Business context and reporting period
The supplied filing is United States Cellular Corporation’s unaudited Form 10-Q for the quarter ended March 31, 2017—not a filing for Array Digital Infrastructure, Inc. U.S. Cellular, an 83%-owned subsidiary of Telephone and Data Systems, Inc., operates wireless markets in 23 states and reported approximately 5.0 million connections.
Financial and operating performance
Amounts are in millions of dollars unless otherwise noted. Comparisons are with the three months ended March 31, 2016.
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenue | $936 | $969 | Down 3% |
| Operating income | $54 | $10 | Up $44 |
| Net income attributable to U.S. Cellular shareholders | $26 | $9 | Up $17 |
| Diluted earnings per share | $0.31 | $0.10 | Up $0.21 |
| Operating cash flow (non-GAAP) | $194 | $168 | Up 15% |
| Adjusted EBITDA (non-GAAP) | $229 | $206 | Up 11% |
| Cash from operating activities | $61 | $163 | Down $102 |
| Capital expenditures | $61 in MD&A summary; $88 cash paid for property, plant and equipment | $79 in MD&A summary; $103 cash paid | Different measures and timing bases |
- Service revenue was $746, down 3%; retail service revenue was $657, down 4%, and inbound roaming revenue was $27, down 26%. Equipment sales were $190, down 4%.
- Operating expenses declined 8% to $882. Operating margin was approximately 5.8%, versus 1.0% a year earlier; net margin attributable to U.S. Cellular shareholders was approximately 2.8%, versus 0.9%.
- Net cash used in investing activities was $75; free cash flow, a non-GAAP measure defined as operating cash flow from the GAAP cash flow statement less cash paid for property, plant and equipment, was negative $27, versus positive $60.
- At March 31, cash and cash equivalents were $572, versus $586 at year-end 2016. Long-term debt was $1,616 plus an $11 current portion. The company had $298 of unused revolving-credit capacity and no cash borrowings under that facility.
- Total postpaid connections were 4.455 million, essentially flat year over year; prepaid connections rose to 480,000 from 399,000. Postpaid net additions were a loss of 27,000 versus 45,000 additions in Q1 2016. Total postpaid churn was 1.29%, versus 1.28%.
Material changes and unusual items
- Profit improved despite lower revenue, reflecting lower operating costs and a $17 gain on a license exchange. The filing identifies the gain as a Q1 2017 item; it was not present in the comparison quarter.
- Retail service revenue and postpaid ARPU declined amid industry price competition and discounts on shared-data plans. Postpaid ARPU was $45.42 versus $48.13. Equipment installment plan billings increased; postpaid ABPA, a non-GAAP metric, was $149.78 versus $145.99, while ABPU was $55.82 versus $56.06.
- Effective January 1, 2017, U.S. Cellular reclassified equipment-installment-plan interest income from interest and dividend income to service revenue and recast prior-period figures. This presentation change did not affect pretax income, net income, or EPS.
- Operating cash flow was pressured by working-capital uses, including a $44 increase in equipment installment plan receivables and a $78 decrease in accounts payable. The company reported a $24 bad-debts expense, including $15 related to equipment installment plan receivables.
Outlook, risks and contingencies
- Management expected negative free cash flow for 2017 and forecast approximately $500 million in 2017 capital expenditures, primarily for network coverage and capacity, VoLTE deployment, retail stores, and office systems. It said available cash, expected cash flows, and credit access were expected to cover normal operating needs and debt service for the coming year. The filing gives no clear full-year revenue or earnings guidance.
- In April 2017, after quarter-end, the FCC announced U.S. Cellular won 188 licenses in the 600 MHz auction for $329 million. The company had paid a $143 million deposit and expected to pay the remaining $186 million in May, using cash on hand.
- The FCC adopted an order in February 2017 providing for a $453 million annual Mobility Fund Phase II over ten years and a future phase-down of legacy support. U.S. Cellular said timing and its ability to offset potential support reductions were uncertain, though it expected legacy support to remain at current levels during 2017.
- Key disclosed risks include intense wireless competition, pressure on roaming revenue, spectrum availability and acquisition costs, potentially declining federal support, significant indebtedness, constrained access to financing, equipment-installment-plan credit and cash-flow exposure, technology deployment, and cybersecurity. The company’s credit rating had been below investment grade since 2014.
- Management reported no material changes to previously disclosed risk factors, legal proceedings, contractual obligations outside the ordinary course, or market-risk disclosures. Disclosure controls were assessed as effective as of March 31, 2017.
Important facts for investors to verify
- Confirm the issuer identity: the provided text is U.S. Cellular’s filing, despite the Array Digital Infrastructure metadata.
- Reconcile the $61 capital-expenditure figure in the MD&A summary with $88 of cash paid for property, plant and equipment and the filing’s separate $500 million full-year estimate.
- Assess the sustainability of the earnings improvement excluding the $17 license-exchange gain and in light of continuing service-revenue and ARPU declines.
- Monitor free cash flow, equipment-installment receivables and credit losses, and the company’s planned $186 million auction payment and broader 2017 capital program.
- Track the timing and effect of the FCC’s Mobility Fund Phase II auction and any resulting changes to legacy support.