Filing identity and reporting period
The supplied filing is United States Cellular Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2012, filed November 7, 2012. This does not match the request metadata naming Array Digital Infrastructure, Inc.; the figures below are for U.S. Cellular.
Financial performance
All amounts are in U.S. dollars. For the third quarter, revenue was $1.140 billion, up 3% year over year; operating income was $48.1 million, down 53%; net income attributable to U.S. Cellular shareholders was $35.5 million, down 43%; and diluted EPS was $0.42 versus $0.73. Operating margin was approximately 4.2%, compared with 9.1%.
For the first nine months, revenue was $3.337 billion, up 3%; operating income was $217.4 million, down 18%; net income attributable to shareholders was $150.6 million, down 13%; and diluted EPS was $1.77 versus $2.02. Operating margin was approximately 6.5%, compared with 8.2%.
- Nine-month service revenue increased 2% to $3.090 billion, while equipment sales increased 12% to $246.9 million. Higher data revenue and inbound data roaming supported service revenue; equipment revenue reflected more higher-priced smartphone sales.
- Nine-month operating expenses rose 5% to $3.119 billion. Equipment costs increased 11% and system operations costs increased 6%. Equipment sales remained loss-making: the equipment loss was $379.8 million, versus $343.8 million.
- Nine-month operating cash flow was $608.8 million, down from $738.8 million. Cash used for property and equipment additions was $611.4 million, yielding reported free cash flow of negative $2.7 million.
- At September 30, cash and cash equivalents were $409.6 million, short-term investments $140.5 million, and long-term investments $10.2 million. Long-term debt was $880.5 million, with $0.1 million current; no revolver borrowings were outstanding and $299.8 million was available. The filing reports total assets of $6.536 billion and equity of $3.862 billion.
Changes and operating developments
U.S. Cellular reported 5.808 million total customers at quarter-end, down from 5.932 million a year earlier. Nine-month retail net losses improved to 43,000 from 112,000, but postpaid net losses worsened to 124,000 from 97,000. Postpaid churn rose to 1.6% from 1.4%; prepaid churn improved to 6.1% from 6.9%. Smartphone penetration increased to 38.6% from 26.2%.
The company began 4G LTE service in 2012; by September 30, coverage reached approximately 30% of its customers. Capital expenditures (including system development) were $583.6 million for the first nine months, and full-year spending was estimated at approximately $850 million.
Operating income was pressured by higher network and equipment costs and the shift from a prior-year asset-disposal gain to a net loss in 2012. Interest expense declined year over year, while equity-method earnings increased. The 2012 nine-month effective tax rate was 32.7%, aided by discrete tax benefits; the company expects federal tax payments to rise substantially beginning in 2013 as accelerated tax depreciation declines.
Outlook, transactions and risks
Management’s full-year 2012 estimates, stated before the Sprint transaction, were service revenue of $4.075–$4.125 billion, operating income of $200–$250 million, adjusted OIBDA of $800–$850 million and capital expenditures of approximately $850 million. The company also expected $30–$60 million of incremental fourth-quarter operating costs related to the Sprint transaction. Estimates are forward-looking and may differ materially from actual results.
On November 6, 2012, after quarter-end, U.S. Cellular agreed to transfer customers and certain spectrum in specified Chicago, central Illinois, St. Louis and Indiana/Michigan/Ohio markets to Sprint for $480 million, subject to adjustments and regulatory and other conditions. Closing was expected by mid-2013. The company estimated net cash proceeds after identified costs and taxes of $275–$350 million, realized over the transaction and transition period. It estimated transaction-related operating statement effects that include $15–$25 million of employee costs, $125–$175 million of contract termination costs, $90–$185 million of incremental accelerated depreciation and related charges, and $10–$25 million of asset and liability write-offs. These are estimates, not recognized final results. Sprint reimbursements for specified costs are capped at $200 million. The transaction would reduce the customer base by approximately 585,000 and involve an expected workforce reduction of about 1,000.
Other notable items include up to $40.1 million of FCC Mobility Fund support, contingent on network build-out milestones, and an FCC-required approval for a pending $57.7 million spectrum-license acquisition. The company cited competitive pricing, customer retention, lower roaming rates, USF reform, data-related network and device costs, economic conditions, system implementation, and potential impairment as risks. It accrued $2.0 million for legal proceedings and unasserted claims and said it did not believe unaccrued contingent losses would be material. An FCC Inspector General subpoena concerning Universal Service Fund support had been answered by TDS; no further communication had been received, and the outcome was uncertain.
Management reported effective disclosure controls at September 30, 2012 and no material change in internal control over financial reporting during the quarter. The filing also revised prior-period cash-flow classifications for errors it judged immaterial.
Important facts for investors to verify
- Confirm that this U.S. Cellular filing, rather than an Array Digital Infrastructure filing, is the intended document.
- Track Sprint transaction approvals, closing conditions, final proceeds, reimbursement eligibility, exit costs, and any impairment charges.
- Compare subsequent operating results with the 2012 estimates, especially operating income, fourth-quarter transaction costs, and capital spending.
- Monitor customer trends, postpaid churn, smartphone economics, equipment losses, and the effect of competition and lower roaming or USF revenue.
- Assess liquidity and cash generation against network investment needs and the expected increase in federal tax payments from 2013.