Filing summary
Issuer discrepancy: The supplied filing is United States Cellular Corporation’s Form 10-Q, not a filing for ARRAY DIGITAL INFRASTRUCTURE, INC. The summary below covers the issuer identified in the filing.
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2016, compared with the same 2015 periods. U.S. Cellular is an 83%-owned subsidiary of Telephone and Data Systems, Inc. It operates wireless markets in 23 states and reported approximately 5.0 million connections at quarter-end.
Financial and operating results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Operating revenue | $1,010 million | $1,069 million | $2,948 million | $3,010 million |
| Service revenue | $771 million | $896 million | $2,293 million | $2,549 million |
| Equipment sales | $239 million | $173 million | $655 million | $461 million |
| Operating income | $9 million | $78 million | $26 million | $337 million |
| Net income | $18 million | $65 million | $54 million | $250 million |
| Net income attributable to U.S. Cellular shareholders | $17 million | $64 million | $53 million | $243 million |
| Diluted EPS | $0.20 | $0.75 | $0.63 | $2.86 |
| Adjusted EBITDA (non-GAAP) | $216 million | $257 million | $639 million | $673 million |
| Operating cash flow (non-GAAP) | $164 million | $208 million | $488 million | $538 million |
| Capital expenditures | $103 million | $135 million | $275 million | $335 million |
Operating margin, calculated from reported figures, was approximately 0.9% in Q3 2016 versus 7.3% in Q3 2015, and 0.9% for the first nine months of 2016 versus 11.2% in 2015. Nine-month cash from operating activities was $415 million, compared with $555 million. Reported free cash flow, a non-GAAP measure defined as operating cash flow from the cash flow statement less cash paid for property, plant and equipment, was $135 million versus $148 million for the comparable nine-month periods.
At September 30, 2016, cash and cash equivalents were $674 million; current assets were $1.607 billion and current liabilities were $695 million. Long-term debt, net, was $1.621 billion, with $11 million current. The $300 million revolving facility had $284 million available and no cash borrowings outstanding, apart from letters of credit. The company reported compliance with its credit-facility covenants.
Material changes versus the prior period
- Service revenue fell 14% in Q3 and 10% year to date, reflecting the end of the loyalty rewards program, competitive pricing and discounts, and lower inbound roaming rates. Growth in connections and smartphone/data usage partly offset the declines.
- Equipment sales rose 38% in Q3 and 42% year to date, driven by installment-plan adoption and device sales. Equipment installment-plan billings were $353 million for the first nine months, versus $180 million a year earlier.
- Operating income and net income declined sharply. The year-ago comparison included a $114 million net gain on a business sale and other exit items for the nine-month period, as well as $147 million in license-sale and exchange gains versus $16 million in 2016. Q3 also included a $13 million expense from termination of a naming-rights agreement.
- Postpaid net additions increased to 75,000 for the first nine months from 43,000; prepaid net additions increased to 93,000 from 32,000. Postpaid churn improved to 1.27% from 1.41%.
- Cash declined $41 million from year-end 2015. Equipment-installment-plan receivables used $160 million of cash in the first nine months, versus $96 million in the comparable period.
Outlook, risks and unusual items
- Management expected 2016 capital expenditures of approximately $500 million, for network coverage and capacity, VoLTE deployment, retail stores and business systems. It expected negative free cash flow for 2016, citing growth in equipment-installment-plan receivables and significant capital expenditures.
- U.S. Cellular said existing cash, available credit and expected cash flows should support normal operating needs and debt service for the coming year, but cautioned that funding needs, credit-rating changes, capital-market access, spectrum purchases, lower regulatory support or reduced distributions from the LA Partnership could pressure liquidity.
- The company deposited $143 million with the FCC to establish bidding eligibility in the 600 MHz Auction 1002. Auction stages were ongoing; additional payments could be substantial if it won licenses, while some or all of the deposit could be refunded if it did not. The filing expected the auction process to continue into 2017.
- Management anticipated continued growth in network costs as data usage and capacity needs rise. VoLTE rollout was planned to begin in one market in early 2017. The company also reported initial 5G testing, with no commercial deployment timetable stated.
- Reported 2016 out-of-period equipment-installment-plan adjustments increased Q3 pretax income by $6 million and nine-month pretax income by $4 million; the company said these adjustments were not material to the periods affected.
- The filing identified competitive pressure, spectrum access, indebtedness and liquidity, regulatory uncertainty, technology deployment, installment-plan credit and churn exposure, cyber risks, and litigation among potential risks. It reported no material change in previously disclosed risk factors and no material change in legal proceedings.
Investor verification priorities
- Confirm the issuer identity: the supplied document is U.S. Cellular’s filing, not ARRAY DIGITAL INFRASTRUCTURE, INC.’s.
- Review subsequent Auction 1002 results, any spectrum purchase commitments, and treatment of the $143 million deposit.
- Track equipment-installment-plan receivables, collections, bad-debt allowances and their effect on cash flow.
- Reconcile the stated full-year capital-expenditure outlook and expected negative free cash flow with reported nine-month cash generation and remaining investment needs.
- Assess the drivers of the operating-income decline, including lower service revenue and the prior-year business-sale and license gains.
- Review debt covenants, refinancing and credit-rating exposure, and the availability of the revolving facility.