Business context and reporting period
This is United States Cellular Corporation’s unaudited Form 10-Q for the quarter ended September 30, 2013, filed November 1, 2013. U.S. Cellular reported approximately 4.9 million customers across 23 states and was 84%-owned by Telephone and Data Systems, Inc. The filing identifies U.S. Cellular—not Array Digital Infrastructure, Inc.—as the registrant; verify the company and filing identity before relying on this summary.
Financial and operating results
Amounts below are in millions of dollars except per-share data and customer metrics.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $939.2 | $1,140.4 | $3,016.1 | $3,336.9 |
| Operating income (loss) | $(43.2) | $48.1 | $177.4 | $217.4 |
| Net income (loss) attributable to U.S. Cellular shareholders | $(9.9) | $35.5 | $138.4 | $150.6 |
| Diluted EPS | $(0.12) | $0.42 | $1.64 | $1.77 |
- Nine-month service revenue fell 10% to $2,769.6 million; equipment revenue was nearly flat at $246.5 million. Nine-month operating income declined 18%, while quarterly operating results turned to a loss.
- Q3 service revenue declined 17% year over year, including a 15% fall in retail service revenue and a 32% fall in inbound roaming revenue. The company attributed pressure to a smaller customer base—including the Sprint divestiture and partnership deconsolidation—and lower roaming rates and usage.
- Nine-month operating expenses included $593.4 million of depreciation, amortization and accretion, up 35%, largely reflecting $134 million of accelerated charges tied to the divestiture. The nine-month reported operating result also included a $243.6 million net gain on sale of business and exit costs.
- For the nine months, equity earnings from unconsolidated entities were $99.8 million, up from $71.6 million. A noncash $18.5 million gain arose from deconsolidating the NY1 and NY2 partnerships.
- Cash from operations was $296.2 million, versus $608.8 million. Capital expenditures were $529.4 million; free cash flow, as defined by the company, was negative $225.9 million, compared with negative $2.7 million.
- Cash and cash equivalents were $183.1 million at September 30, 2013; short- and long-term investments totaled $85.3 million. Long-term debt was $878.9 million, with only $0.1 million current. The $300 million revolving facility had no borrowings and $282.4 million available after letters of credit.
- On June 25, the company paid a special dividend of $5.75 per share, totaling $482.3 million. It also repurchased $18.5 million of common shares during the nine-month period.
Material changes versus the prior comparable period
- Comparability is affected by the May 16 sale to Sprint of customers and certain spectrum in specified markets for $480 million, and by the April 3 deconsolidation of NY1 and NY2. These transactions changed the consolidated customer base and results.
- Core Markets recorded 118,000 retail customer net losses in the first nine months, versus 14,000 net additions in the prior-year period. Postpaid net losses worsened to 146,000 from 73,000; prepaid net additions slowed to 28,000 from 87,000.
- Core Markets billed ARPU rose to $50.98 from $50.48, but service revenue ARPU declined to $57.83 from $58.76. Postpaid churn increased to 1.6% from 1.5%, and prepaid churn to 6.2% from 5.2%.
- Customer migration to a new billing and operational support system caused billing delays and increased accounts receivable. Accounts receivable absorbed $214.1 million of operating cash in the nine months, versus $67.3 million in the prior year.
Guidance, commentary, risks and unusual items
- Updated 2013 consolidated estimates: service revenue of $3.590–$3.640 billion; adjusted income before taxes of $600–$700 million; and capital expenditures of approximately $735 million. The service-revenue range was lowered from $3.615–$3.715 billion; adjusted pretax income and capital expenditure estimates were unchanged. Adjusted income before taxes is a non-GAAP measure, not a substitute for GAAP results or cash flow.
- Management cited competitive pressure, customer losses, declining roaming and USF support, and continued device subsidies as headwinds. It expects growth efforts to center on data, smartphones, multi-device customers, customer retention and network investment.
- The new billing platform had caused delays, intermittent outages and slower response times. Management warned that further problems could affect customer satisfaction, churn, sales, bad debts, expenses and cash flow.
- The company had an Apple commitment to purchase an estimated $1.2 billion of iPhone products over three years beginning November 2013, creating device-sale and subsidy risks. It also expected approximately $735 million of 2013 capital expenditure, including continued 4G LTE deployment.
- After quarter-end, U.S. Cellular sold a Mississippi Valley unbuilt license for $308 million; it expected a $252.2 million gain and $96 million current tax expense in Q4 2013. A proposed $92.3 million St. Louis license sale, subject to regulatory approval, was expected to close by year-end, with an estimated $76.2 million gain and $28.5 million current tax expense.
- Legal proceedings and unasserted claims were accrued at $1.7 million; the company said excess contingent loss was not expected to be material, while noting outcomes could differ from accruals. FCC matters, USF/intercarrier reforms, roaming access, competition, spectrum needs and financing availability remain risks.
- Disclosure controls were assessed as effective at September 30, 2013. The filing reported no material changes to internal control over financial reporting other than the billing-system migration.
Important facts for investors to verify
- Confirm the registrant: the supplied metadata names Array Digital Infrastructure, while this filing is for United States Cellular Corporation.
- Review the full GAAP-to-non-GAAP reconciliation and how divestiture, accelerated depreciation and deconsolidation affect reported and estimated results.
- Track billing-system remediation, receivables collection, bad-debt experience and customer churn after the conversion.
- Verify completion, proceeds, tax impacts and regulatory status of the two spectrum-license transactions, and the timing and amount of Sprint cost reimbursements.
- Assess liquidity and investment funding against negative nine-month free cash flow, planned capital spending, the Apple purchase commitment and the special dividend.