Filing Summary
Filing identity: The supplied filing is United States Cellular Corporation’s Form 10-Q, not a filing for Array Digital Infrastructure, Inc. It covers the quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods.
Business context
UScellular is an 82%-owned subsidiary of Telephone and Data Systems, Inc. It reported 5.0 million connections, operated in 21 states, and was deploying 5G and modernizing its 4G LTE network. COVID-19 had no material effect on results for the reported periods, according to management.
Financial and operating results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Operating revenue | $1.014 billion | $973 million | $2.037 billion | $1.937 billion |
| Operating income | $36 million | $53 million | $120 million | $104 million |
| Net income | $35 million | $69 million | $97 million | $141 million |
| Net income attributable to UScellular shareholders | $35 million | $68 million | $95 million | $139 million |
| Diluted EPS | $0.39 | $0.78 | $1.08 | $1.59 |
| Adjusted EBITDA (non-GAAP) | $267 million | $280 million | $567 million | $560 million |
| Adjusted OIBDA (non-GAAP) | $218 million | $235 million | $476 million | $466 million |
Q2 operating margin was approximately 3.6%, down from 5.4%; six-month operating margin was approximately 5.9%, up from 5.4%. Revenue growth reflected higher retail service and equipment sales, partly offset by lower inbound roaming revenue. Q2 operating income and net income fell despite revenue growth. Higher interest expense was a major factor in the net income decline; it included a $20 million write-off of debt issuance costs related to redeemed notes. Six-month cost of equipment sold rose 23%, while SG&A fell 3%.
Postpaid connections ended the quarter at 4.399 million, versus 4.372 million a year earlier. Q2 postpaid ARPU rose 3% to $47.74 and ARPA rose 4% to $125.25. Total postpaid net additions were negative 6,000, versus positive 12,000 in Q2 2020; handset churn increased to 0.88% from 0.71%. Management attributed handset defections partly to consumer switching activity rebounding from pandemic-depressed 2020 levels. Connected-device net additions also weakened amid reduced COVID-related subsidy funding.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $363 million, compared with $692 million. Cash capital spending on property, plant and equipment was $281 million versus $471 million; reported free cash flow, a non-GAAP measure, was $82 million versus $221 million.
- Investing cash outflow was $1.534 billion, including $1.259 billion of cash paid for spectrum licenses. Cash, cash equivalents and restricted cash fell $994 million to $297 million; balance-sheet cash and cash equivalents were $267 million at June 30.
- Long-term debt, net, was $2.710 billion, up from $2.489 billion at year-end 2020. UScellular had $300 million available under its revolving credit facility, had drawn the full $300 million term-loan capacity, and had $100 million outstanding under its receivables securitization facility, with $350 million of stated unused capacity subject to collateral availability.
- Management said available cash, borrowing capacity, expected tax refunds and anticipated cash flows should provide sufficient liquidity for operating needs and debt service for the coming years. The company reported compliance with its debt covenants at June 30.
Material changes, outlook and risks
UScellular issued $500 million of 5.5% senior notes in May and redeemed $575 million of 7.25% senior notes in May and June. Spectrum licenses increased by $1.288 billion, primarily due to Auction 107. The FCC granted the Auction 107 licenses in July; UScellular expects access to the spectrum only in late 2023 and expects approximately $178 million of relocation-related costs through 2024. In July, credit facilities were amended, including added term-loan capacity and a 3.75-to-1.00 maximum consolidated leverage covenant. In August, Moody’s lowered the senior unsecured rating from Ba1 to Ba2, citing increased capacity in structurally senior debt facilities; UScellular also announced an expected September redemption of $342 million of 6.95% notes.
Full-year 2021 capital expenditures were forecast at $775 million to $875 million, principally for network modernization, 5G, coverage, capacity and IT. Management warned that intense pricing and promotional competition could pressure revenue and operating income, and expected inbound roaming revenue to continue declining relative to 2020. Other stated risks include spectrum access and deployment, regulatory support and fees, indebtedness and access to financing, cybersecurity, and unresolved False Claims Act litigation concerning historical FCC spectrum auctions; the company said it could not predict the litigation outcome.
Key facts for investors to verify
- Confirm that UScellular, rather than Array Digital Infrastructure, is the intended issuer for this summary.
- Track whether revenue gains can offset equipment costs, promotional pressure, rising churn and declining roaming revenue.
- Review cash generation against spectrum purchases, planned capital spending, relocation obligations and debt service.
- Assess the effect of the debt amendments, Moody’s downgrade and announced note redemption on leverage, interest expense and covenant headroom.
- Monitor timing of Auction 107 spectrum clearance and deployment, upcoming spectrum auction participation, regulatory developments and the pending litigation.
Adjusted EBITDA, Adjusted OIBDA and free cash flow are non-GAAP measures; the filing provides reconciliations and cautions against treating them as substitutes for GAAP results or cash flows.