Business context and reporting period
The supplied filing is United States Cellular Corporation’s (UScellular) Form 10-Q for the quarter ended September 30, 2020—not a filing for Array Digital Infrastructure, Inc. UScellular is an 82%-owned subsidiary of Telephone and Data Systems, Inc. It operates wireless markets in 21 states and reported 5.0 million connections, including 4.4 million postpaid and 0.5 million prepaid connections.
Unless noted otherwise, financial figures below are in millions of dollars. Comparisons are with the three or nine months ended September 30, 2019.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $1,027 | $1,031 | $2,964 | $2,970 |
| Operating income | $65 | $20 | $168 | $115 |
| Net income | $85 | $24 | $227 | $115 |
| Net income attributable to UScellular shareholders | $85 | $23 | $224 | $109 |
| Diluted earnings per share | $0.97 | $0.27 | $2.56 | $1.24 |
| Adjusted EBITDA (non-GAAP) | $282 | $256 | $841 | $793 |
| Adjusted OIBDA (non-GAAP) | $232 | $208 | $698 | $651 |
Revenue was essentially flat in both comparison periods. Operating margin was approximately 6.3% versus 1.9% in Q3 and 5.7% versus 3.9% for the nine months. Net margin was approximately 8.3% versus 2.3% in Q3 and 7.7% versus 3.9% for the nine months. The sharp increase in net income partly reflects CARES Act tax benefits: the effective tax rate was 3.7% in Q3 2020 and 4.7% for the nine-month period, versus 37.4% and 32.5%, respectively, in 2019.
Service revenue was $775 million in Q3, up slightly, and $2.290 billion for nine months, up 1%. Equipment sales were $252 million in Q3 and $674 million for nine months, down 2% and 3%, respectively. Postpaid ARPU rose 2% to $47.10 in Q3 and to $46.84 for nine months; postpaid ARPA rose 3% to $123.27 in Q3 and 2% to $122.28 for nine months.
For the first nine months, operating cash flow was $950 million versus $687 million; cash paid for property, plant and equipment was $690 million versus $439 million; and reported free cash flow, a non-GAAP measure defined as operating cash flow less those capital expenditures, was $260 million versus $248 million. Investing activities used $855 million, including $169 million for spectrum licenses. Financing activities provided $562 million, principally from debt issuance.
At September 30, 2020, cash and cash equivalents were $931 million, compared with $285 million at year-end 2019. Long-term debt, net, was $2.108 billion and current debt was $2 million, compared with $1.502 billion and $8 million, respectively, at year-end. UScellular issued $500 million of 6.25% senior notes due 2069 and borrowed $125 million under its receivables securitization agreement. The weighted-average interest rate on long-term debt was 6.3%, down from 6.8% at year-end. Available capacity was $298 million under its revolving credit agreement, $217 million under its senior term loan, and $75 million under the securitization agreement at quarter-end, subject to collateral availability. Management said liquidity was expected to be sufficient for normal operating needs and debt service for the coming year; the company also disclosed a sub-investment-grade credit rating.
Material changes versus the prior comparable period
- Operating income, adjusted EBITDA and adjusted OIBDA increased, while total operating revenue remained nearly unchanged. Lower SG&A and depreciation expense contributed to the operating-income improvement; bad-debt expense declined.
- Postpaid total churn fell to 1.06% in Q3 from 1.38%. Postpaid connections ended at 4.401 million, versus 4.395 million a year earlier. Connected-device net additions improved, while handset gross additions declined.
- Inbound roaming revenue declined 23% in Q3 and 10% for nine months. Management cited lower rates and reduced travel, and expected further pressure, including from the Sprint–T-Mobile merger.
- Capital expenditures rose to $621 million for nine months from $467 million. Cash increased substantially following debt issuance and higher operating cash flow.
- UScellular repurchased 803,836 common shares for $23 million during the first nine months; it reported no repurchases during Q3.
Outlook, commentary and risks
- Management expected 2020 capital expenditures of $850 million to $950 million, primarily for network coverage, speed and capacity, VoLTE, 5G and IT. Commercial 5G service had launched in portions of nine states; completion of VoLTE deployment was planned for Q4 2020.
- COVID-19 reduced some service revenues and equipment sales, but also lowered promotions, handset additions and defections. The FCC Keep Americans Connected Pledge ended June 30; some affected accounts were terminated in Q3, and additional nonpayment-related terminations were expected. The pandemic’s future effects on operations, cash flows and financial position were uncertain and could be material.
- The CARES Act reduced 2020 tax expense and was expected to produce a cash refund in 2021 for taxes paid in prior years. Its effects materially influence reported earnings and working-capital comparisons.
- UScellular was the provisional winning bidder for 237 Auction 103 licenses for $146 million; the licenses were granted in June. It was also the provisional winning bidder for 243 Auction 105 licenses for $14 million, expected to be granted in Q4, and planned to participate in Auction 107.
- Risks include competition, COVID-19 impacts, roaming revenue declines, spectrum access and auction costs, significant indebtedness, financing availability, network deployment and technology execution, regulatory support uncertainty, and cybersecurity. The filing reported ongoing private False Claims Act litigation related to historic spectrum auctions; UScellular said it could not predict the outcome. No potential loss amount is provided in the supplied filing text.
- Management reported effective disclosure controls as of September 30, 2020, and no material changes in internal control over financial reporting during the nine-month period.
Important facts for investors to verify
- Confirm the issuer identity: this source is UScellular, not Array Digital Infrastructure, Inc.
- Assess how much of the earnings increase is attributable to CARES Act tax benefits versus underlying operating performance.
- Compare the $850 million–$950 million 2020 capital-expenditure outlook with actual spending and assess funding needs, spectrum commitments and debt service.
- Track post-pandemic customer payment arrangements and terminations, subscriber churn, roaming revenue trends and the effect of the Sprint–T-Mobile merger.
- Review the status and cost of Auction 105 and Auction 107 licenses, and developments in the False Claims Act litigation.