United States Cellular Corporation — Q2 2010 Form 10-Q
Entity note: The supplied filing is for United States Cellular Corporation, not Array Digital Infrastructure, Inc. It covers the quarter and six months ended June 30, 2010; the financial statements are unaudited.
Business context and reporting period
U.S. Cellular, an 82%-owned subsidiary of Telephone and Data Systems, provides wireless service in 26 states. At June 30, it served 6.144 million customers, including 5.775 million retail customers, and operated 7,416 cell sites.
Financial performance and liquidity
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Service revenue | $972.6 million | $974.3 million | $1,937.6 million | $1,957.8 million |
| Total operating revenue | $1,029.9 million | $1,042.1 million | $2,053.8 million | $2,096.5 million |
| Operating income | $63.5 million | $138.8 million | $141.1 million | $257.2 million |
| Net income attributable to U.S. Cellular shareholders | $40.8 million | $81.8 million | $88.1 million | $165.8 million |
| Diluted EPS | $0.47 | $0.94 | $1.01 | $1.90 |
- Six-month operating margin was approximately 6.9%, down from 12.3%; Q2 operating margin was approximately 6.2%, down from 13.3% (calculated from reported figures).
- Six-month operating cash flow was $403.7 million, versus $373.1 million. Capital expenditures were $255.0 million, versus $228.9 million; reported free cash flow was $148.7 million, versus $144.2 million.
- At June 30, cash and cash equivalents were $232.9 million, short-term investments $135.8 million, and long-term investments $41.0 million. The $300 million revolving facility had no borrowings and $299.8 million available. Long-term debt was $867.9 million, with a further $0.1 million current portion.
- Total assets were $5.796 billion and equity was $3.521 billion. No dividend information is provided in the supplied text.
Material changes versus comparable periods
- For the first half, operating revenue declined 2%, operating income fell 45%, and shareholder net income fell 47%. Management attributed the earnings decline principally to lower revenue and higher customer-serving, retention, and initiative costs.
- Service revenue declined 1% in the first half. Data revenue grew 31% to $416.6 million and reached 21% of service revenue, offsetting some voice-revenue weakness. Inbound roaming revenue fell 8%, partly reflecting Verizon’s acquisition of Alltel and reduced use of U.S. Cellular’s network.
- Equipment sales revenue fell 16% in the first half, reflecting lower handset pricing and fewer units sold. System operations expense rose 7% and selling, general and administrative expense rose 7%; SG&A included higher USF contributions, marketing and systems-project costs, and employee expenses.
- Retail net additions improved to 31,000 from 4,000, but postpaid customers had net losses of 31,000 versus additions of 28,000. Prepaid additions were 62,000 versus net losses of 24,000. Postpaid churn improved to 1.4% from 1.6%.
- Operating cash flow increased despite lower Adjusted OIBDA, aided by timing of partnership distributions, tax payments, receivables, and inventory. Capital spending increased.
Guidance, commentary, risks, and unusual items
- Full-year 2010 estimates were reduced: service revenue to $3.925–$4.000 billion from $3.975–$4.075 billion; Adjusted OIBDA to $800–$850 million from $850–$950 million; and operating income to $200–$250 million from $250–$350 million. Capital expenditures remained approximately $600 million; depreciation, amortization, accretion, and asset-disposal losses were estimated at approximately $600 million.
- Management cited continued competition, voice-price pressure, economic uncertainty, roaming-revenue risk, increasing network usage and costs, and execution risk around multi-year billing, customer-service, and operating-system projects. Data growth and selling more services to existing customers were identified as growth priorities.
- U.S. Cellular disclosed prior-period accounting errors involving operating revenue and sales-tax liabilities. It concluded the errors were immaterial to each affected prior period, but said recording the cumulative corrections in 2010 would have significantly affected those quarters. Comparative statements were revised; the December 2009 retained-earnings balance was reduced by $15.9 million. The filing states previously filed reports were revised through an August 5, 2010 Form 8-K.
- The company reported no material change in contractual obligations and no material off-balance-sheet arrangements. It described ordinary-course legal and regulatory proceedings but provided no clear quantified exposure in the supplied text. It may provide further funding to consolidated spectrum-auction partnerships; additional financing is not assured. The estimated settlement value of certain long-dated redeemable noncontrolling interests was $167.9 million, versus a $53.9 million carrying value, and is assumption-dependent.
- Mary N. Dillon became President and CEO on June 1, 2010. Management reported disclosure controls were effective at June 30, 2010 and no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Confirm the issuer identity: this filing is United States Cellular Corporation, despite the request metadata naming Array Digital Infrastructure, Inc.
- Review the revised 2009 comparatives and the August 5, 2010 Form 8-K for the full accounting-error corrections and their effects on 2010-period comparisons.
- Assess the reduced full-year estimates against second-quarter performance, ongoing expense growth, and the approximately $600 million capital-spending plan.
- Verify trends in postpaid losses, prepaid additions, data monetization, voice pricing, and inbound roaming after industry consolidation.
- Review spectrum-partnership funding needs, redeemable-interest assumptions, and developments in FCC/USF and broadband regulation.