Filing summary
Entity and period: The supplied filing is United States Cellular Corporation’s unaudited Form 10-Q for the quarter ended June 30, 2018, not a filing for Array Digital Infrastructure, Inc. Financial results below therefore relate to U.S. Cellular. The company is an 83%-owned subsidiary of Telephone and Data Systems, Inc.
Business context
U.S. Cellular operates wireless markets in 22 states and reported approximately 5.1 million total connections, including 4.5 million postpaid connections. Its strategy emphasizes customer retention, revenue growth, cost improvements, and network and online-platform investment. It continued VoLTE deployment and reported successful 5G testing.
Financial and operating performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total operating revenue | $974 million | $963 million | $1,915 million | $1,899 million |
| Operating income | $56 million | $5 million | $121 million | $59 million |
| Net income | $52 million | $12 million | $107 million | $40 million |
| Net income attributable to U.S. Cellular shareholders | $49 million | $12 million | $93 million | $38 million |
| Diluted EPS | $0.56 | $0.14 | $1.08 | $0.44 |
| Adjusted EBITDA (non-GAAP) | $248 million | $198 million | $507 million | $426 million |
| Adjusted OIBDA (non-GAAP) | $205 million | $163 million | $423 million | $356 million |
Q2 operating margin was approximately 5.7%, versus 0.5% in Q2 2017; the six-month margin was approximately 6.3%, versus 3.1%. Margins are calculated from reported revenue and operating income. Q2 service revenue was $741 million, equipment sales $233 million, and operating expenses $918 million. For the six months, service revenue was $1,465 million and equipment sales $450 million.
Six-month operating cash flow was $365 million, compared with $220 million a year earlier. Cash paid for property, plant and equipment was $173 million, yielding reported non-GAAP free cash flow of $192 million, versus $65 million. Investing activities used $101 million and financing activities used $19 million. Cash and cash equivalents were $596 million at June 30, 2018, up from $352 million at year-end 2017; cash, cash equivalents and restricted cash totaled $597 million.
At June 30, 2018, the balance sheet reported $1.614 billion of long-term debt, net, and $18 million of current debt. The company had no cash borrowings under its new revolving credit facility; $298 million of its $300 million capacity was available. Receivables securitization capacity was reported as $200 million, subject to collateral availability. The current ratio was approximately 2.9, based on reported current assets of $1.709 billion and current liabilities of $590 million. U.S. Cellular disclosed a sub-investment-grade credit rating.
Changes and accounting comparability
- Revenue increased 1% in Q2 and 1% for the six-month period. Operating income and net income rose substantially from the prior-year comparisons; lower equipment costs and SG&A, alongside higher equipment sales and gains on license transactions, contributed to results.
- Postpaid connections ended the quarter at 4.468 million, down 10,000 year over year; prepaid connections rose to 527,000 from 484,000. Q2 postpaid net additions were negative 13,000 versus positive 23,000, and postpaid churn increased to 1.19% from 1.13%.
- Postpaid ARPU was $44.74 in Q2, compared with $44.60, while six-month ARPU fell to $44.54 from $45.00. Postpaid ABPU, a non-GAAP billing measure, rose to $57.75 from $55.19 in Q2, primarily reflecting greater equipment-installment-plan billings.
- The company adopted the new revenue-recognition standard on January 1, 2018, using the modified retrospective method. It recorded a $173 million increase to opening retained earnings, and prior periods were not recast. The standard altered revenue classification and timing; reported Q2 2018 revenue was $8 million lower and net income $7 million lower than under the prior accounting rules. Comparisons with 2017 are therefore affected by accounting changes.
- Q2 net income included a $40 million contribution from earnings of unconsolidated entities, versus $33 million a year earlier. Six-month shareholder net income was reduced by an $8 million out-of-period adjustment relating to noncontrolling interests; management said it was not material to the periods affected.
Outlook, risks and unusual matters
- Management expected full-year 2018 capital expenditures of $500 million to $550 million, principally for network coverage, VoLTE, capacity, and replacement of end-of-life platforms. No earnings or revenue guidance was provided in the supplied filing text.
- Management said existing cash, available credit and expected cash flows should fund normal operating needs and debt service for the coming year, while cautioning that financing availability and liquidity could be affected by spectrum spending, reduced LA Partnership distributions, lower regulatory support, credit-market conditions, or other factors.
- Federal USF support was expected to remain at the 2017 level through 2018. The timing and outcome of the FCC Mobility Fund Phase II process, including the effect on legacy support, remained uncertain.
- The Department of Justice notified U.S. Cellular and TDS of an investigation under the False Claims Act into participation in certain FCC spectrum auctions. The companies said they were cooperating and believed the arrangements complied with applicable law and FCC rules; the outcome could not be predicted.
- The company expected a substantial increase in balance-sheet assets and liabilities upon adopting the lease accounting standard in 2019; its full effect was still under evaluation. It also noted that final adjustments to provisional Tax Act accounting could be material.
- Risks highlighted include intense competition, customer churn and pricing pressure, spectrum availability, network and technology investment, regulatory support changes, indebtedness and access to capital, cyber and operational disruptions, litigation, and impairment of licenses or other assets. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm that the intended filing is U.S. Cellular’s Form 10-Q; the request names a different company.
- Review the revenue-recognition adoption effects and use caution comparing 2018 results with 2017, which was not recast.
- Track postpaid net losses, churn, customer trends, and the sustainability of higher equipment-plan billings.
- Assess whether operating cash flow and liquidity can support the $500–$550 million capex plan, debt service, and possible spectrum purchases.
- Monitor the DOJ auction investigation, FCC support changes, and any final Tax Act accounting adjustments.