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

Business Context and Reporting Period

This filing covers the quarterly period ended June 30, 2005. United States Cellular Corporation ("U.S. Cellular") is a regional wireless operator and an 81.5%-owned subsidiary of Telephone and Data Systems, Inc. (TDS). As of June 30, 2005, the company owned or had rights to acquire interests in 229 wireless markets, with 176 consolidated markets. The company focuses on building contiguous operating areas and recently launched commercial service in Lincoln, Nebraska; Oklahoma City, Oklahoma; and Portland, Maine, with St. Louis, Missouri launching in the third quarter of 2005.

Key Financial Metrics (Six Months Ended June 30, 2005)

Liquidity: The company maintains a $700 million revolving credit facility with $649.8 million available as of June 30, 2005. Total debt includes $50 million in notes payable and $1,161 million in long-term debt.

Material Changes vs. Prior Period

• Revenue Growth: Service revenues increased primarily due to a 12% growth in the customer base (5.23 million customers vs. 4.68 million in 2004) and increased data product usage. However, average monthly service revenue per customer declined 4% to $44.42 due to competitive pricing and a shift toward prepaid/reseller customers.
• Expense Increases: Operating expenses rose 6% to $1,347.1 million. Selling, general, and administrative (SG&A) expenses increased 6% due to higher employee costs for customer acquisition and retention, and increased advertising for new market launches. Depreciation increased 7% driven by the addition of 614 cell sites.
• Roaming Revenue Decline: Inbound roaming revenues dropped 26% to $64.7 million, attributed to lower negotiated rates per minute, partially offset by increased roaming volume.
• Accounting Change: Effective January 1, 2005, the company changed its accounting for early termination fees, recording revenue only upon collection. This reduced both retail service revenues and bad debt expense by $18.8 million compared to 2004.

Guidance, Outlook, and Risks

Full-Year 2005 Guidance (Updated July 27, 2005):

• Service Revenues: $2.8 billion +/- 2%.
• Operating Income: $180 million to $220 million.
• Depreciation, Amortization, and Accretion: $530 million.
• Net Retail Customer Activations: 475,000 to 525,000.
• Capital Expenditures: Estimated at $575 million to $595 million.

Management Commentary: Management expects continued pressure on operating margins due to customer acquisition costs, competition, and network enhancements. However, these are expected to be mitigated by reduced per-minute costs and revenue expansion in new markets.

Risks and Contingencies:

• Credit Rating Downgrade: On July 11, 2005, Moody's downgraded U.S. Cellular from Baa1 (negative outlook) to Baa2 (stable outlook). This increased the interest rate spread on the revolving credit facility from 30 to 45 basis points and the facility fee from 10 to 15 basis points.
• Accounting Standards: Adoption of SFAS 123R (Share-Based Payment) in Q1 2006 is expected to increase compensation expense, reducing net income and EPS.
• Market Risk: The company holds significant marketable equity securities (Vodafone, Rural Cellular) valued at $251.1 million, hedged by forward contracts. A 30% decline in underlying security prices would reduce the fair value of these investments to approximately $175.8 million.
• Asset Retirement Obligations: The company has obligations related to cell site remediation, with a liability balance of $78.0 million as of June 30, 2005.

Key Facts for Investor Verification

• Customer Growth vs. Revenue Per User: Verify the sustainability of the 12% customer growth given the 4% decline in average monthly revenue per customer and the shift to lower-yield prepaid/reseller segments.
• Impact of Credit Downgrade: Assess the long-term impact of the Moody's downgrade on borrowing costs and the ability to secure future financing for the $130 million investment in Carroll Wireless (Auction 58 licenses).
• Capital Expenditure Execution: Monitor the execution of the $575-$595 million capital expenditure plan, particularly regarding the St. Louis market launch and network migration to CDMA 1XRTT.
• Impairment Testing: Review the annual impairment testing of licenses ($1.36 billion) and goodwill ($426 million), as market conditions or valuation changes could trigger significant write-downs.
• Forward Contract Settlement: Track the maturity of forward contracts on marketable securities in May 2007 and the potential tax liabilities upon settlement.