Filing summary
Entity identification: The request identifies ARRAY DIGITAL INFRASTRUCTURE, INC., but the supplied Form 10-Q is for UNITED STATES CELLULAR CORPORATION. The figures and disclosures below summarize the filing provided, not the named company. It covers the quarter ended March 31, 2012, with comparisons to the quarter ended March 31, 2011; financial statements are unaudited.
Business context and financial results
U.S. Cellular, an approximately 84%-owned subsidiary of Telephone and Data Systems, Inc., provides wireless service. It reported approximately 5.84 million total customers and had begun offering 4G LTE service in late March 2012.
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Service revenue | $1,023.8 million | $985.1 million | Up 4% |
| Total operating revenue | $1,092.1 million | $1,057.1 million | Up 3% |
| Operating income | $85.2 million | $58.7 million | Up 45% |
| Net income attributable to U.S. Cellular shareholders | $62.5 million | $35.2 million | Up 78% |
| Diluted EPS | $0.73 | $0.41 | Up $0.32 |
| Cash from operating activities | $257.0 million | $257.7 million | Down $0.7 million |
| Free cash flow | $47.8 million | $136.7 million | Down $88.9 million |
Revenue growth reflected higher retail service and inbound roaming revenue, partly offset by lower equipment sales. Operating expenses rose 1%; system operations expense increased 7%. The filing does not present a standalone gross-margin figure.
Liquidity, debt and investment
At March 31, 2012, cash and cash equivalents were $511.1 million, short-term investments were $116.4 million, and long-term investments were $40.3 million. Cash plus short-term investments totaled $627.4 million. The $300 million revolving credit facility had no borrowings and $299.8 million available after a $0.2 million letter of credit. Long-term debt was $880.5 million, with a further $0.1 million current portion; there were no first-quarter borrowings or repayments. The company reported compliance with its credit facility and debt covenants and an investment-grade credit rating.
Cash used for property, plant and equipment additions was $209.2 million, versus $121.0 million a year earlier. Reported capital expenditures, including system development, were $201.3 million. Investing cash outflow was $170.2 million, partly offset by $49.8 million proceeds from a market sale.
Material changes and unusual items
- Retail customer net losses were 34,000, compared with 31,000 a year earlier; postpaid net losses worsened to 38,000 from 22,000. Postpaid churn rose to 1.6% from 1.4%.
- Service revenue per average customer increased to $58.21 from $54.29. Postpaid smartphone penetration rose to 34.4% from 20.3%; smartphones were 54.1% of devices sold, versus 42.5%.
- Inbound roaming revenue grew 24% to $80.1 million, primarily due to other carriers’ customers’ data usage on U.S. Cellular’s network.
- The March sale of most assets and liabilities of a wireless market generated $49.8 million cash proceeds and a $4.2 million gain. The income statement reports a net $2.2 million gain on asset disposals.
- The 2012 effective tax rate was 27.1%, compared with 38.0%. Discrete tax benefits reduced Q1 tax expense by $9.1 million; the company also received a $58.1 million federal tax refund related primarily to 2009 and 2010 carrybacks.
- The comparative 2011 figures were revised for previously identified errors in asset retirement accounting and cash-flow classifications. The company deemed the errors immaterial to the affected periods and did not amend prior filings; revisions increased reported Q1 2011 net income by $1.1 million and operating cash flow by $55.9 million.
Outlook, risks and contingencies
Full-year 2012 estimates were unchanged from the 2011 Form 10-K: service revenue of $4.05–$4.15 billion; operating income of $200–$300 million; adjusted OIBDA of $800–$900 million; depreciation, amortization and accretion, together with net asset-disposal/exchange gains or losses and impairment, of approximately $600 million; and capital expenditures of approximately $850 million. Management cautioned that actual results may differ materially and does not undertake to update these estimates.
The company planned to expand LTE coverage to more than 50% of customers by year-end 2012; coverage was approximately 25% at quarter-end. Management expects network operating costs to rise as capacity, cell sites and data usage grow, while SG&A is expected to remain relatively flat. It expects federal tax payments to increase substantially beginning in 2013 for several years as accelerated tax depreciation declines, assuming no further bonus-depreciation provisions.
Key risks include competition and continued customer losses, service and equipment pricing pressure, roaming revenue exposure, data-network investment and execution, uncertainty over FCC universal-service and intercarrier-compensation reforms, economic conditions, and possible impairment of licenses or goodwill. The company said an interim impairment test could be required in Q2 2012 and a resulting charge could be material, depending on conditions. Legal proceedings and unasserted claims were accrued at $1.8 million; the company did not believe unaccrued contingent losses would be material. It also disclosed a subsequent agreement to acquire four 700 MHz licenses for $34 million, subject to FCC approval and expected to close in Q3 2012.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for United States Cellular Corporation, not ARRAY DIGITAL INFRASTRUCTURE, INC.
- Assess whether customer losses and higher postpaid churn persist, and whether smartphone adoption and the Belief Plans improve retention and revenue.
- Track LTE deployment, capital spending, and the resulting effect on operating costs and free cash flow.
- Evaluate exposure to declining universal-service support and the potential effects of FCC reforms on revenue and network obligations.
- Review the basis for the lower effective tax rate, the expected tax-payment increase from 2013, and the possibility of a material impairment charge.
- Check progress and approval status for the announced $34 million spectrum-license acquisition.