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Business Context and Reporting Period

Company: United States Cellular Corporation (U.S. Cellular)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: U.S. Cellular owns, operates, and invests in wireless markets across the United States. As of September 30, 2007, it served approximately 6 million customers across six market areas in 26 states. The company is an 80.7%-owned subsidiary of Telephone and Data Systems, Inc. (TDS).

Key Financial Metrics (Nine Months Ended Sept 30, 2007)

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 14% year-over-year, driven by a 6% growth in the customer base and an 8% increase in average monthly service revenue per customer ($50.66 in 2007 vs. $46.92 in 2006). Data product revenues grew 71% to $260.1 million.
• Profitability Surge: Net income increased 128% to $285.5 million. This was primarily driven by higher operating income and a significant non-operating gain.
• Unusual Item (Gain on Sale): The company recognized a pre-tax gain of $131.7 million in the second quarter of 2007 from the settlement of prepaid forward contracts and the disposition of remaining Vodafone Group Plc American Depositary Receipts (ADRs).
• Customer Metrics: Total customers increased to 6.07 million. Net retail customer additions were 269,000, up 35% from the prior year. Retail postpay churn rate was 1.4% per month.
• Capital Expenditures: Additions to property, plant, and equipment totaled $377.4 million, including the construction of 529 new cell sites.

Guidance, Outlook, and Risks

Full Year 2007 Estimates (Updated Nov 6, 2007)

• Service Revenues: $3.6 billion - $3.7 billion
• Operating Income: $410 million - $460 million
• Depreciation, Amortization, and Accretion: Approximately $600 million
• Net Retail Customer Additions: 375,000 - 425,000

Management Commentary & Risks

• Margin Pressure: Management anticipates continued pressure on operating income margins due to customer acquisition costs, competition, and the costs of developing new products and network enhancements.
• Internal Controls: The company disclosed that its disclosure controls and procedures were not effective as of September 30, 2007, due to material weaknesses in accounting personnel expertise, income tax accounting, and property, plant, and equipment accounting. These weaknesses led to prior restatements.
• Regulatory & Legal: The company is subject to FCC anti-collusion rules regarding future spectrum auctions (Auction 73). It is also under examination by the IRS and various state taxing authorities for years 2002-2005.
• Future Transactions: U.S. Cellular expects to receive approximately $16.7 million in cash and recognize a $16.4 million pre-tax gain upon the closing of Verizon Wireless's acquisition of Rural Cellular Corporation (RCCC), expected in the first half of 2008.

Investor Verification Checklist

• Non-Recurring Gains: Verify the impact of the $131.7 million Vodafone gain on net income to assess core operating performance.
• Internal Control Remediation: Review the progress of remediation efforts for the material weaknesses in financial reporting controls identified in Item 4.
• Share Repurchases: Confirm the status and final settlement costs of the Accelerated Share Repurchase (ASR) agreements, which had potential additional costs of approximately $13.1 million as of period end.
• License Impairments: Monitor the $4.0 million in impairment charges (licenses and customer lists) and the potential for future impairments given the company's strategy of divesting non-strategic markets.
• Debt Covenants: Verify continued compliance with the $700 million revolving credit facility covenants, noting that the company previously received waivers for defaults related to late filings.