Filing identity and reporting period
Important identity mismatch: The supplied filing is United States Cellular Corporation’s Form 10-Q for the quarter ended March 31, 2018, not a filing for Array Digital Infrastructure, Inc. The summary below describes the filing provided.
U.S. Cellular is an 83%-owned subsidiary of Telephone and Data Systems, Inc. It operates wireless markets in 22 states and reported approximately 5.1 million total connections. Financial comparisons are for the three months ended March 31, 2018, versus the same period in 2017, unless noted.
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total operating revenue | $942 million | $936 million | +1% |
| Service revenue | $724 million | $746 million | -3% |
| Equipment sales revenue | $218 million | $190 million | +14% |
| Operating income | $65 million | $54 million | +21% |
| Operating margin | 6.9% | 5.8% | Up approximately 1.1 percentage points |
| Net income | $55 million | $28 million | +97% |
| Net income attributable to U.S. Cellular shareholders | $45 million | $26 million | +69% |
| Diluted EPS attributable to shareholders | $0.52 | $0.31 | Higher |
| Adjusted EBITDA (non-GAAP) | $259 million | $229 million | +13% |
| Adjusted OIBDA (non-GAAP) | $218 million | $194 million | +13% |
| Operating cash flow | $188 million | $61 million | Higher |
| Free cash flow (non-GAAP) | $112 million | $(27) million | Improved |
| Capital expenditures | $70 million | $61 million | +14% |
Q1 cash capital spending for property, plant and equipment was $76 million; the capital expenditure measure above includes accruals and capitalized interest. Interest expense was $29 million, versus $28 million.
Cash and cash equivalents were $509 million at March 31, 2018, compared with $352 million at year-end 2017. Long-term debt was $1.618 billion, with a further $18 million current portion. The company reported $298 million of unused revolving credit capacity and $200 million of unused receivables-securitization capacity, subject to collateral availability; it had no cash borrowings under either facility at quarter-end. Management identified its credit rating as below investment grade.
Postpaid connections were 4.481 million, up from 4.455 million; prepaid connections were 525,000, up from 480,000. Total retail connections increased to 5.006 million from 4.935 million. Postpaid net losses worsened to 37,000 from 27,000, while postpaid churn improved to 1.23% from 1.29%. Postpaid ARPU fell to $44.34 from $45.42; postpaid ABPU, a non-GAAP billing measure, rose to $57.10 from $55.82.
Material changes and comparability
- Revenue was nearly flat overall: lower service revenue was largely offset by higher equipment sales. Operating income and earnings improved, aided by lower selling, general and administrative expense, reduced equipment-sale losses, and lower income tax expense.
- Service revenue pressure reflected industry price competition and adoption of the new revenue standard. Postpaid ARPU and ARPA were reduced by $0.53 and $1.11, respectively, by the standard’s effect. Equipment-plan billings increased, supporting higher ABPU and ABPA despite lower ARPU and ARPA.
- U.S. Cellular adopted ASC 606 (ASU 2014-09) on January 1, 2018 using the modified retrospective method; prior-year figures were not recast. Adoption increased opening retained earnings by $175 million. For Q1 2018, the filing’s reconciliation indicates adoption reduced reported revenue by $10 million, operating income by $5 million, net income by $3 million and EPS by $0.04 versus the prior accounting rules. It also changed revenue classification and balance-sheet contract assets and liabilities.
- The effective tax rate decreased to 28.8% from 54.2%, primarily reflecting the federal corporate tax rate reduction under the Tax Act and distortive, immaterial tax adjustments in the prior-year period.
- Cash from operations rose substantially year over year, principally with lower working-capital cash outflows. Q1 2018 working capital reduced operating cash by $42 million, compared with a $117 million reduction in Q1 2017.
Outlook, risks and unusual items
- Management forecast full-year 2018 capital expenditures of $500 million to $550 million, primarily for network coverage and capacity, VoLTE deployment, and replacement of end-of-life platforms. It expected to fund spending mainly from operating cash flow and cash balances, with facilities available if needed.
- Management expected legacy Federal USF support to remain at its 2017 level through 2018, but could not predict the timing or outcome of the FCC Mobility Fund Phase II auction or the effect on future support.
- VoLTE had launched in Iowa and Wisconsin, with deployments planned in additional markets. The company reported 5G testing and standards/use-case work; no commercial deployment timing or quantified financial outlook was provided.
- The Department of Justice is investigating U.S. Cellular and TDS under the False Claims Act concerning U.S. Cellular’s participation in the 2008 FCC spectrum auction. The company said it was cooperating, believed its arrangements complied with applicable requirements, and could not predict the outcome.
- Q1 included an $8 million out-of-period adjustment that increased income attributable to noncontrolling interests and reduced income attributable to U.S. Cellular shareholders by $8 million. Management said the adjustments were not material to any periods affected.
- Tax expense included a $3 million benefit from adjustment of a provisional Tax Act estimate. The company had not completed its analysis of certain 2017 fixed-asset matters and said final adjustments, expected by Q3 2018, could be material.
- Key risks include intense wireless competition and pricing pressure, customer churn, spectrum access and acquisition needs, regulatory-support reductions, substantial indebtedness and financing access, technology execution, cybersecurity, and the value of unconsolidated investments. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the intended issuer: the submitted filing is for United States Cellular Corporation, not Array Digital Infrastructure, Inc.
- Assess how ASC 606 changed reported revenue, earnings, contract balances and year-over-year comparability; prior periods were not restated.
- Track service revenue, postpaid ARPU, net losses and churn against equipment-billing growth and management’s competitive response.
- Monitor the $500–$550 million 2018 capital-spending plan, liquidity, debt maturities and availability of financing, including collateral constraints on securitization capacity.
- Follow Federal USF/Mobility Fund developments and the DOJ inquiry into the 2008 spectrum auction.
- Review final Tax Act adjustments and the effects of the reported $8 million noncontrolling-interest adjustment.