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SEC Filing Summary: United States Cellular Corporation (10-Q)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2003, for United States Cellular Corporation ("U.S. Cellular"), an 82.2%-owned subsidiary of Telephone and Data Systems, Inc. (TDS). The company operates wireless markets across the United States, owning or having rights to acquire interests in 165 cellular markets and 71 PCS markets. A significant event during the period was the completion of an asset exchange with AT&T Wireless Services, Inc. (AWE) on August 1, 2003, involving the transfer of 10 markets in Florida and Georgia in exchange for PCS licenses and cash.

Key Financial Metrics (Nine Months Ended Sept 30, 2003)

Note: 2002 figures are restated to reflect accounting changes related to EITF 01-09 and SAB 101.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 20% ($310.6 million) driven by an 18% increase in average customers served and the inclusion of the Chicago market for the full nine-month period in 2003 (vs. partial in 2002).
• Operating Income Decline: Despite revenue growth, operating income decreased 40% ($98.3 million). This was primarily due to a $25.6 million loss on assets held for sale related to the AWE exchange and increased operating expenses (31% increase) driven by the Chicago acquisition integration, higher marketing costs, and increased depreciation.
• Profitability Turnaround: The company returned to profitability with $56.2 million in net income, compared to a $28.9 million loss in the prior year. The 2002 loss was heavily impacted by a $278.9 million "other than temporary" loss on investments (Vodafone and Rural Cellular).
• Customer Metrics: Total customers grew 8% to 4.27 million. Postpay churn rate improved to 1.6% from 1.9%.

Guidance, Outlook, and Risks

2003 Full-Year Outlook (Revised):

• Net Customer Additions: 450,000 - 475,000
• Service Revenues: $2.35 - $2.4 billion
• Operating Income: $180 - $200 million (includes $26 million loss on assets held for sale)
• Capital Spending: $650 - $670 million

Management Commentary: Management expects operating income and margins to remain below historical levels for the full year due to transition costs associated with the Chicago market, network buildouts, and the launch of data services. They anticipate slower customer growth in the future due to increased competition and market maturation.

Risks and Contingencies:

• Wireless Number Portability: Implementation mandated by the FCC in November 2003 may increase churn rates and operating costs.
• Asset Impairment: Significant investments in licenses ($1.1 billion) and goodwill ($550 million) are subject to annual impairment testing; future write-downs are possible.
• Capital Markets: Uncertainty in access to capital for telecom companies could restrict financing for construction and acquisitions.
• Legal Proceedings: Ongoing litigation regarding wireless system rights, though management does not expect a material adverse impact.

Key Facts for Investor Verification

• AWE Transaction Impact: Verify the long-term value of the 36 PCS licenses received from AWE versus the $25.6 million loss recorded on the divested Florida/Georgia markets.
• Chicago Integration Costs: Monitor the trajectory of General and Administrative expenses, which rose 36% year-over-year, to ensure transition costs do not persist longer than anticipated.
• Capital Expenditure Execution: Confirm that the remaining $211-$231 million of 2003 capital spending is deployed efficiently to support the projected customer additions.
• Investment Portfolio: Review the valuation of the $211.2 million marketable equity securities (primarily Vodafone) and the associated $66.9 million deferred tax liability.
• Debt Covenants: Verify continued compliance with revolving credit facility covenants, especially given the credit rating review by Moody's Investors Service.