Business context and reporting period
Entity mismatch: The supplied filing is for United States Cellular Corporation (U.S. Cellular), not Array Digital Infrastructure, Inc. It is an unaudited Form 10-Q for the quarter and six months ended June 30, 2012, filed August 3, 2012. U.S. Cellular, an 84%-owned TDS subsidiary, reported approximately 5.8 million customers across 26 states.
Financial and operating performance
| Metric | Three months ended June 30, 2012 | Six months ended June 30, 2012 |
|---|---|---|
| Total operating revenue | $1,104.4 million; up 2.6% year over year | $2,196.5 million; up 3.0% |
| Operating income | $84.2 million; down 19% | $169.4 million; up 4% |
| Net income attributable to U.S. Cellular shareholders | $52.7 million; down 30%; diluted EPS $0.62 | $115.2 million; up 5%; diluted EPS $1.35 |
| Operating margin | 7.6%, versus 9.7% in 2011 | 7.7%, versus 7.6% |
| Cash flow from operating activities | Not presented as a quarterly figure | $412.2 million, versus $438.1 million |
| Capital spending and free cash flow | Not presented as quarterly figures | $384.5 million capital expenditures; $430.2 million cash paid for PP&E additions; free cash flow of negative $18.0 million |
For the six-month period, service revenue rose 3.3% to $2,053.6 million, while equipment sales declined 2.2% to $143.0 million. Service growth reflected higher data and inbound roaming revenue; operating cost increases partly offset the revenue gains. Quarterly operating income fell despite higher revenue, principally as operating expenses rose 5%, including higher equipment costs and network expenses.
Liquidity, debt and material changes
At June 30, cash and cash equivalents were $437.6 million, short-term investments $100.7 million, and long-term investments $55.5 million. The company had $299.8 million available under its $300 million revolving facility, with no borrowings outstanding. Long-term debt was $880.6 million; current debt was $0.1 million. Management said available cash, investments, operating cash flows and financing sources were sufficient for foreseeable needs.
Compared with the first half of 2011, operating cash flow declined $25.9 million and investing cash outflows increased to $396.2 million, largely reflecting higher capital spending. Cash increased $13.5 million during the period. Revenue and shareholder net income improved for the six months, but retail customers continued to decline: total customers were 5.799 million versus 5.968 million a year earlier. Retail net losses narrowed to 62,000 from 89,000; postpaid net losses worsened to 86,000 from 63,000, while prepaid additions improved to 24,000 from losses of 26,000. Postpaid churn increased to 1.6% from 1.4%.
Six-month comparisons also reflect lower interest expense and different investment items: 2011 included a $13.4 million investment gain, while 2012 recorded a $3.7 million loss provision. Equity-method earnings increased to $46.8 million, including $36.3 million from the LA Partnership.
Outlook, risks and unusual items
- Full-year 2012 estimates, unchanged from the prior quarter: service revenue of $4.05–$4.15 billion; operating income of $200–$300 million; depreciation, amortization and accretion plus net asset disposal/exchange and impairment effects of approximately $600 million; Adjusted OIBDA of $800–$900 million; and capital expenditures of approximately $850 million.
- Management cited competition, customer losses, pricing pressure, equipment subsidies, rising data use and network costs, and uncertainty over future Universal Service Fund support. Current USF support was scheduled to decline, with an estimated 2012 reduction of approximately $16 million; replacement support was uncertain.
- 4G LTE service launched in late March and covered approximately 30% of customers at quarter-end; the company planned coverage for over 50% by year-end. Smartphone penetration rose to 36.8% from 23.1%. Management emphasized data growth, customer retention, cost initiatives and multiyear billing/customer-system projects.
- Capital and contractual commitments include an estimated $148.5 million for the Amdocs billing and operations system through 2013, of which $67.4 million had been paid. The filing also reports $135.4 million of increased purchase obligations, primarily related to LTE deployment, and $161.3 million of added future tower lease payments.
- The company sold most assets and liabilities of a wireless market for $49.8 million cash and recorded a $4.2 million gain. It had agreements, subject to FCC approval, to acquire 700 MHz licenses for $34.0 million and $57.7 million. A second-quarter impairment test found no goodwill or license impairment; however, management noted sensitivity to assumptions and the possibility of future impairment, including a potential material license impairment under adverse valuation changes.
- U.S. Cellular disclosed immaterial revisions to prior-period financial information for errors involving cash-flow classifications and asset-retirement accounting. It said prior filings did not require amendment. The FCC had previously sought information from TDS and affiliates regarding USF support; information was supplied, with no subsequent FCC communication reported. Legal accruals were $1.8 million, and management did not believe unaccrued contingent losses would be material.
Important facts for investors to verify
- Confirm the issuer: this filing belongs to U.S. Cellular, not the company named in the request metadata.
- Review customer trends, postpaid churn, and whether LTE/data growth and the Belief Plans can offset subscriber losses and competitive pricing.
- Track the gap between operating cash flow and capital spending, planned $850 million full-year capex, and the funding of system and LTE commitments.
- Assess the timing and effect of USF support reductions, pending FCC matters, and the planned spectrum acquisitions.
- Monitor license and goodwill valuation assumptions and the sensitivity disclosed for potential impairment.
- Consider the disclosed prior-period revisions when comparing historical results; management reported disclosure controls were effective and no material change in internal control during the quarter.