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United States Cellular 10-Q 2011

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usm10q.htm - Generated by SEC Publisher for SEC Filing

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 June 30, 2011

¨ 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 ¨

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 x No ¨

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 ¨

Non-accelerated filer ¨

(Do not check if a smaller reporting company)

Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ 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 June 30, 2011
Common Shares, $1 par value		51,531,111 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 June 30, 2011

Index

				Page No.
Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited)

		Consolidated Statement of Operations
			Three and Six Months Ended June 30, 2011 and 2010	3

		Consolidated Statement of Cash Flows
			Six Months Ended June 30, 2011 and 2010	4

		Consolidated Balance Sheet
			June 30, 2011 and December 31, 2010	5

		Consolidated Statement of Changes in Equity
			Six Months Ended June 30, 2011 and 2010	7

		Notes to Consolidated Financial Statements		9

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

		Overview		17
		Results of Operations		20
		Recent Accounting Pronouncements		27
		Financial Resources		27
		Liquidity and Capital Resources		30
		Application of Critical Accounting Policies and Estimates		32
		Safe Harbor Cautionary Statement		33

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		36

	Item 4.	Controls and Procedures		37

Part II.	Other Information

	Item 1.	Legal Proceedings		38

	Item 1A.	Risk Factors		38

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		39

	Item 5.	Other Information		39

	Item 6.	Exhibits		40

Signatures

Table of Contents

Part I. Financial Information
Item 1. Financial Statements

United States Cellular Corporation

Consolidated Statement of Operations (Unaudited)

			Three Months Ended						Six Months Ended
			June 30,						June 30,
(Dollars and shares in thousands, except per share amounts)			2011			2010			2011			2010

Operating revenues
	Service		$	1,002,030		$	972,576		$	1,987,143		$	1,937,584
	Equipment sales			74,152			57,317			146,131			116,166
		Total operating revenues		1,076,182			1,029,893			2,133,274			2,053,750

Operating expenses
	System operations (excluding Depreciation, amortization and accretion reported below)			227,801			213,542			445,404			420,656
	Cost of equipment sold			168,614			161,965			362,974			323,070
	Selling, general and administrative (including charges from affiliates of $25.8 million and $26.4 million, respectively, for the three months, and $51.9 million and $54.1 million, respectively, for the six months)			426,172			445,177			868,176			874,782
	Depreciation, amortization and accretion			148,283			144,455			293,328			287,688
	Loss on asset disposals, net			2,922			1,250			3,959			6,426
		Total operating expenses		973,792			966,389			1,973,841			1,912,622

Operating income				102,390			63,504			159,433			141,128

Investment and other income (expense)
	Equity in earnings of unconsolidated entities			22,469			25,753			43,360			50,447
	Interest and dividend income			748			862			1,597			1,883
	Gain on investment			13,373			—			13,373			—
	Interest expense			(25,197	)		(16,438	)		(40,383	)		(32,962	)
	Other, net			175			472			50			407
		Total investment and other income (expense)		11,568			10,649			17,997			19,775

Income before income taxes				113,958			74,153			177,430			160,903
	Income tax expense			34,077			28,181			58,169			61,843

Net income				79,881			45,972			119,261			99,060
	Less: Net income attributable to noncontrolling interests, net of tax			(5,993	)		(5,219	)		(11,262	)		(10,938	)
Net income attributable to U.S. Cellular shareholders			$	73,888		$	40,753		$	107,999		$	88,122

Basic weighted average shares outstanding				84,930			86,425			85,206			86,500
Basic earnings per share attributable to U.S. Cellular shareholders			$	0.87		$	0.47		$	1.27		$	1.02

Diluted weighted average shares outstanding				85,397			86,787			85,739			86,873
Diluted earnings per share attributable to U.S. Cellular shareholders			$	0.87		$	0.47		$	1.26		$	1.01

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

Table of Contents

United States Cellular Corporation

Consolidated Statement of Cash Flows (Unaudited)

				Six Months Ended
				June 30,
(Dollars in thousands)				2011			2010

Cash flows from operating activities
	Net income			$	119,261		$	99,060
	Add (deduct) adjustments to reconcile net income
		to net cash flows from operating activities
			Depreciation, amortization and accretion		293,328			287,688
			Bad debts expense		27,677			36,605
			Stock-based compensation expense		10,798			9,012
			Deferred income taxes, net		80,371			(9,935	)
			Equity in earnings of unconsolidated entities		(43,360	)		(50,447	)
			Distributions from unconsolidated entities		47,143			48,491
			Loss on asset disposals, net		3,959			6,426
			Gain on investment		(13,373	)		—
			Noncash interest expense		9,152			1,231
			Other operating activities		1,044			(1,695	)
	Changes in assets and liabilities from operations
			Accounts receivable		(35,907	)		(22,995	)
			Inventory		(48,504	)		32,252
			Accounts payable - trade		8,588			(34,009	)
			Accounts payable - affiliate		5,102			(3,017	)
			Customer deposits and deferred revenues		22,376			3,854
			Accrued taxes		10,215			27,744
			Accrued interest		111			121
			Other assets and liabilities		(74,549	)		(26,680	)
					423,432			403,706

Cash flows from investing activities
	Additions to property, plant and equipment				(258,040	)		(255,004	)
	Cash paid for acquisitions and licenses				(22,167	)		(10,501	)
	Cash paid for investments				(20,000	)		(175,000	)
	Cash received for investments				75,000			226
	Other investing activities				2,691			663
					(222,516	)		(439,616	)

Cash flows from financing activities
	Repayment of long-term debt				(330,043	)		(32	)
	Issuance of long-term debt				342,000			—
	Common shares reissued for benefit plans, net of tax payments				1,264			144
	Common shares repurchased				(62,308	)		(21,423	)
	Payment of debt issuance costs				(11,229	)		—
	Distributions to noncontrolling interests				(877	)		(4,314	)
	Other financing activities				163			(23	)
					(61,030	)		(25,648	)

Cash classified as held for sale					(5,687	)		—

Net increase (decrease) in cash and cash equivalents					134,199			(61,558	)

Cash and cash equivalents
	Beginning of period				294,426			294,411
	End of period			$	428,625		$	232,853

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

Table of Contents

United States Cellular Corporation

Consolidated Balance Sheet — Assets (Unaudited)

			June 30,		December 31,
(Dollars in thousands)			2011		2010

Current assets
	Cash and cash equivalents		$	428,625	$	294,426
	Short-term investments			96,085		146,586
	Accounts receivable
		Customers and agents, less allowances of $20,955 and $24,455, respectively		318,687		331,452
		Roaming		38,756		37,218
		Affiliated		438		226
		Other, less allowances of $1,461 and $1,361, respectively		72,566		55,123
	Inventory			160,783		112,279
	Income taxes receivable			32,106		41,397
	Prepaid expenses			64,208		53,356
	Net deferred income tax asset			37,582		26,757
	Other current assets			11,099		10,804
				1,260,935		1,109,624

Assets held for sale				53,910		—

Investments
	Licenses			1,454,901		1,452,101
	Goodwill			494,737		494,737
	Customer lists, net of accumulated amortization of $96,376 and $96,153, respectively			536		759
	Investments in unconsolidated entities			142,377		160,847
	Notes and interest receivable — long-term			3,997		4,070
	Long-term investments			40,326		46,033
				2,136,874		2,158,547
Property, plant and equipment
	In service and under construction			6,598,300		6,382,581
	Less: Accumulated depreciation			4,016,255		3,767,509
				2,582,045		2,615,072

Other assets and deferred charges				56,152		50,367

Total assets			$	6,089,916	$	5,933,610

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

Table of Contents

United States Cellular Corporation

Consolidated Balance Sheet — Liabilities and Equity (Unaudited)

					June 30,			December 31,
(Dollars and shares in thousands)					2011			2010

Current liabilities
	Current portion of long-term debt				$	101		$	101
	Accounts payable
		Affiliated				15,894			10,791
		Trade				290,308			281,601
	Customer deposits and deferred revenues					168,803			146,428
	Accrued taxes					41,421			39,299
	Accrued compensation					48,551			65,952
	Other current liabilities					79,726			121,823
						644,804			665,995

Liabilities held for sale						871			—

Deferred liabilities and credits
	Net deferred income tax liability					684,472			579,769
	Other deferred liabilities and credits					277,543			284,949

Long-term debt						880,300			867,941

Commitments and contingencies

Noncontrolling interests with redemption features						863			855

Equity
	U.S. Cellular shareholders’ equity
		Series A Common and Common Shares
			Authorized 190,000 shares (50,000 Series A Common and 140,000 Common Shares)
			Issued 88,074 shares (33,006 Series A Common and 55,068 Common Shares)
			Outstanding 84,537 shares (33,006 Series A Common and 51,531 Common Shares) and 85,547 shares (33,006 Series A Common and 52,541 Common Shares), respectively
			Par Value ($1 per share) ($33,006 Series A Common and $55,068 Common Shares)			88,074			88,074
		Additional paid-in capital				1,378,166			1,368,487
		Treasury shares, at cost, 3,537 and 2,527 Common Shares, respectively				(153,525	)		(105,616	)
		Retained earnings				2,224,453			2,129,638
			Total U.S. Cellular shareholders’ equity			3,537,168			3,480,583

	Noncontrolling interests					63,895			53,518

				Total equity		3,601,063			3,534,101

Total liabilities and equity					$	6,089,916		$	5,933,610

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

Table of Contents

United States Cellular Corporation

Consolidated Statement of Changes in Equity (Unaudited)

	U.S. Cellular Shareholders
(Dollars in thousands)	Series A Common and Common Shares		Additional Paid-In Capital		Treasury Shares			Retained Earnings		Total U.S. Cellular Shareholders’ Equity		Noncontrolling Interests		Total Equity
Balance, December 31, 2010	$	88,074	$	1,368,487	$	(105,616	)	$	2,129,638	$	3,480,583	$	53,518	$	3,534,101
Add (Deduct)

United States Cellular (USM)

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