, operates, and invests in cellular markets throughout the United States. As of June 30, 2002, it held interests in 175 cellular markets and 28 PCS markets. It is an 82.2%-owned subsidiary of Telephone and Data Systems, Inc. (TDS).
Key Financial Metrics (Six Months Ended June 30, 2002)
| Metric | 2002 (in millions) | 2001 (in millions) |
|---|---|---|
| Total Operating Revenues | $1,006.1 | $915.1 |
| Service Revenues | $962.3 | $885.1 |
| Operating Income | $178.9 | $152.1 |
| Net Income (Loss) | $(45.2) | $87.8 |
| Diluted EPS | $(0.53) | $1.01 |
| Operating Cash Flow | $328.1 | $296.5 |
| Cash from Operating Activities (GAAP) | $306.8 | $214.2 |
| Capital Expenditures | $256.8 | $252.1 |
| Long-Term Debt | $567.2 | $403.2 |
| Cash and Equivalents | $18.2 | $28.9 |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 10% ($91.1 million) driven by an 8% increase in the customer base to 3.55 million. Retail service revenue rose 13%.
- Operating Income Improvement: Operating income increased 18% ($26.8 million). This was primarily due to revenue growth and a reduction in amortization of intangibles following the adoption of SFAS No. 142 (which eliminated goodwill amortization).
- Net Loss: Despite strong operating performance, the Company reported a net loss of $45.2 million compared to net income of $87.8 million in 2001. This was caused by a non-cash, "other than temporary" loss of $244.7 million on marketable equity securities (Vodafone AirTouch and Rural Cellular Corporation).
- Expense Increases: Operating expenses rose 8% ($64.3 million). System operations expenses increased 12% due to a 17% increase in cell sites. Marketing and selling expenses rose 17% due to data service strategy development and advertising.
- Accounting Changes: The Company adopted SFAS No. 142 (Goodwill) and SFAS No. 145 (Debt Extinguishment), reclassifying prior debt retirement losses from extraordinary items to other income/expense.
Guidance, Outlook, and Risks
- Capital Expenditures: The Company anticipates 2002 capital expenditures of $620 million to $640 million. Approximately $257 million was incurred by June 30, 2002. A significant portion is allocated to migrating to a single digital equipment platform (estimated total cost $400-$450 million by 2004).
- Chicago 20MHz Acquisition: On August 7, 2002, the Company completed the acquisition of Chicago 20MHz for approximately $610 million. This was financed via revolving credit, $175 million in Series A Notes, and a $105 million loan from TDS. The acquisition adds 13.2 million population equivalents.
- Outlook: Management expects service revenues to continue growing but anticipates slower customer growth due to increased competition and market maturation. Average revenue per minute is expected to decline.
- Liquidity: The Company maintains a $500 million revolving credit facility (1997) with $485 million available as of June 30, 2002. A new $325 million facility (2002) was established to support the Chicago acquisition.
- Risks: Key risks include increased competition, technology obsolescence, regulatory changes, and the potential for further impairment charges on marketable securities or long-lived assets. The outcome of FCC litigation regarding pending license auctions remains a contingency.
Investor Verification Checklist
- Investment Loss Impact: Verify the sustainability of earnings by excluding the $244.7 million non-cash investment loss, which resulted in a reported net loss despite positive operating cash flow.
- Chicago Acquisition Integration: Monitor the integration costs and capital requirements for the newly acquired Chicago 20MHz system, including the $90 million estimated spend for the first year post-acquisition.
- Debt Covenants: Confirm continued compliance with financial covenants under the 1997 and 2002 Revolving Credit Facilities, particularly given the increased debt load from the Chicago acquisition.
- Goodwill and License Valuation: Review future impairment testing results for licenses and goodwill, as the cessation of amortization under SFAS No. 142 shifts risk to periodic impairment charges.
- Customer Churn and ARPU: Track postpay churn rates and average monthly service revenue per customer, as management anticipates pressure on these metrics due to competitive pricing and market saturation.