Filing summary
Entity note: The request identifies Array Digital Infrastructure, Inc., but the supplied Form 10-Q is for United States Cellular Corporation (U.S. Cellular), an 82%-owned subsidiary of Telephone and Data Systems, Inc. This summary reflects the filing provided, not the company named in the request.
Business context and reporting period
The unaudited report covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. U.S. Cellular operates wireless markets in 21 states and reported 5.0 million total connections, including 4.4 million postpaid connections. Its priorities include customer and revenue growth, cost improvements, network investment, VoLTE expansion and 5G deployment.
Financial and operating results
- Total operating revenue was $966 million, up 3% from $942 million. Service revenue rose 2% to $741 million; equipment sales rose 3% to $225 million.
- Operating income was $64 million, down from $65 million. Net income was $58 million, up from $55 million; net income attributable to U.S. Cellular shareholders was $54 million versus $45 million. Diluted EPS increased to $0.62 from $0.52.
- Adjusted EBITDA, a non-GAAP measure, was $281 million versus $259 million; Adjusted OIBDA was $231 million versus $218 million. These measures are not substitutes for GAAP results.
- Operating cash flow was $287 million versus $188 million. Capital expenditures paid were $107 million versus $76 million, producing reported non-GAAP free cash flow of $180 million versus $112 million.
- Cash and cash equivalents were $648 million at March 31, 2019, up from $580 million at year-end 2018. Current assets were $1.839 billion and current liabilities $802 million.
- Long-term debt, net, was $1.601 billion, with a further $19 million current portion. No cash borrowings were outstanding under the revolving credit or receivables securitization agreements; available capacity was $298 million and $200 million, respectively, subject to stated conditions. The company reported a sub-investment-grade credit rating.
- Adoption of lease accounting standard ASC 842 added $888 million of operating lease right-of-use assets and $957 million of operating lease liabilities at quarter-end. These are separate from reported debt.
- Retail connections were 4.943 million versus 5.006 million a year earlier. Postpaid net losses improved to 32,000 from 37,000, while total postpaid churn increased to 1.26% from 1.23%. Postpaid ARPU rose to $45.44 from $44.34.
Changes, outlook and material matters
- Revenue growth reflected higher postpaid ARPU, inbound roaming revenue and average equipment revenue per device. Equipment costs increased 7%, while system operations costs declined 1%; depreciation, amortization and accretion increased 6%. Operating income consequently edged lower.
- Management expects 2019 capital expenditures of $625 million to $725 million, principally for network coverage, speed and capacity, 5G deployment and information technology. It expects to fund investment mainly from operating cash flow and existing cash, with credit facilities available if needed.
- U.S. Cellular paid $135 million in first-quarter advances toward spectrum licenses and disclosed a $249 million spectrum purchase commitment subject to regulatory approval, with substantially all of the remainder expected to be paid in 2019. Separately, after March 31, it committed to an additional $120 million spectrum purchase, also subject to regulatory approval and expected to be paid in 2019.
- The company amended its senior term loan agreement in March to reduce the interest rate; the filing reports no significant change to maturity or other key terms. It also received $31 million from divestitures and exchanges during the quarter.
- The Department of Justice is investigating U.S. Cellular and TDS under the False Claims Act regarding U.S. Cellular’s participation in specified FCC spectrum auctions. The companies say they are cooperating and believe the arrangements complied with applicable law and FCC rules; the outcome cannot be predicted.
- Management cited competition, churn, spectrum access, financing and debt, roaming economics, technology deployment, regulatory support, cybersecurity, and litigation as risks. It reported no material changes to the risk factors in the 2018 Form 10-K.
- U.S. Cellular reported effective disclosure controls as of March 31, 2019, and no material change in internal control over financial reporting other than implementing controls for the new lease standard.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is U.S. Cellular’s, not Array Digital Infrastructure, Inc.’s.
- Review the terms, regulatory status, timing and funding of the disclosed $249 million and subsequent $120 million spectrum commitments, and distinguish them from the $135 million already advanced.
- Assess whether expected 2019 capital spending and spectrum purchases can be funded while maintaining liquidity and servicing debt, given the company’s sub-investment-grade credit rating.
- Monitor connection losses and churn, particularly connected-device churn, alongside postpaid ARPU and revenue trends.
- Track the DOJ investigation and any resulting financial, regulatory or operational consequences.
- Consider lease liabilities separately from debt and review the filing’s non-GAAP reconciliations when evaluating Adjusted EBITDA, Adjusted OIBDA and free cash flow.