Business Context and Reporting Period
This summary covers the Annual Report on Form 10-K for United States Cellular Corporation (U.S. Cellular) for the fiscal year ended December 31, 2006. U.S. Cellular is a wireless telephone service provider operating in 201 consolidated markets across 26 states, serving approximately 5.815 million customers. The company is a majority-owned subsidiary of Telephone and Data Systems, Inc. (TDS), which controls approximately 95.6% of the combined voting power.
Key Financial Metrics
The filing incorporates detailed financial statements by reference; however, the following specific metrics are disclosed in the text:
- Customers: 5,815,000 at year-end 2006 (up from 5,482,000 in 2005).
- Market Penetration: 10.5% in consolidated markets.
- Churn Rate: Averaged 1.8% per month for the twelve months ended December 31, 2006.
- Revenue per Customer: Average monthly total service revenue per customer was $47.23 in 2006 (up 4.4% from $45.24 in 2005). Average monthly retail service revenue was $41.44.
- Capital Expenditures: Estimated to be between $600 million and $615 million for 2007.
- Investments: Marketable equity securities (primarily Vodafone Group Plc) had a market value of $253.9 million at December 31, 2006. Net unrealized holding gains were $77.5 million.
- Universal Service Fund: Paid over $80 million in contributions and received $71.0 million in high-cost support payments in 2006.
- Property, Plant, and Equipment: Net of accumulated depreciation, totaled $2,628.8 million as of December 31, 2006.
Note: Specific figures for total revenue, net income, operating cash flow, and total debt are incorporated by reference in the Annual Report (Exhibit 13) and are not explicitly stated in the provided text.
Material Changes and Unusual Items
- Gain on Sale of Investment: In the fourth quarter of 2006, U.S. Cellular recorded a gain of $70.4 million related to the sale of its interest in Midwest Wireless Communications to ALLTEL Corporation. This included $4.3 million received in early 2007 from escrow.
- Equity in Earnings: Recorded $6.3 million in equity in earnings of unconsolidated entities in Q4 2006, primarily due to the Midwest Wireless sale.
- Financial Restatements: The company announced restatements of financial statements in November 2005 and November 2006. These restatements resulted in delays in filing periodic reports, credit rating downgrades, and defaults under the revolving credit agreement and certain forward contracts.
- Internal Control Weaknesses: Management identified material weaknesses in internal control over financial reporting as of December 31, 2006, specifically regarding accounting personnel expertise, income tax accounting, prepaid forward contracts, and property, plant, and equipment accounting.
- Acquisitions and Auctions:
- Auction 66: Barat Wireless (consolidated by U.S. Cellular) was the high bidder for 17 licenses for $127.1 million (net of discount). Licenses were not yet awarded by the FCC as of year-end.
- Auction 58: Carroll Wireless (consolidated) was awarded 16 licenses. U.S. Cellular had contributed $129.9 million to this entity.
- AT&T Exchange: Rights to acquire 17 additional PCS licenses from AT&T Wireless remain pending, expiring August 1, 2008.
Guidance, Outlook, and Risks
Outlook: U.S. Cellular anticipates increases in customers and revenues in 2007 driven by internal growth and the integration of markets acquired or launched in 2004-2006. Management expects cash flows from operating activities to increase year-over-year, though operating income growth may be reduced by expenses associated with customer growth and the one-time gain recorded in 2006.
Key Risks and Contingencies:
- Regulatory Compliance: The FCC denied U.S. Cellular's waiver for the 95% GPS-capable handset penetration requirement for E-911 services. While the company certified it met the requirement in Q4 2006, it faces potential monetary forfeitures and is under review by the FCC Enforcement Bureau.
- Internal Controls: The material weaknesses in internal controls pose a risk of inaccurate financial statements and potential SEC sanctions. Remediation is ongoing.
- Competition: Intense competition from larger national carriers (Verizon, Sprint Nextel, AT&T, T-Mobile) and regional carriers (ALLTEL) could pressure prices and increase costs.
- Technology Obsolescence: Risks associated with the transition from TDMA to CDMA and the potential impact of new technologies like VoIP and WiMAX.
- Legal Proceedings: Ongoing litigation regarding radio frequency emissions and health effects, as well as class actions regarding billing practices.
Investor Verification Checklist
- Verify the specific impact of the financial restatements on 2006 net income and cash flow by reviewing the restated financial statements in Exhibit 13.
- Confirm the status of the FCC E-911 enforcement review and any potential monetary penalties.
- Review the progress of remediation efforts for the identified material weaknesses in internal controls.
- Assess the timeline and likelihood of FCC approval for the 17 licenses won by Barat Wireless in Auction 66.
- Monitor the company's ability to maintain roaming agreements and manage costs as competitors consolidate.
- Verify the details of the accelerated share repurchase (ASR) agreement entered into in April 2007 for 670,000 shares.