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United States Cellular 10-Q 2010

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2010

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                   to                  

 

Commission File Number 1-9712

 

UNITED STATES CELLULAR CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

62-1147325

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

8410 West Bryn Mawr, Suite 700, Chicago, Illinois  60631

(Address of principal executive offices)  (Zip Code)

 

Registrant’s telephone number, including area code: (773) 399-8900

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at March 31, 2010

Common Shares, $1 par value

 

53,434,528 Shares

Series A Common Shares, $1 par value

 

33,005,877 Shares

 

 

 



Table of Contents

 

United States Cellular Corporation

 

Quarterly Report on Form 10-Q

For the Quarterly Period Ended March 31, 2010

 

Index

 

 

 

Page No.

Part I.

Financial Information

3

 

 

 

 

Item 1.

Financial Statements (Unaudited)

3

 

 

 

 

 

 

Consolidated Statement of Operations Three Months Ended March 31, 2010 and 2009

3

 

 

 

 

 

 

Consolidated Statement of Cash Flows Three Months Ended March 31, 2010 and 2009

4

 

 

 

 

 

 

Consolidated Balance Sheet March 31, 2010 and December 31, 2009

5

 

 

 

 

 

 

Consolidated Statement of Changes in Equity Three Months Ended March 31, 2010 and 2009

7

 

 

 

 

 

 

Notes to Consolidated Financial Statements

9

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

 

 

 

 

 

 

Overview

18

 

 

Results of Operations

23

 

 

Recent Accounting Pronouncements

29

 

 

Financial Resources

29

 

 

Liquidity and Capital Resources

31

 

 

Application of Critical Accounting Policies and Estimates

34

 

 

Safe Harbor Cautionary Statement

35

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

39

 

 

 

 

 

Item 4.

Controls and Procedures

40

 

 

 

 

Part II.

Other Information

41

 

 

 

 

 

Item 1.

Legal Proceedings

41

 

 

 

 

 

Item 1A.

Risk Factors

41

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

 

 

 

 

 

Item 5.

Other Information

43

 

 

 

 

 

Item 6.

Exhibits

43

 

 

Signatures

 

 



Table of Contents

 

Part I.  Financial Information

Item 1.  Financial Statements

 

United States Cellular Corporation

 

Consolidated Statement of Operations

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars and shares in thousands, except per share amounts)

 

2010

 

2009

 

 

 

 

 

 

 

Operating revenues

 

 

 

 

 

Service

 

$

965,188

 

$

983,615

 

Equipment sales

 

58,849

 

70,890

 

Total operating revenues

 

1,024,037

 

1,054,505

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

System operations (excluding Depreciation, amortization and accretion reported below)

 

207,077

 

199,883

 

Cost of equipment sold

 

161,105

 

185,701

 

Selling, general and administrative (including charges from affiliates of $27.7 million and $28.8 million, respectively)

 

428,661

 

408,159

 

Depreciation, amortization and accretion

 

143,233

 

137,878

 

Loss on asset disposals, net

 

5,176

 

3,945

 

Total operating expenses

 

945,252

 

935,566

 

 

 

 

 

 

 

Operating income

 

78,785

 

118,939

 

 

 

 

 

 

 

Investment and other income (expense)

 

 

 

 

 

Equity in earnings of unconsolidated entities

 

24,694

 

25,327

 

Interest and dividend income

 

1,021

 

477

 

Interest expense

 

(16,286

)

(19,287

)

Other, net

 

(65

)

280

 

Total investment and other income (expense)

 

9,364

 

6,797

 

 

 

 

 

 

 

Income before income taxes

 

88,149

 

125,736

 

Income tax expense

 

34,198

 

35,226

 

 

 

 

 

 

 

Net income

 

53,951

 

90,510

 

Less: Net income attributable to noncontrolling interests, net of tax

 

(5,719

)

(6,008

)

Net income attributable to U.S. Cellular shareholders

 

$

48,232

 

$

84,502

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

86,576

 

87,196

 

Basic earnings per share attributable to U.S. Cellular shareholders

 

$

0.56

 

$

0.97

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

86,978

 

87,446

 

Diluted earnings per share attributable to U.S. Cellular shareholders

 

$

0.55

 

$

0.97

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



Table of Contents

 

United States Cellular Corporation

 

Consolidated Statement of Cash Flows

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2010

 

2009

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

53,951

 

$

90,510

 

Add (deduct) adjustments to reconcile net income to net cash flows from operating activities

 

 

 

 

 

Depreciation, amortization and accretion

 

143,233

 

137,878

 

Bad debts expense

 

19,193

 

18,704

 

Stock-based compensation expense

 

3,830

 

2,964

 

Deferred income taxes, net

 

(2,419

)

2,342

 

Equity in earnings of unconsolidated entities

 

(24,694

)

(25,327

)

Distributions from unconsolidated entities

 

7,238

 

5,908

 

Loss on asset disposals, net

 

5,176

 

3,945

 

Other operating activities

 

274

 

440

 

Changes in assets and liabilities from operations

 

 

 

 

 

Accounts receivable

 

1,313

 

(18,132

)

Inventory

 

(722

)

7,204

 

Accounts payable - trade

 

(39,375

)

(30,754

)

Accounts payable - affiliate

 

(5,843

)

(2,358

)

Customer deposits and deferred revenues

 

403

 

(1,579

)

Accrued taxes

 

29,860

 

42,144

 

Accrued interest

 

9,221

 

9,337

 

Other assets and liabilities

 

(48,387

)

(57,664

)

 

 

152,252

 

185,562

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Additions to property, plant and equipment

 

(121,514

)

(137,741

)

Cash paid for acquisitions and licenses

 

(3,800

)

(12,127

)

Cash paid for investments

 

(25,000

)

(278

)

Other investing activities

 

356

 

518

 

 

 

(149,958

)

(149,628

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Common shares reissued for benefit plans, net of tax payments

 

486

 

356

 

Common shares repurchased

 

(5,186

)

(13,291

)

Distributions to noncontrolling interests

 

(2,284

)

(2,101

)

Other financing activities

 

(63

)

(97

)

 

 

(7,047

)

(15,133

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(4,753

)

20,801

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

Beginning of period

 

294,411

 

170,996

 

End of period

 

$

289,658

 

$

191,797

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

United States Cellular Corporation

 

Consolidated Balance Sheet — Assets

(Unaudited)

 

 

 

March 31,

 

December 31,

 

(Dollars in thousands)

 

2010

 

2009

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

289,658

 

$

294,411

 

Short-term investments

 

25,534

 

330

 

Accounts receivable

 

 

 

 

 

Customers, less allowances of $24,749 and $26,260, respectively

 

305,083

 

339,825

 

Roaming

 

26,087

 

28,450

 

Affiliated

 

3,818

 

135

 

Other, less allowances of $307 and $364, respectively

 

69,565

 

56,647

 

Inventory

 

153,278

 

152,556

 

Prepaid income taxes

 

 

717

 

Prepaid expenses

 

72,829

 

63,463

 

Net deferred income tax asset

 

21,570

 

21,570

 

Other current assets

 

55,250

 

51,013

 

 

 

1,022,672

 

1,009,117

 

Investments

 

 

 

 

 

Licenses

 

1,438,800

 

1,435,000

 

Goodwill

 

494,737

 

494,737

 

Customer lists, net of accumulated amortization of $94,020 and $92,829, respectively

 

2,892

 

4,083

 

Investments in unconsolidated entities

 

178,903

 

161,481

 

Notes and interest receivable — long-term

 

4,179

 

4,214

 

 

 

2,119,511

 

2,099,515

 

Property, plant and equipment

 

 

 

 

 

In service and under construction

 

5,975,704

 

5,884,307

 

Less: Accumulated depreciation

 

3,397,244

 

3,282,969

 

 

 

2,578,460

 

2,601,338

 

 

 

 

 

 

 

Other assets and deferred charges

 

38,393

 

38,776

 

 

 

 

 

 

 

Total assets

 

$

5,759,036

 

$

5,748,746

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5



Table of Contents

 

United States Cellular Corporation

 

Consolidated Balance Sheet — Liabilities and Equity

(Unaudited)

 

 

 

March 31,

 

December 31,

 

(Dollars and shares in thousands)

 

2010

 

2009

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Current portion of long-term debt

 

$

84

 

$

76

 

Accounts payable

 

 

 

 

 

Affiliated

 

8,889

 

14,732

 

Trade

 

256,913

 

296,288

 

Customer deposits and deferred revenues

 

140,651

 

140,248

 

Accrued taxes

 

83,876

 

52,026

 

Accrued compensation

 

38,220

 

62,242

 

Other current liabilities

 

90,602

 

92,884

 

 

 

619,235

 

658,496

 

 

 

 

 

 

 

Deferred liabilities and credits

 

 

 

 

 

Net deferred income tax liability

 

504,822

 

513,151

 

Other deferred liabilities and credits

 

268,795

 

262,412

 

 

 

773,617

 

775,563

 

 

 

 

 

 

 

Long-term debt

 

867,662

 

867,522

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interests with redemption features

 

752

 

727

 

 

 

 

 

 

 

Equity

 

 

 

 

 

U.S. Cellular shareholders’ equity

 

 

 

 

 

Common Shares, par value $1 per share; authorized 140,000 shares; issued 55,068 shares

 

55,068

 

55,068

 

Series A Common Shares, par value $1 per share; authorized 50,000 shares; issued and outstanding 33,006 shares

 

33,006

 

33,006

 

Additional paid-in capital

 

1,360,712

 

1,356,322

 

Treasury shares, at cost, 1,634 and 1,534 Common Shares, respectively

 

(72,194

)

(69,616

)

Retained earnings

 

2,066,066

 

2,019,957

 

Total U.S. Cellular shareholders’ equity

 

3,442,658

 

3,394,737

 

 

 

 

 

 

 

Noncontrolling interests

 

55,112

 

51,701

 

 

 

 

 

 

 

Total equity

 

3,497,770

 

3,446,438

 

 

 

 

 

 

 

Total liabilities and equity

 

$

5,759,036

 

$

5,748,746

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6



Table of Contents

 

United States Cellular Corporation

 

Consolidated Statement of Changes in Equity

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Cellular Shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

Series A

 

Additional

 

 

 

 

 

U.S. Cellular

 

 

 

 

 

 

 

Common

 

Common

 

Paid-In

 

Treasury

 

Retained

 

Shareholders’

 

Noncontrolling

 

 

 

(Dollars in thousands)

 

Shares

 

Shares

 

Capital

 

Shares

 

Earnings

 

Equity

 

Interests

 

Total Equity

 

Balance, December 31, 2009

 

$

55,068

 

$

33,006

 

$

1,356,322

 

$

(69,616

)

$

2,019,957

 

$

3,394,737

 

$

51,701

 

$

3,446,438

 

Add (Deduct)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to U.S. Cellular shareholders

 

 

 

 

 

48,232

 

48,232

 

 

48,232

 

Net income attributable to noncontrolling interests classified as equity

 

 

 

 

 

 

 

5,695

 

5,695

 

Repurchase of Common Shares

 

 

 

 

(5,186

)

 

(5,186

)

 

(5,186

)

Incentive and compensation plans

 

 

 

605

 

2,608

 

(2,123

)

1,090

 

 

1,090

 

Stock-based compensation awards

 

 

 

3,830

 

 

 

3,830

 

 

3,830

 

Tax windfall (shortfall) from stock awards

 

 

 

(45

)

 

 

(45

)

 

(45

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

(2,284

)

(2,284

)

Balance, March 31, 2010

 

$

55,068

 

$

33,006

 

$

1,360,712

 

$

(72,194

)

$

2,066,066

 

$

3,442,658

 

$

55,112

 

$

3,497,770

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7



Table of Contents

 

United States Cellular Corporation

 

Consolidated Statement of Changes in Equity

(Unaudited)

 

 

 

U.S. Cellular Shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

Series A

 

Additional

 

 

 

 

 

U.S. Cellular

 

 

 

 

 

 

 

Common

 

Common

 

Paid-In

 

Treasury

 

Retained

 

Shareholders’

 

Noncontrolling

 

 

 

(Dollars in thousands)

 

Shares

 

Shares

 

Capital

 

Shares

 

Earnings

 

Equity

 

Interests

 

Total Equity

 

Balance, December 31, 2008

 

$

55,068

 

$

33,006

 

$

1,340,146

 

$

(50,258

)

$

1,827,644

 

$

3,205,606

 

$

48,567

 

$

3,254,173

 

Add (Deduct)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to U.S. Cellular shareholders

 

 

 

 

 

84,502

 

84,502

 

 

84,502

 

Net income attributable to noncontrolling interests classified as equity

 

 

 

 

 

 

 

5,985

 

5,985

 

Repurchase of Common Shares

 

 

 

 

(13,291

)

 

(13,291

)

 

(13,291

)

Incentive and compensation plans

 

 

 

499

 

1,714

 

(1,277

)

936

 

 

936

 

Stock-based compensation awards

 

 

 

2,964

 

 

 

2,964

 

 

2,964

 

Tax windfall (shortfall) from stock awards

 

 

 

(10

)

 

 

(10

)

 

(10

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

(2,101

)

(2,101

)

Balance, March 31, 2009

 

$

55,068

 

$

33,006

 

$

1,343,599

 

$

(61,835

)

$

1,910,869

 

$

3,280,707

 

$

52,451

 

$

3,333,158

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

8



Table of Contents

 

United States Cellular Corporation

 

Notes to Consolidated Financial Statements

 

1.    Basis of Presentation

 

United States Cellular Corporation (“U.S. Cellular”), a Delaware Corporation, is an 82%-owned subsidiary of Telephone and Data Systems, Inc. (“TDS”).

 

The accounting policies of U.S. Cellular conform to accounting principles generally accepted in the United States of America (“GAAP”) as set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The consolidated financial statements include the accounts of U.S. Cellular, its majority-owned subsidiaries since acquisition, general partnerships in which U.S. Cellular has a majority partnership interest and certain entities in which U.S. Cellular has a variable interest that require consolidation under GAAP.  All material intercompany accounts and transactions have been eliminated.  Certain prior year amounts have been reclassified to conform to the 2010 presentation.

 

The consolidated financial statements included herein have been prepared by U.S. Cellular, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, U.S. Cellular believes that the disclosures included herein are adequate to make the information presented not misleading.  These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in U.S. Cellular’s Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2009.

 

The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items and adjustments to prior periods as described in Note 2 - Adjustment of Prior Period Amounts) necessary to present fairly the financial position as of March 31, 2010 and the results of operations, cash flows and changes in equity for the three months ended March 31, 2010 and 2009.  The Consolidated Statement of Comprehensive Income was not included because comprehensive income for the three months ended March 31, 2010 and 2009 equaled net income. The results of operations, cash flows and changes in equity for the three months ended March 31, 2010 are not necessarily indicative of the results to be expected for the full year.

 

9



Table of Contents

 

2.   Revision of Prior Period Amounts

 

In preparing its financial statements for the three months ended March 31, 2010, U.S. Cellular discovered certain errors related to accounting for service revenues and sales tax liabilities. These errors resulted in the overstatement of service revenues and understatement of sales tax liabilities for 2009, 2008 and 2007. In accordance with SEC Staff Accounting Bulletin Nos. 99 and 108 (“SAB 99 and SAB 108”), U.S. Cellular evaluated these errors and determined that they were immaterial to each of the reporting periods affected and, therefore, amendment of previously filed reports was not required. However, if the adjustments to correct the cumulative errors had been recorded in the first quarter 2010, U.S. Cellular believes the impact would have been significant to the first quarter and would impact comparisons to prior periods. As permitted by SAB 108, U.S. Cellular revised in the current filing and plans to revise in the next filings of its quarterly and annual consolidated financial statements previously reported annual and quarterly results for 2009, 2008 and 2007 for these immaterial amounts. In addition to recording these adjustments, U.S. Cellular recorded and plans to record other adjustments to prior-year amounts to correct other immaterial items, which include adjustments related to rent expense as disclosed in U.S. Cellular’s 2009 Form 10-K.

 

The Consolidated Balance Sheet at December 31, 2009 was revised to reflect the cumulative effect of these errors which resulted in a decrease to Retained earnings of $9.6 million.  Also, in accordance with SAB 108, the Consolidated Statement of Operations and the Consolidated Statement of Cash Flows have been revised as follows:

 

Consolidated Balance Sheet — December 31, 2009

 

(Dollars in thousands)

 

As previously
reported

 

Adjustment

 

Revised

 

 

 

 

 

 

 

 

 

Accounts receivable - Due from customers

 

$

336,296

 

$

3,529

 

$

339,825

 

Total current assets

 

1,005,588

 

3,529

 

1,009,117

 

Total assets

 

5,745,217

 

3,529

 

5,748,746

 

Customer deposits and deferred revenues

 

143,760

 

(3,512

)

140,248

 

Accrued taxes

 

34,583

 

17,443

 

52,026

 

Total current liabilities

 

644,565

 

13,931

 

658,496

 

Net deferred income tax liability

 

513,994

 

(843

)

513,151

 

Total deferred liabilities and credits

 

776,406

 

(843

)

775,563

 

Retained earnings

 

2,029,516

 

(9,559

)

2,019,957

 

Total U.S. Cellular shareholders’ equity

 

3,404,296

 

(9,559

)

3,394,737

 

Total equity

 

3,455,997

 

(9,559

)

3,446,438

 

Total liabilities and equity

 

5,745,217

 

3,529

 

5,748,746

 

 

Consolidated Statement of Operations — Three Months Ended March 31, 2009

 

(Dollars in thousands)

 

As previously
reported

 

Adjustment

 

Revised

 

 

 

 

 

 

 

 

 

Service revenues

 

$

981,874

 

$

1,741

 

$

983,615

 

Total operating revenues

 

1,052,764

 

1,741

 

1,054,505

 

System operations expenses (excluding Depreciation, amortization and accretion)

 

200,003

 

(120

)

199,883

 

Selling, general and administrative expenses

 

412,448

 

(4,289

)

408,159

 

Depreciation, amortization and accretion

 

137,651

 

227

 

137,878

 

Loss on asset disposals, net

 

2,191

 

1,754

 

3,945

 

Total operating expenses

 

937,994

 

(2,428

)

935,566

 

Operating income

 

114,770

 

4,169

 

118,939

 

Interest expense

 

(19,022

)

(265

)

(19,287

)

Total investment and other income (expense)

 

7,062

 

(265

)

6,797

 

Income before income taxes

 

121,832

 

3,904

 

125,736

 

Income tax expense

 

31,232

 

3,994

 

35,226

 

Net income

 

90,600

 

(90

)

90,510

 

Net income attributable to U.S. Cellular shareholders

 

84,592

 

(90

)

84,502

 

Basic earnings attributable to U.S. Cellular shareholders

 

0.97

 

 

0.97

 

Diluted earnings attributable to U.S. Cellular shareholders

 

0.97

 

 

0.97

 

 

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Consolidated Statement of Cash Flows — Three Months Ended March 31, 2009

 

(Dollars in thousands)

 

As previously
reported

 

Adjustment

 

Revised

 

 

 

 

 

 

 

 

 

Net income

 

$

90,600

 

$

(90

)

$

90,510

 

Depreciation, amortization and accretion

 

137,651

 

227

 

137,878

 

Deferred income taxes, net

 

1,673

 

669

 

2,342

 

Loss on asset disposals, net

 

2,191

 

1,754

 

3,945

 

Change in accounts receivable

 

(13,468

)

(4,664

)

(18,132

)

Change in customer deposits and deferred revenues

 

(1,392

)

(187

)

(1,579

)

Change in accrued taxes

 

39,591

 

2,553

 

42,144

 

Change in other assets and liabilities

 

(57,402

)

(262

)

(57,664

)

Cash flows from operating activities

 

185,562

 

 

185,562

 

 

3.   Summary of Significant Accounting Policies

 

Amounts Collected from Customers and Remitted to Governmental Authorities

 

If a tax is assessed upon the customer and U.S. Cellular merely acts as an agent in collecting the tax on behalf of the governmental authority imposing such tax, the amounts collected from customers and remitted to governmental authorities are recorded net in Accrued taxes in the Consolidated Balance Sheet.  If a tax is assessed upon U.S. Cellular but billed to customers to recover it, the amounts billed to customers are recorded in Service revenues and the amounts remitted to governmental authorities are recorded in Selling, general and administrative expenses in the Consolidated Statement of Operations.  The amounts recorded in Service revenues that were billed to customers and remitted to governmental authorities totaled $34.1 million and $24.1 million for the three months ended March 31, 2010 and 2009, respectively.

 

Implementation of Revised Variable Interest Entity Accounting

 

U.S. Cellular holds interests in certain variable interest entities (“VIEs”) as such term is defined by GAAP.  Under GAAP, a VIE generally is an entity in which the voting rights held by equity holders are ineffective in determining which party has a controlling financial interest in the entity because control of an entity may be achieved through arrangements that do not involve voting equity.  The primary beneficiary of a VIE, as defined by GAAP, is required to consolidate the VIE in its financial statements.  Prior to January 1, 2010, the primary beneficiary of a VIE was the entity that recognized a majority of a VIE’s expected gains or losses, as determined based on a quantitative model.  Effective January 1, 2010, new provisions under GAAP related to accounting for VIEs provide for a more qualitative assessment in determining the primary beneficiary of a VIE.

 

The revised consolidation guidance related to VIEs effective January 1, 2010 did not change U.S. Cellular’s consolidated reporting entities.  See Note 10 — Variable Interest Entities (VIEs) for details on consolidated VIEs.

 

Recent Accounting Pronouncements

 

In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Multiple Deliverable Revenue Arrangements—a consensus of FASB Emerging Issues Task Force (“ASU 2009-13”).  ASU 2009-13 provides for less restrictive separation criteria that must be met for a deliverable to be considered a separate unit of accounting. Additionally, under this Standard, there is a hierarchy for determining the selling price of a unit of accounting and consideration must be allocated using a relative-selling price method.  ASU 2009-13 will be effective for U.S. Cellular on January 1, 2011; however, early adoption is permitted.  U.S. Cellular is currently reviewing the requirements of ASU 2009-13 and has not yet determined the impact on its financial position or results of operations.

 

In October 2009, the FASB issued Accounting Standards Update No. 2009-14, Certain Revenue Arrangements that include Software Elements—a consensus of the FASB Emerging Issues Task Force (“ASU 2009-14”).  ASU 2009-14 amends accounting and reporting guidance for revenue arrangements involving both tangible products and software that is “more than incidental to the tangible product as a whole.”  ASU 2009-14 will be effective for U.S. Cellular on January 1, 2011; however, early adoption is permitted.  U.S. Cellular does not anticipate that this pronouncement will have a significant impact on its financial position or results of operations.

 

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In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value Measurements (“ASU 2010-06”).  ASU 2010-06 requires new disclosures regarding transfers in and out of Levels 1 and 2 and activity in Level 3 fair value measurements.  It also clarifies existing disclosure requirements regarding the level of disaggregation in certain disclosures, inputs, and valuation techniques used in FASB ASC 820, Fair Value Measurements and Disclosures.  U.S. Cellular adopted all of the requirements of this update on January 1, 2010, its effective date, except for the new requirement regarding activity in Level 3 fair value measurements which has a later effective date under the provisions of ASU 2010-6, and will become effective on January 1, 2011.  Adoption of this pronouncement has not had, and is not expected to have, a significant impact on U.S. Cellular’s fair value disclosures.

 

4.   Fair Value Measurements

 

As of March 31, 2010 and December 31, 2009, U.S. Cellular did not have any financial assets or liabilities that were required, under GAAP, to be recorded at fair value on a recurring basis in its Consolidated Balance Sheet. However, U.S. Cellular has applied the provisions of fair value accounting for purposes of computing the fair value of financial instruments for disclosure purposes. The fair value of financial instruments was as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2010

 

2009

 

(Dollars in thousands)

 

Book Value

 

Fair Value

 

Book Value

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

289,658

 

$

289,658

 

$

294,411

 

$

294,411

 

Short-term investments

 

25,534

 

25,534

 

330

 

330

 

Long-term debt (1)

 

863,316

 

851,920

 

863,202

 

853,937

 

 


(1)   Excludes capital lease obligations

 

The fair values of Cash and cash equivalents and Short-term investments approximate their book values due to the short-term nature of these financial instruments. The fair value of Long-term debt, excluding capital lease obligations, was estimated using market prices for the 7.5% senior notes and discounted cash flow analysis for the remaining debt.

 

As of March 31, 2010, U.S. Cellular held commercial paper with a face value of $25.0 million guaranteed under the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program.  These notes issued by General Electric Capital Corporation pay interest semi-annually at the coupon rate of 1.8% and mature on March 11, 2011. This investment was purchased at a premium and is carried at amortized cost on the balance sheet ($25.3 million as of March 31, 2010).

 

As of March 31, 2010, U.S. Cellular did not have any nonfinancial assets or liabilities that required the application of fair value accounting for purposes of reporting such amounts in its Consolidated Balance Sheet.

 

5.   Income Taxes

 

U.S. Cellular is included in a consolidated federal income tax return and in certain state income tax returns with other members of the TDS consolidated group.  For financial statement purposes, U.S. Cellular and its subsidiaries compute their income tax expense as if they comprised a separate affiliated group and were not included in the TDS consolidated group.

 

U.S. Cellular’s overall effective tax rate on Income before income taxes for the three months ended March 31, 2010 and 2009 was 38.8% and 28.0%, respectively.  The effective tax rate for the three months ended March 31, 2009 was lower than the rate for the three months ended March 31, 2010 due primarily to a 2009 state tax benefit resulting from a state tax law change.  This benefit, along with other minor discrete benefits in the quarter, decreased income tax expense for the three months ended March 31, 2009 by $12.1 million; absent these benefits, the effective tax rate for such period would have been higher by 9.6 percentage points.

 

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6.   Earnings Per Share

 

Basic earnings per share attributable to U.S. Cellular shareholders is computed by dividing Net income attributable to U.S. Cellular shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share attributable to U.S. Cellular shareholders is computed by dividing Net income attributable to U.S. Cellular shareholders by the weighted average number of common shares adjusted to include the effects of potentially dilutive securities. Potentially dilutive securities include incremental shares issuable upon exercise of outstanding stock options and the vesting of restricted stock units.

 

The amounts used in computing Earnings per Common and Series A Common Share and the effects of potentially dilutive securities on the weighted average number of Common and Series A Common Shares are as follows:

 

 

 

Three Months Ended

 

(Dollars and shares in thousands,

 

March 31,

 

except per share amounts)

 

2010

 

2009

 

 

 

 

 

 

 

Net income attributable to U.S. Cellular shareholders

 

$

48,232

 

$

84,502

 

 

 

 

 

 

 

Weighted average number of shares used in basic earnings per share

 

86,576

 

87,196

 

Effect of dilutive securities:

 

 

 

 

 

Stock options (1)

 

57

 

33

 

Restricted stock units (2)

 

345

 

217

 

Weighted average number of shares used in diluted earnings per share

 

86,978

 

87,446

 

 

 

 

 

 

 

Basic earnings per share attributable to U.S. Cellular shareholders

 

$

0.56

 

$

0.97

 

 

 

 

 

 

 

Diluted earnings per share attributable to U.S. Cellular shareholders

 

$

0.55

 

$

0.97

 

 


(1)         Stock options exercisable into 1,401 Common Shares in 2010 and 1,485 Common Shares in 2009 were not included in computing Diluted Earnings per Share because their effects were antidilutive.

(2)         Restricted stock units issuable upon vesting into Common Shares that were excluded in computing Diluted Earnings per share because their effects were antidilutive totaled less than one thousand in both 2010 and 2009.

 

7.   Licenses and Goodwill

 

Changes in U.S. Cellular’s licenses and goodwill for the three months ended March 31, 2010 and 2009 are presented below.

 

Licenses

 

 

 

March 31,

 

March 31,

 

(Dollars in thousands)

 

2010

 

2009

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,435,000

 

$

1,433,415

 

Acquisitions

 

3,800

 

12,250

 

Balance, end of period

 

$

1,438,800

 

$

1,445,665

 

 

Goodwill

 

 

 

March 31,

 

March 31,

 

(Dollars in thousands)

 

2010

 

2009

 

 

 

 

 

 

 

Balance, beginning of period

 

$

494,737

 

$

494,279

 

Accumulated impairment losses

 

 

 

 

 

494,737

 

494,279

 

Other

 

 

458

 

Balance, end of period

 

$

494,737

 

$

494,737

 

 

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8.   Investment in Unconsolidated Entities

 

Investments in unconsolidated entities consist of amounts invested in wireless entities in which U.S. Cellular holds a noncontrolling interest. These investments are accounted for using either the equity or cost method.

 

Equity in earnings of unconsolidated entities totaled $24.7 million and $25.3 million in the three months ended March 31, 2010 and 2009, respectively; of those amounts, U.S. Cellular’s investment in the Los Angeles SMSA Partnership (“LA Partnership”) contributed $16.9 million in both periods.  U.S. Cellular held a 5.5% ownership interest in the LA Partnership during these periods.

 

The following table summarizes the combined results of operations of U.S. Cellular’s equity method investments:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2010

 

2009

 

 

 

 

 

 

 

Revenues

 

$

1,214,000

 

$

1,172,000

 

Operating expenses

 

859,000

 

814,000

 

Operating income

 

355,000

 

358,000

 

Other income (expense)

 

7,000

 

8,000

 

Net income

 

$

362,000

 

$

366,000

 

 

9.   Commitments and Contingencies

 

Indemnifications

 

U.S. Cellular enters into agreements in the normal course of business that provide for indemnification of counterparties.  The terms of the indemnifications vary by agreement.  The events or circumstances that would require U.S. Cellular to perform under these indemnities are transaction specific; however, these agreements may require U.S. Cellular to indemnify the counterparty for costs and losses incurred from litigation or claims arising from the underlying transaction.  U.S. Cellular is unable to estimate the maximum potential liability for these types of indemnifications as the amounts are dependent on the outcome of future events, the nature and likelihood of which cannot be determined at this time.  Historically, U.S. Cellular has not made any significant indemnification payments under such agreements.

 

Legal Proceedings

 

U.S. Cellular is involved or may be involved from time to time in legal proceedings before the Federal Communications Commission (“FCC”), other regulatory authorities, and/or various state and federal courts.  If U.S. Cellular believes that a loss arising from such legal proceedings is probable and can be reasonably estimated, an amount is accrued in the financial statements for the estimated loss.  If only a range of loss can be determined, the best estimate within that range is accrued; if none of the estimates within that range is better than another, the low end of the range is accrued.  The assessment of the expected outcomes of legal proceedings is a highly subjective process that requires judgments about future events.  The legal proceedings are reviewed at least quarterly to determine the adequacy of accruals and related financial statement disclosures.  The ultimate outcomes of legal proceedings could differ materially from amounts accrued in the financial statements.

 

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10.   Variable Interest Entities (VIEs)

 

From time to time, the FCC conducts auctions through which additional spectrum is made available for the provision of wireless services.  U.S. Cellular participated in and was awarded spectrum licenses in each of four separate spectrum auctions (FCC Auctions 78, 73, 66, and 58) indirectly through its interests in Aquinas Wireless L.P. (“Aquinas Wireless”), King Street Wireless L.P. (“King Street Wireless”), Barat Wireless L.P. (“Barat Wireless”) and Carroll Wireless L.P. (“Carroll Wireless”), collectively, the “limited partnerships.”  Each entity qualified as a “designated entity” and thereby was eligible for bidding credits with respect to licenses purchased in accordance with the rules defined by the FCC for each auction. In most cases, the bidding credits resulted in a 25% discount from the gross winning bid.

 

Consolidated VIEs

 

As of March 31, 2010, U.S. Cellular consolidates the following VIEs under GAAP:

 

·                  Aquinas Wireless;

·                  King Street Wireless and King Street Wireless, Inc., the general partner of King Street Wireless;

·                  Barat Wireless and Barat Wireless, Inc., the general partner of Barat Wireless; and

·                  Carroll Wireless and Carroll PCS, Inc., the general partner of Carroll Wireless.

 

U.S. Cellular holds a variable interest in the entities listed above due to capital contributions and/or advances it provided to these entities.  The power to direct the activities of the VIEs that most significantly impacts their economic performance is shared.  Specifically, the general partner of each of these VIEs has the exclusive right to manage, operate and control the limited partnerships and make all decisions to carry on the business of the partnerships; however, the general partner of each partnership needs consent of the limited partner, a U.S. Cellular subsidiary, to sell or lease certain licenses, to make certain large expenditures, admit other partners or liquidate the limited partnerships.  Although the power to direct the activities of the VIEs is shared, U.S. Cellular has a disproportionate level of exposure to the variability associated with economic performance of the VIEs, indicating that U.S. Cellular is the primary beneficiary of the VIEs in accordance with GAAP.  Accordingly, these VIEs are consolidated.

 

Following is a summary of the capital contributions and advances made to each entity by U.S. Cellular as of March 31, 2010 (dollars in thousands).  The amounts shown in the table below exclude funds provided to these entities solely from the shareholder of the general partner.

 

Aquinas Wireless

 

$

2,132

 

King Street Wireless & King Street Wireless, Inc.

 

300,904

 

Barat Wireless & Barat Wireless, Inc.

 

127,685

 

Carroll Wireless & Carroll PCS, Inc.

 

131,294

 

 

 

$

562,015

 

 

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Table of Contents

 

The following table presents the classification of the consolidated VIEs’ assets and liabilities in U.S. Cellular’s Consolidated Balance Sheet.

 

 

 

March 31,

 

December 31,

 

(Dollars in thousands)

 

2010

 

2009

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Cash

 

$

651

 

$

679

 

Other current assets

 

204

 

393

 

Licenses

 

487,962

 

487,962

 

Other assets

 

1,548

 

440

 

Total assets

 

$

490,365

 

$

489,474

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Customer deposits and deferred revenues

 

$

 

$

70

 

Total liabilities

 

$

 

$

70

 

 

Other Related Matters

 

U.S. Cellular may agree to make additional capital contributions and/or advances to the VIEs discussed above and/or to their general partners to provide additional funding for the development of licenses granted in the various auctions.  U.S. Cellular may finance such amounts with a combination of cash on hand, borrowings under its revolving credit agreement and/or long-term debt.  There is no assurance that U.S. Cellular will be able to obtain additional financing on commercially reasonable terms or at all to provide such financial support.

 

These VIEs are in the process of developing long-term business and financing plans.  These entities were formed to participate in FCC auctions of wireless spectrum and to fund, establish, and provide wireless service with respect to any FCC licenses won in the auctions.  As such, these entities have risks similar to the business risks described in the “Risk Factors” in U.S. Cellular’s Form 10-K for the year ended December 31, 2009.

 

11. Common Share Repurchases

 

On November 17, 2009, the Board of Directors of U.S. Cellular authorized the repurchase of up to 1,300,000 Common Shares on an annual basis beginning in 2009 and continuing each year thereafter, on a cumulative basis.  These purchases will be made pursuant to open market purchases, block purchases, private purchases, or otherwise, depending on market prices and other conditions.  This authorization does not have an expiration date.

 

Common Share repurchases made under this authorization and prior authorizations were as follows:

 

 

 

Three Months Ended March 31,

 

(Dollars and shares in thousands, except cost per share)

 

2010

 

2009

 

 

 

 

 

 

 

Number of shares

 

128

 

367

 

Average cost per share

 

$

40.68

 

$

36.22

 

Total cost

 

$

5,186

 

$

13,291

 

 

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12. Noncontrolling Interests

 

Mandatorily Redeemable Noncontrolling Interests in Finite-Lived Subsidiaries

 

Under GAAP, certain noncontrolling interests in consolidated entities with finite lives may meet the definition of mandatorily redeemable financial instruments. U.S. Cellular’s consolidated financial statements include certain noncontrolling interests that meet the definition of mandatorily redeemable financial instruments.  These mandatorily redeemable noncontrolling interests represent interests held by third parties in consolidated partnerships and limited liability companies (“LLCs”), where the terms of the underlying partnership or LLC agreement provide for a defined termination date at which time the assets of the subsidiary are to be sold, the liabilities are to be extinguished and the remaining net proceeds are to be distributed to the noncontrolling interest holders and U.S. Cellular in accordance with the respective partnership and LLC agreements.  The termination dates of these mandatorily redeemable noncontrolling interests range from 2085 to 2094.

 

The settlement value of U.S. Cellular’s mandatorily redeemable noncontrolling interests in finite-lived subsidiaries is estimated to be $137.0 million at March 31, 2010.  This amount represents the estimate of cash that would be due and payable to settle these noncontrolling interests assuming an orderly liquidation of the finite-lived consolidated partnerships and LLCs on March 31, 2010, net of estimated liquidation costs.  This amount excludes redemption amounts recorded in Noncontrolling interests with redemption features in the Consolidated Balance Sheet.  U.S. Cellular currently has no plans or intentions relating to the liquidation of any of the related partnerships or LLCs prior to their scheduled termination dates.  The corresponding carrying value of the mandatorily redeemable noncontrolling interests in finite-lived consolidated partnerships and LLCs at March 31, 2010 was $50.4 million, and is included in Noncontrolling interests in the Consolidated Balance Sheet. The excess of the aggregate settlement value over the aggregate carrying value of these mandatorily redeemable noncontrolling interests is due primarily to the unrecognized appreciation of the noncontrolling interest holders’ share of the underlying net assets in the consolidated partnerships and LLCs.  Neither the noncontrolling interest holders’ share, nor U.S. Cellular’s share, of the appreciation of the underlying net assets of these subsidiaries is reflected in the consolidated financial statements. The estimate of settlement value was based on certain factors and assumptions which are subjective in nature.  Changes in those factors and assumptions could result in a materially larger or smaller settlement amount.

 

13. Supplemental Cash Flow Disclosures

 

Following are supplemental cash flow disclosures regarding transactions related to stock-based compensation awards:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars and shares in thousands)

 

2010

 

2009

 

 

 

 

 

 

 

Common Shares withheld (1)

 

18

 

 

 

 

 

 

 

 

Aggregate value of Common Shares withheld

 

$

753

 

$

 

 

 

 

 

 

 

Cash receipts upon exercise of stock options

 

$

538

 

$

356

 

Cash disbursements for payment of taxes (2)

 

(52

)

 

Net cash receipts from exercise of stock options and vesting of other stock awards

 

$

486

 

$

356

 

 


(1)          Such shares were withheld to cover the exercise price of stock options, if applicable, and required tax withholdings.

(2)          In certain situations, U.S. Cellular withholds shares that are issuable upon the exercise of stock options or the vesting of restricted shares to cover, and with a value equivalent to, the exercise price and/or the amount of taxes required to be withheld from the stock award holder at the time of the exercise or vesting.  U.S. Cellular then pays the amount of the required tax withholdings to the taxing authorities in cash.

 

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Table of Contents

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

United States Cellular Corporation (“U.S. Cellular”) owns, operates and invests in wireless markets throughout the United States. U.S. Cellular is an 82%-owned subsidiary of Telephone and Data Systems, Inc. (“TDS”) as of March 31, 2010.

 

The following discussion and analysis should be read in conjunction with U.S. Cellular’s interim consolidated financial statements and footnotes included in Item 1 above, and with the description of U.S. Cellular’s business, its audited consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the U.S. Cellular Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2009.

 

OVERVIEW

 

The following is a summary of certain selected information contained in the comprehensive Management’s Discussion and Analysis of Financial Condition and Results of Operations that follows. The overview does not contain all of the information that may be important. You should carefully read the entire Management’s Discussion and Analysis of Financial Condition and Results of Operations and not rely solely on the overview.

 

U.S. Cellular provides wireless telecommunications services to approximately 6.1 million customers in five geographic market areas in 26 states. As of March 31, 2010, U.S. Cellular’s average penetration rate in its consolidated operating markets, calculated by dividing U.S. Cellular’s total customers by the total population of 46.5 million in such markets, was 13.2%. U.S. Cellular operates on a customer satisfaction strategy, striving to meet or exceed customer needs by providing a comprehensive range of wireless products and services, excellent customer support, and a high-quality network. U.S. Cellular’s business development strategy is to acquire and operate controlling interests in wireless licenses in areas adjacent to or in proximity to its other wireless licenses, thereby building contiguous operating market areas. U.S. Cellular believes that operating in contiguous market areas will continue to provide it with certain economies in its capital and operating costs.

 

Financial and operating highlights in the first three months of 2010 included the following:

 

·                  Total customers were 6,147,000 at March 31, 2010, including 5,768,000 retail customers.

 

·                  Retail customer net additions were 24,000 in 2010 compared to 63,000 in 2009, reflecting continuing pressures from weak economic and very competitive industry conditions.  Prepaid net additions increased to 33,000 in 2010 from 3,000 in 2009.

 

·                  Postpay customers comprised approximately 95% of U.S. Cellular’s retail customers as of March 31, 2010. The postpay churn rate improved to 1.4% in 2010 compared to 1.5% in 2009.

 

·                  Service revenues of $965.2 million decreased $18.4 million (2%) year-over-year, due primarily to decreases in retail service revenues ($10.6 million) and inbound roaming revenues ($8.1 million). Retail service revenues decreased due to a decline in voice revenues which was partially offset by continued growth in data revenues.  Data revenues grew 28% year-over-year to $201.3 million.

 

·                  Cash flows from operating activities were $152.3 million. At March 31, 2010, Cash and cash equivalents totaled $289.7 million and there were no outstanding borrowings under the revolving credit facility.

 

·                  Additions to property, plant and equipment totaled $121.5 million, including expenditures to construct cell sites, increase capacity in existing cell sites and switches, expand mobile broadband services based on third generation Evolution Data Optimized technology (“3G”) to additional markets, outfit new and remodel existing retail stores, develop new billing and other customer management related systems and platforms, and enhance existing office systems. Total cell sites in service increased 5% year-over-year to 7,310.

 

·                  U.S. Cellular’s innovative Battery Swap program and Overage Protection service remained popular with its customers in 2010.  By March 31, 2010, U.S. Cellular had completed 1.5 million battery swaps since the program launched in May 2009. Also, U.S. Cellular had nearly 1.5 million customers sign up for Overage Protection since it launched in November 2009.

 

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·                  U.S. Cellular continued its efforts on a number of multi-year initiatives including the development of: a Billing and Operational Support System (“BSS/OSS”) including a new point-of-sale system to consolidate billing on one platform; an Electronic Data Warehouse/Customer Relationship Management System to collect and analyze information more efficiently to build and improve customer relationships; and a new Internet/Web platform to enable customers to complete a wide range of transactions and, eventually, to manage their accounts online.

 

·                  Operating income decreased $40.2 million, or 34%, to $78.8 million in 2010 from $118.9 million in 2009. Factors in the decrease were lower service revenues as discussed above, together with higher costs of serving and retaining customers in an increasingly competitive industry and costs of investments in multi-year initiatives.

 

·                  Net income attributable to U.S. Cellular shareholders decreased $36.3 million, or 43%, to $48.2 million in 2010 compared to $84.5 million in 2009, due primarily to lower operating income. Basic earnings per share was $0.56 in 2010, which was $0.41 lower than in 2009, and Diluted earnings per share was $0.55, which was $0.42 lower than in 2009.

 

U.S. Cellular anticipates that its future results will be affected by the following factors:

 

·                  Continued uncertainty related to current economic conditions and their impact on customer purchasing and payment behaviors;

 

·                  Increased competition in the wireless industry, including potential reductions in pricing for products and services overall and impacts associated with the expanding presence of carriers offering low-priced, unlimited prepaid service;

 

·                  Potential increases in prepaid or reseller customers as a percentage of U.S. Cellular’s customer base in response to changes in customer preferences and industry dynamics;

 

·                  Increasing penetration in the wireless industry, requiring U.S. Cellular to grow revenues primarily from selling additional products and services to its existing customers, increasing the number of multi-device users among its existing customers, increasing data products and services and attracting wireless customers switching from other wireless carriers rather than by adding customers that are new to wireless service;

 

·                  Continued growth in revenues from data products and services and lower growth or declines in revenues from voice services;

 

·                  The effect of recent industry consolidation, such as Verizon’s acquisition of Alltel, and possible further industry consolidation, and the effects on roaming revenues, service and equipment pricing;

 

·                  Costs of developing and enhancing office and customer support systems, including costs and risks associated with the completion and potential benefits of the multi-year initiatives described above;

 

·                  Continued enhancements to U.S. Cellular’s wireless networks, including expansion of 3G services; and

 

·                  Uncertainty related to the National Broadband Plan and other rulemaking by the Federal Communications Commission (“FCC”), including uncertainty relating to future eligible telecommunication carrier (“ETC”) funding from the universal service fund (“USF”), as discussed below.

 

Cash Flows and Investments

 

U.S. Cellular believes that cash on hand, expected future cash flows from operating activities and sources of external financing provide substantial liquidity and financial flexibility and are sufficient to permit U.S. Cellular to finance its contractual obligations and anticipated capital expenditures for the foreseeable future. U.S. Cellular continues to seek to maintain a strong balance sheet and an investment grade credit rating.

 

See “Financial Resources” and “Liquidity and Capital Resources” below for additional information related to cash flows and investments.

 

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Recent Developments

 

American Recovery and Reinvestment Act

 

Congress enacted the American Recovery and Reinvestment Act of 2009, or the Recovery Act, which provides, among other things, for an aggregate appropriation of $7.2 billion to fund grants and loans to provide broadband infrastructure, access and equipment to consumers residing in rural, unserved or underserved areas of the United States. U.S. Cellular has not received any grants of Recovery Act funds. The distribution of Recovery Act funds to other telecommunications service providers could impact competition in certain of U.S. Cellular’s service areas.

 

National Broadband Plan and Related Matters

 

In early 2009, Congress directed the FCC to develop a National Broadband Plan to ensure every American has “access to broadband capability.”  In March 2010, the FCC released the plan which describes the FCC’s goals in enhancing broadband availability and the methods for achieving those goals over the next decade. The six long-term goals identified by the FCC in the plan include:

 

(1)          At least 100 million U.S. homes should have affordable access to actual download speeds of at least 100 megabits per second and actual upload speeds of at least 50 megabits per second;

(2)          The United States should lead the world in mobile innovation, with the fastest and most extensive wireless networks of any nation;

(3)          Every American should have affordable access to robust broadband service, and the means and skills to subscribe if they so choose;

(4)          Every community should have affordable access to at least 1 gigabit per second (“Gbps”) broadband service to anchor institutions such as schools, hospitals and government buildings;

(5)          To ensure the safety of Americans, every first responder should have access to a nationwide public safety wireless network;

(6)          To ensure that America leads in the clean energy economy, every American should be able to use broadband to track and manage their real-time energy consumption.

 

The National Broadband Plan identifies four approaches in which the government can influence broadband development in the United States.  The following identifies each of these approaches and also discusses certain actions taken by the FCC on April 21, 2010, consistent with or in furtherance of the National Broadband Plan.

 

(1)  Design policies to ensure robust competition and, as a result, maximize consumer welfare, innovation and investment:

 

Under this approach, among other things, action would be taken that would facilitate wireless data roaming.  Consistent with this policy, on April 21, 2010, the FCC issued a proposed rulemaking seeking comment on rules that if adopted, would apply to roaming for mobile data services, such as mobile broadband service.

 

In addition, consistent with the foregoing, on April 21, 2010, the FCC issued an order expanding voice roaming by eliminating the “home roaming exclusion” that allowed a wireless carrier to deny roaming where the requesting carrier had spectrum in the relevant market.  As a result, the FCC will treat requests for automatic roaming in home markets under the same framework as other requests for automatic roaming.

 

In addition, the National Broadband Plan recommends that new spectrum be identified by the end of 2010 and released for unlicensed use within the next ten years and that revised rules be proposed in the third quarter of 2010 to allow for increased spectrum sharing among compatible point-to-point microwave services and greater flexibility in deploying wireless backhaul.

 

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(2)  Ensure efficient allocation and management of assets that the government controls or influences, such as spectrum, poles and rights-of-way, to encourage network upgrades and competitive entry:

 

Under this approach, among other things, the FCC would ensure that assets (e.g., spectrum and poles) are managed efficiently such as through rules on right of way, and access to support infrastructure of municipalities and competitors.

 

In addition, the National Broadband Plan recommends that the FCC make 500 megahertz of spectrum available for broadband use within the next ten years, of which 300 MHz of high-value spectrum between 225 MHz and 3.7 gigahertz should be made available for mobile use within five years.

 

Also, the National Broadband Plan recommends that Congress consider expanding the FCC’s authority to enable it to conduct incentive auctions in which incumbent licensees may relinquish rights in spectrum assignments for the FCC to reclaim and re-license that spectrum for another purpose which could include mobile uses.

 

(3)  Reform current universal service mechanisms to support deployment of broadband in high-cost areas; and ensure that low-income Americans can afford broadband; and, in addition, support efforts to boost adoption and utilization:

 

Under this approach, among other things, the USF would be reformed to transfer funding from existing USF mechanisms to a new fund aimed at broadband deployment.  As part of this plan, on April 21, 2010, the FCC issued a notice of inquiry and proposed rulemaking with the goal of reforming USF to ultimately transition USF compensation from current recipients for the provision of voice services to carriers for the provision of broadband in unserved areas.  If such actions are taken, they could reduce support for wireless recipients of USF funds, which could have a material adverse effect on U.S. Cellular.

 

The National Broadband Plan also contemplates a reform of inter-carrier compensation in conjunction with the changes to the USF. In the notice of inquiry and proposed rulemaking of April 21, 2010, the FCC indicated that it was seeking comment on the relationship of the USF and existing inter-carrier compensation and ways to reform inter-carrier compensation.  However, the notice of inquiry and proposed rulemaking of April 21, 2010 does not make any specific recommendations concerning inter-carrier compensation and, thus, the issue is likely to be the subject of further rulemaking proceedings by the FCC.

 

(4)  Reform laws, policies, standards and incentives to maximize the benefits of broadband in sectors that the government influences significantly, such as public education, health care and government operations:

 

Under this approach, among other things, state and local governments would be encouraged to invest in broadband and to implement online service delivery and to use cloud-computing models.

 

The FCC notes that about one-half of the plan will be addressed by the FCC, while the remainder would be addressed by Congress, the Executive Branch and the state and local government working closely with private and non-profit sectors.  U.S. Cellular cannot predict the outcome of these deliberations or what effect any final rules, regulations or laws may have on its ability to compete in the provision of wireless broadband service to its customer base. Changes in regulation or the amount or distribution of funds to U.S. Cellular and other telecommunications service providers could impact competition in certain of U.S. Cellular’s service areas, and could have a material adverse affect on U.S. Cellular’s business, financial condition or results of operations.

 

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Net Neutrality

 

As disclosed in U.S. Cellular’s Annual Report on Form 10-K for the year ended December 31, 2009, the FCC initiated a rulemaking proceeding in 2009 designed to codify its existing “Net Neutrality” principles and impose new requirements that could have the effect of restricting the ability of wireless Internet service providers to manage applications and content that traverse their networks. These principles, which the FCC initially announced in 2005, espoused the right of consumers to access lawful Internet content, to run applications and use services of their choice.  In 2008, the FCC ruled that Comcast had violated these principles by moderating the amount of bandwidth used by certain peer-to-peer services and ordered Comcast to discontinue this practice. Comcast challenged this order and, on April 6, 2010, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the FCC had exceeded its authority under the Communications Act of 1934, as amended, when it sought to regulate Comcast’s network management practices for its high-speed Internet access service. In 2010, the FCC sought and received comments on its Net Neutrality proposals and concerning the impact of the Comcast case on those proposals.  It is currently evaluating those comments.  Accordingly, the status of the FCC’s network neutrality proceeding is uncertain at this time and, as a result, there may be further proceedings or legislation relating to the FCC’s authority to regulate the Internet. U.S. Cellular cannot predict the ultimate outcome of this matter or the effect it will have on its wireless broadband services.

 

2010 Estimates

 

U.S. Cellular’s estimates of full-year 2010 results are shown below. Such estimates represent U.S. Cellular’s views as of the date of filing of U.S. Cellular’s Quarterly Report on Form 10-Q (“Form 10-Q”) for the quarterly period ended March 31, 2010. Such forward-looking statements should not be assumed to be accurate as of any future date. U.S. Cellular undertakes no duty to update such information whether as a result of new information, future events or otherwise. There can be no assurance that final results will not differ materially from such estimated results.

 

 

 

2010
Estimated Results

 

Service revenues

 

$3,975-$4,075 million

 

Adjusted OIBDA (1)

 

$850-$950 million

 

Operating income

 

$250-$350 million

 

Depreciation, amortization and accretion expenses, and losses on disposals and impairment of assets (2)

 

Approx. $600 million

 

Capital expenditures

 

Approx. $600 million

 

 


(1)   Adjusted OIBDA is defined as operating income excluding the effects of: depreciation, amortization and accretion (OIBDA); the net gain or loss on asset disposals (if any); and the loss on impairment of intangible assets (if any). This amount may also be commonly referred to by management as operating cash flow. This amount should not be confused with Cash flows from operating activities, which is a component of the Consolidated Statement of Cash Flows.

 

(2)   The 2010 Estimated Results include estimates for Depreciation, amortization and accretion expenses and losses on disposals of assets, but do not include an estimate for losses on impairment of assets since these can not be predicted.

 

U.S. Cellular management currently believes that the foregoing estimates represent a reasonable view of what is achievable considering actions that U.S. Cellular has taken and will be taking. However, the current general economic conditions have created a challenging business environment that could continue to significantly impact actual results. U.S. Cellular expects to continue its focus on customer satisfaction by delivering a high quality network, attractively priced service plans, a broad line of handsets and other products, and outstanding customer service in its company-owned and agent retail stores and customer care centers. U.S. Cellular believes that future growth in its revenues will result primarily from selling additional products and services, including data products and services, to its existing customers, increasing the number of multi-device users among its existing customers and attracting wireless users switching from other wireless carriers, rather than by adding users that are new to wireless service. U.S. Cellular is focusing on opportunities to increase revenues, pursuing cost reduction initiatives in various areas and implementing a number of initiatives to enable future growth. The initiatives are intended, among other things, to allow U.S. Cellular to accelerate its introduction of new products and services, better segment its customers for new services and retention, sell additional services such as data, expand its Internet sales and customer service capabilities, improve its prepaid products and services and reduce operational expenses over the long term.

 

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RESULTS OF OPERATIONS

 

Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009

 

Following is a table of summarized operating data for U.S. Cellular’s consolidated operations.

 

As of March 31, (1)

 

2010

 

2009

 

Total market population of consolidated operating markets (2)

 

46,546,000

 

46,306,000

 

Customers (3)

 

6,147,000

 

6,243,000

 

Market penetration (2)

 

13.2

%

13.5

%

Total full-time equivalent employees

 

8,868

 

8,754

 

Cell sites in service

 

7,310

 

6,942

 

 

For the Three Months Ended March 31, (4)

 

2010

 

2009

 

Net retail customer additions (5)

 

24,000

 

63,000

 

Net customer additions (5)

 

6,000

 

47,000

 

Average monthly service revenue per customer (6)

 

$

52.42

 

$

52.64

 

Postpay churn rate (7)

 

1.4

%

1.5

%

 


(1)   Amounts include results for U.S. Cellular’s consolidated operating markets as of March 31.

 

(2)   Calculated using 2009 and 2008 Claritas population estimates for 2010 and 2009, respectively. “Total market population of consolidated operating markets” is used only for the purposes of calculating market penetration of consolidated operating markets, which is calculated by dividing customers by the total market population (without duplication of population in overlapping markets).

 

The total market population and penetration measures for consolidated operating markets apply to markets in which U.S. Cellular provides wireless service to customers. For comparison purposes, total market population and penetration related to all consolidated markets in which U.S. Cellular owns an interest were 90,468,000 and 6.8%, and 83,726,000 and 7.5%, as of March 31, 2010 and 2009, respectively.

 

(3)   U.S. Cellular’s customer base consists of the following types of customers:

 

 

 

March 31,

 

 

 

2010

 

2009

 

Customers on postpay service plans in which the end user is a customer of U.S. Cellular (“postpay customers”)

 

5,473,000

 

5,480,000

 

Customers on prepaid service plans in which the end user is a customer of U.S. Cellular (“prepaid customers”)

 

295,000

 

290,000