U.S. Cellular Reports Second Quarter 2012 Results

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Aug 03, 2012, 07:59 ET

CHICAGO, Aug. 3, 2012 /PRNewswire/ --

Note: Comparisons are year over year unless otherwise noted.

2Q 2012 Highlights

Smartphones as a percent of total devices sold increased to 51.9 percent from 39.6 percent; smartphone customers increased to 36.8 percent of postpaid customers from 23.1 percent.
Postpaid ARPU (average revenue per user) increased 5 percent to $54.42 from $51.84; total ARPU increased 6 percent to $59.05 from $55.69.
Service revenues increased 3 percent to $1,029.7 million.
Postpaid gross additions increased 9 percent and postpaid churn increased to 1.57 percent, resulting in a net loss of 48,000 postpaid customers. Postpaid customers comprised 94 percent of retail customers.
Prepaid gross additions increased 77 percent, driven by the introduction in select Walmart stores of U Prepaid, a new no contract wireless service, and prepaid churn decreased to 6.2 percent, resulting in a net increase of 20,000 prepaid customers.
Retail gross additions increased 23 percent; net loss of 28,000 retail customers, compared to a net loss of 58,000 retail customers.
Cell sites in service increased 2 percent to 7,932, of which 4,512 are owned towers.
4G LTE network covers 30 percent of customers; expect to reach 58 percent of customers by year end.
Investment in the Los Angeles Partnership contributed $19 million to equity in earnings of unconsolidated entities, up from $14 million.

As previously announced, U.S. Cellular will hold a teleconference Aug. 3, 2012 at 9:30 a.m. CDT. Interested parties may listen to the call live by accessing the Investor Relations page of www.uscellular.com or www.teldta.com.

United States Cellular Corporation (NYSE:USM) reported service revenues of $1,029.7 million for the second quarter of 2012, up 3 percent versus $1,002.0 million in the comparable period one year ago. Net income attributable to U.S. Cellular shareholders and related diluted earnings per share were $52.7 million and $0.62, respectively, for the second quarter of 2012, compared to $74.9 million and $0.88, respectively, in the comparable period one year ago.

"Our second quarter results were mixed," said Mary N. Dillon, U.S. Cellular president and CEO. "We achieved a strong increase in postpaid gross customer additions, evidence that we are increasing awareness and convincing wireless consumers to switch to U.S. Cellular. Postpaid churn, however, remained elevated, resulting in a net loss of postpaid subscribers. We're focused on improving our subscriber results by implementing aggressive strategies to offer high-demand devices, expand our distribution options, and further differentiate U.S. Cellular's superior customer service and benefits. Profitability in the quarter declined, however, due to higher device subsidies on 4G LTE handsets and expenses related to data growth, expansion of the 4G LTE network and spending for our multi-year initiatives.

"Our positive prepaid customer results reflect the success we've had selling our U Prepaid service through Walmart since mid-May. We will continue to find new ways to optimize our distribution and be where our customers want to shop.

"Revenues grew in the quarter as smartphone penetration continued to increase, contributing to strong data use and increased average revenue per user. 4G LTE devices made up 17 percent of smartphones sold, and we expect to continue to migrate customers to our expanding 4G LTE network by offering devices like the highly acclaimed Samsung Galaxy S® III.

"To continue our positive momentum related to gross additions, our newly launched marketing campaign, Hello Better, takes an aggressive approach to encouraging our competitors' customers to break free from unrewarding provider relationships. We'll be utilizing a full range of traditional, social, retail and grassroots tools to reach out to customers who are unhappy with their current providers, and show them there's a better option with U.S. Cellular."

Interest expense

The $12.8 million decrease in interest expense was due primarily to the write-off of $8.2 million in unamortized debt issuance costs in 2011 and lower interest rates on outstanding debt.

Guidance for year ending Dec. 31, 2012

Guidance for the year ending Dec. 31, 2012, as of Aug. 3, 2012, is unchanged from the previous guidance provided on May 4, 2012. 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 this guidance.

		2012 Estimated Results (1)
	Service revenues	$4,050-$4,150 million
	Operating income (2)	$200-$300 million
	Depreciation, amortization and accretion expenses,
	and losses on asset disposals and exchanges
	and impairment of assets (2)	Approx. $600 million
	Adjusted OIBDA (2) (3)	$800-$900 million
	Capital expenditures	Approx. $850 million



(1)	These estimates are based on U.S. Cellular's current plans, which include a multi-year deployment of 4G LTE technology which commenced in 2011. New developments or changing conditions (such as customer net growth, customer demand for data services or possible acquisitions, dispositions or exchanges) could affect U.S. Cellular's plans and, therefore, its 2012 estimated results.
(2)	The 2012 Estimated Results do not include any estimate for unrecognized net gains or losses related to disposals and exchanges of assets or losses on impairment of assets (since such transactions and their effects are uncertain).
(3)	Adjusted OIBDA is defined as operating income excluding the effects of depreciation, amortization and accretion (OIBDA); the net gain or loss on asset disposals and exchanges (if any); and the loss on impairment of assets (if any). This measure also may be commonly referred to by management as operating cash flow. This measure should not be confused with Cash flows from operating activities, which is a component of the Consolidated Statement of Cash Flows. Adjusted OIBDA excludes the net gain or loss on asset disposals and exchanges (if any) and loss on impairment of assets (if any), in order to show operating results on a more comparable basis from period to period. U.S. Cellular does not intend to imply that any of such amounts that are excluded are non-recurring, infrequent or unusual and, accordingly, they may be incurred in the future. U.S. Cellular believes this measure provides useful information to investors regarding U.S. Cellular's financial condition and results of operations because it highlights certain key cash and non-cash items and their impacts on cash flows from operating activities.

Conference call information

U.S. Cellular will hold a conference call on Aug. 3, 2012 at 9:30 a.m. CDT.

Access the live call on the Investor Relations page of uscellular.com or at http://www.videonewswire.com/event.asp?id=88721.
Access the call by phone at 877/407-8029 (US/Canada), no pass code required.

Before the call, certain financial and statistical information to be discussed during the call will be posted to the Investor Relations page of www.uscellular.com. The call will be archived on the Conference Calls page of www.uscellular.com.

About U.S. Cellular

United States Cellular Corporation, the nation's seventh-largest wireless carrier, provides a comprehensive range of wireless products and services, excellent customer support, and a high-quality network to approximately 5.8 million customers in 26 states. The Chicago-based company employed approximately 8,600 people as of June 30, 2012. At the end of the second quarter of 2012, Telephone and Data Systems, Inc. owned 84 percent of U.S. Cellular.

Visit www.uscellular.com for comprehensive financial information, including earnings releases, quarterly and annual filings, shareholder information and more.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: All information set forth in this news release, except historical and factual information, represents forward-looking statements. This includes all statements about the company's plans, beliefs, estimates, and expectations. These statements are based on current estimates, projections, and assumptions, which involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Important factors that may affect these forward-looking statements include, but are not limited to: the ability of the company to successfully manage and grow its markets; the overall economy; competition; the ability to obtain or maintain roaming arrangements with other carriers on acceptable terms; the state and federal telecommunications regulatory environment; the value of assets and investments; adverse changes in the ratings afforded our debt securities by accredited ratings organizations; industry consolidation; advances in telecommunications technology; uncertainty of access to the capital markets; pending and future litigation; changes in income tax rates, laws, regulations or rulings; acquisitions/divestitures of properties and/or licenses; changes in customer growth rates, average monthly revenue per user, churn rates, roaming revenue and terms, the availability of handset devices, or the mix of products and services offered by the company. Investors are encouraged to consider these and other risks and uncertainties that are discussed in the Form 8-K Current Report used by U.S. Cellular to furnish this press release to the Securities and Exchange Commission ("SEC"), which are incorporated by reference herein.

United States Cellular Corporation
Summary Operating Data (Unaudited)

Quarter Ended			6/30/2012		3/31/2012		12/31/2011		9/30/2011		6/30/2011
Total population
	Consolidated markets (1)		92,684,000		92,684,000		91,965,000		91,965,000		91,204,000
	Consolidated operating markets (1)		46,966,000		46,966,000		46,888,000		46,888,000		46,888,000
Market penetration at end of period
	Consolidated markets (2)		6.3%		6.3%		6.4%		6.5%		6.5%
	Consolidated operating markets (2)		12.3%		12.4%		12.6%		12.7%		12.7%
All customers
	Total at end of period		5,799,000		5,837,000		5,891,000		5,932,000		5,968,000
	Gross additions		290,000		285,000		306,000		299,000		257,000
	Net additions (losses)		(38,000)		(49,000)		(41,000)		(36,000)		(70,000)
	Smartphones sold as a percent of
	total devices sold (3)		51.9%		54.1%		52.5%		39.9%		39.6%
Retail customers
	Total at end of period		5,542,000		5,570,000		5,608,000		5,621,000		5,644,000
	Smartphone penetration (3) (4)		36.8%		34.4%		30.5%		26.2%		23.1%
	Gross additions		277,000		273,000		298,000		284,000		226,000
	Net retail additions (losses) (5)		(28,000)		(34,000)		(13,000)		(23,000)		(58,000)
	Net postpaid additions (losses)		(48,000)		(38,000)		(20,000)		(34,000)		(41,000)
	Net prepaid additions (losses)		20,000		4,000		7,000		11,000		(17,000)
Service revenue components (000s)
	Retail service	$	889,219	$	888,527	$	882,091	$	871,199	$	868,630
	Inbound roaming		86,363		80,132		93,353		107,810		82,760
	Other		54,160		55,161		54,601		57,600		50,640
Total service revenues (000s)		$	1,029,742	$	1,023,820	$	1,030,045	$	1,036,609	$	1,002,030
Total ARPU (6)		$	59.05	$	58.21	$	58.13	$	58.09	$	55.69
Billed ARPU (7)		$	50.99	$	50.52	$	49.78	$	48.82	$	48.28
Postpaid ARPU (8)		$	54.42	$	54.00	$	53.35	$	52.41	$	51.84
Postpaid churn rate (9)			1.6%		1.6%		1.6%		1.5%		1.4%
Capital expenditures (000s)		$	183,200	$	201,300	$	276,400	$	248,000	$	162,100
Cell sites in service			7,932		7,875		7,882		7,828		7,770


(1)	Used only to calculate market penetration of consolidated markets and consolidated operating markets, respectively. See footnote (2) below.
(2)	Market Penetration is calculated by dividing the number of wireless customers at the end of the period by the total population of consolidated markets and consolidated operating markets, respectively, as estimated by Claritas®.
(3)	Smartphones represent wireless devices which run on an Android™, BlackBerry®, or Windows Mobile® operating system, excluding tablets.
(4)	Smartphone penetration is calculated by dividing postpaid smartphone customers by total postpaid customers.
(5)	Includes net postpaid additions (losses) and net prepaid additions (losses).
(6)	Total ARPU - Average monthly service revenue per user includes retail service, inbound roaming and other service revenues and is calculated by dividing total service revenues by the number of months in the period and by the average total customers during the period.
(7)	Billed ARPU - Average monthly billed revenue per user is calculated by dividing total retail service revenues by the number of months in the period and by the average total customers during the period. Retail service revenues include revenues attributable to postpaid, prepaid and reseller customers.
(8)	Postpaid ARPU - Average monthly revenue per postpaid user is calculated by dividing total retail service revenues from postpaid customers by the number of months in the period and by the average postpaid customers during the period.
(9)	Represents the percentage of the postpaid customer base that disconnects service each month. This amount represents the average postpaid churn rate for each respective quarterly period.


United States Cellular Corporation Consolidated Statement of Operations Highlights
Three Months Ended June 30,
(Unaudited, dollars and shares in thousands, except per share amounts)

								Increase (Decrease)
				2012		2011		Amount		Percent
Operating revenues
	Service			$	1,029,742	$	1,002,030	$	27,712		3%
	Equipment sales				74,658		74,152		506		1%
		Total operating revenues			1,104,400		1,076,182		28,218		3%

Operating expenses
	System operations (excluding Depreciation,
		amortization and accretion reported below)			243,227		227,801		15,426		7%
	Cost of equipment sold				191,700		170,833		20,867		12%
	Selling, general and administrative				435,053		423,953		11,100		3%
	Depreciation, amortization and accretion				147,555		146,577		978		1%
	Loss on asset disposals and exchanges, net				2,702		2,922		(220)		(8%)
		Total operating expenses			1,020,237		972,086		48,151		5%

Operating income					84,163		104,096		(19,933)		(19%)

Investment and other income (expense)
	Equity in earnings of unconsolidated entities				25,154		22,469		2,685		12%
	Interest and dividend income				845		748		97		13%
	Gain (loss) on investment				(3,728)		13,373		(17,101)		>(100)%
	Interest expense				(12,360)		(25,197)		12,837		51%
	Other, net				(229)		175		(404)		>(100)%
			Total investment and other income (expense)		9,682		11,568		(1,886)		(16%)

Income before income taxes					93,845		115,664		(21,819)		(19%)
	Income tax expense				34,597		34,732		(135)		—

Net income					59,248		80,932		(21,684)		(27%)
	Less: Net income attributable to noncontrolling
		interests, net of tax			(6,563)		(5,993)		(570)		(10%)
Net income attributable to U.S. Cellular shareholders				$	52,685	$	74,939	$	(22,254)		(30%)

Basic weighted average shares outstanding					84,707		84,930		(223)		—
Basic earnings per share attributable to
	U.S. Cellular shareholders			$	0.62	$	0.88	$	(0.26)		(30%)

Diluted weighted average shares outstanding					85,061		85,397		(336)		—
Diluted earnings per share attributable to
	U.S. Cellular shareholders			$	0.62	$	0.88	$	(0.26)		(30%)



United States Cellular Corporation Consolidated Statement of Operations Highlights
Six Months Ended June 30,
(Unaudited, dollars and shares in thousands, except per share amounts)

								Increase (Decrease)
				2012		2011		Amount		Percent
Operating revenues
	Service			$	2,053,562	$	1,987,143	$	66,419		3%
	Equipment sales				142,959		146,131		(3,172)		(2%)
		Total operating revenues			2,196,521		2,133,274		63,247		3%

Operating expenses
	System operations (excluding Depreciation,
		amortization and accretion reported below)			476,391		445,404		30,987		7%
	Cost of equipment sold				378,736		367,488		11,248		3%
	Selling, general and administrative				877,297		863,662		13,635		2%
	Depreciation, amortization and accretion				294,240		289,917		4,323		1%
	Loss on asset disposals				492		3,959		(3,467)		(88%)
		Total operating expenses			2,027,156		1,970,430		56,726		3%

Operating income					169,365		162,844		6,521		4%

Investment and other income (expense)
	Equity in earnings of unconsolidated entities				46,768		43,360		3,408		8%
	Interest and dividend income				1,888		1,597		291		18%
	Gain (loss) on investment				(3,728)		13,373		(17,101)		>(100)%
	Interest expense				(25,771)		(40,383)		14,612		36%
	Other, net				(27)		50		(77)		>(100)%
			Total investment and other income (expense)		19,130		17,997		1,133		6%

Income before income taxes					188,495		180,841		7,654		4%
	Income tax expense				60,235		59,479		756		1%

Net income					128,260		121,362		6,898		6%
	Less: Net income attributable to noncontrolling
		interests, net of tax			(13,083)		(11,262)		(1,821)		(16%)
Net income attributable to U.S. Cellular shareholders				$	115,177	$	110,100	$	5,077		5%

Basic weighted average shares outstanding					84,638		85,206		(568)		(1%)
Basic earnings per share attributable to
	U.S. Cellular shareholders			$	1.36	$	1.29	$	0.07		5%

Diluted weighted average shares outstanding					85,076		85,739		(663)		(1%)
Diluted earnings per share attributable to
	U.S. Cellular shareholders			$	1.35	$	1.28	$	0.07		5%

United States Cellular Corporation Consolidated Balance Sheet Highlights
(Unaudited, dollars in thousands)

ASSETS

		June 30,		December 31,
		2012		2011
Current assets
	Cash and cash equivalents	$	437,624	$	424,155
	Short-term investments		100,738		127,039
	Accounts receivable from customers and other		430,761		441,821
	Inventory		183,139		127,056
	Income taxes receivable		324		74,791
	Prepaid expenses		61,194		55,980
	Net deferred income tax asset		35,641		31,905
	Other current assets		11,197		10,096
			1,260,618		1,292,843

Assets held for sale			—		49,647

Investments
	Licenses		1,484,202		1,470,769
	Goodwill		494,737		494,737
	Customer lists, net		170		314
	Investments in unconsolidated entities		175,663		138,096
	Notes and interest receivable – long-term		82		1,921
	Long-term investments		55,468		30,057
			2,210,322		2,135,894

Property, plant and equipment, net
	In service and under construction		7,232,771		7,008,449
	Less: accumulated depreciation		4,349,653		4,218,147
			2,883,118		2,790,302

Other assets and deferred charges			71,194		59,290

Total assets		$	6,425,252	$	6,327,976

United States Cellular Corporation Consolidated Balance Sheet Highlights
(Unaudited, dollars in thousands)

LIABILITIES AND EQUITY

			June 30,		December 31,
			2012		2011
Current liabilities
	Current portion of long-term debt		$	127	$	127
	Accounts payable
		Affiliated		15,312		12,183
		Trade		239,950		303,779
	Customer deposits and deferred revenues			202,485		181,355
	Accrued taxes			44,250		34,095
	Accrued compensation			51,305		69,551
	Other current liabilities			89,284		121,190
				642,713		722,280

Liabilities held for sale				—		1,051

Deferred liabilities and credits
	Net deferred income tax liability			840,484		799,190
	Other deferred liabilities and credits			247,692		248,213

Long-term debt				880,623		880,320


Noncontrolling interests with mandatory redemption features				1,050		1,005

Equity
	U.S. Cellular shareholders' equity
	Series A Common and Common Shares, par value $1 per share			88,074		88,074
	Additional paid-in capital			1,399,010		1,387,341
	Treasury shares			(146,057)		(152,817)
	Retained earnings			2,403,312		2,297,363
		Total U.S. Cellular shareholders' equity		3,744,339		3,619,961

Noncontrolling interests				68,351		55,956

	Total equity			3,812,690		3,675,917

Total liabilities and equity			$	6,425,252	$	6,327,976

United States Cellular Corporation Schedule of Cash and Cash Equivalents and Investments (Unaudited, dollars in thousands) The following table presents U.S. Cellular's cash and cash equivalents and investments at June 30, 2012 and December 31, 2011.

		June 30,		December 31,
		2012		2011

Cash and cash equivalents		$	437,624	$	424,155

Amounts included in short-term investments (1)(2)
	Government-backed securities (3)	$	100,738	$	127,039

Amounts included in long-term investments (1)(4)
	Government-backed securities (3)	$	55,468	$	30,057


(1)	Designated as held-to-maturity investments and recorded at amortized cost on the Consolidated Balance Sheet.
(2)	Maturities are less than twelve months from the respective balance sheet dates.
(3)	Includes U.S. treasuries and corporate notes guaranteed under the Federal Deposit Insurance Corporation's Temporary Liquidity Guarantee Program.
(4)	At June 30, 2012, maturities range between 12 and 21 months from the balance sheet date.

United States Cellular Corporation Consolidated Statement of Cash Flows
Six Months Ended June 30,
(Unaudited, dollars in thousands)


				2012		2011
Cash flows from operating activities
	Net income			$	128,260	$	121,362
	Add (deduct) adjustments to reconcile net income to net
		cash flows from operating activities
			Depreciation, amortization and accretion		294,240		289,917
			Bad debts expense		30,659		27,677
			Stock-based compensation expense		11,057		10,798
			Deferred income taxes, net		30,479		80,371
			Equity in earnings of unconsolidated entities		(46,768)		(43,360)
			Distributions from unconsolidated entities		6,743		47,143
			Loss on asset disposals, net		492		3,959
			(Gain) loss on investment		3,728		(13,373)
			Noncash interest expense		902		9,152
			Other operating activities		321		1,044
	Changes in assets and liabilities from operations
			Accounts receivable		(13,383)		(35,907)
			Inventory		(56,039)		(48,504)
			Accounts payable - trade		(20,987)		23,835
			Accounts payable - affiliate		3,129		5,102
			Customer deposits and deferred revenues		21,131		22,376
			Accrued taxes		85,327		11,525
			Accrued interest		149		111
			Other assets and liabilities		(67,203)		(75,128)
					412,237		438,100

Cash flows from investing activities
	Cash used for additions to property, plant and equipment				(430,225)		(265,394)
	Cash paid for acquisitions and licenses				(12,647)		(22,167)
	Cash received for divestitures				49,786		—
	Cash paid for investments				(45,000)		(20,000)
	Cash received for investments				45,000		75,000
	Other investing activities				(3,097)		2,691
					(396,183)		(229,870)

Cash flows from financing activities
	Repayment of long-term debt				(45)		(330,043)
	Issuance of long-term debt				—		342,000
	Common shares reissued for benefit plans, net of tax payments				(2,465)		1,264
	Common shares repurchased				—		(62,308)
	Payment of debt issuance costs				—		(11,229)
	Distributions to noncontrolling interests				(643)		(877)
	Other financing activities				568		163
					(2,585)		(61,030)

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

Net increase in cash and cash equivalents					13,469		141,513

Cash and cash equivalents
	Beginning of period				424,155		276,915
	End of period			$	437,624	$	418,428

United States Cellular Corporation Financial Measures and Reconciliations (Unaudited, dollars in thousands)

			Three Months Ended June 30,				Six Months Ended June 30,
			2012		2011		2012		2011

Service revenues			$	1,029,742	$	1,002,030	$	2,053,562	$	1,987,143

Operating income				84,163		104,096		169,365		162,844
Add:
	Depreciation, amortization and accretion			147,555		146,577		294,240		289,917
	Loss on impairment of intangible assets			—		—		—		—
	Loss on asset disposals and exchanges			2,702		2,922		492		3,959
		Adjusted OIBDA (1)	$	234,420	$	253,595	$	464,097	$	456,720

		Adjusted OIBDA margin (2)		22.8%		25.3%		22.6%		23.0%


			2012		2011		2012		2011

Cash flows from operating activities			$	155,270	$	180,392	$	412,237	$	438,100
Deduct:
	Cash used for additions to property, plant and equipment			(221,065)		(144,353)		(430,225)		(265,394)
		Free cash flow (3)	$	(65,795)	$	36,039	$	(17,988)	$	172,706


(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 and exchanges (if any); and the loss on impairment of assets (if any). This measure also may be commonly referred to by management as operating cash flow. This measure should not be confused with cash flows from operating activities, which is a component of the consolidated statement of cash flows. Adjusted OIBDA excludes the net gain or loss on asset disposals and exchanges and loss on impairment of assets, if any, in order to show operating results on a more comparable basis from period to period. U.S. Cellular does not intend to imply that any of such amounts that are excluded are non-recurring, infrequent or unusual, and accordingly, they may be incurred in the future.
(2)	Adjusted OIBDA margin is defined as adjusted OIBDA divided by service revenues. Equipment revenues are excluded from the denominator of the calculation since equipment is generally sold at a net loss, and such net loss is included in adjusted OIBDA as a cost of earning service revenues for purposes of assessing business results. U.S. Cellular believes that this calculation method is consistent with the method used by certain investors to assess U.S. Cellular's business results. Adjusted OIBDA margin may also be commonly referred to by management as operating cash flow margin. U.S. Cellular believes this measure provides useful information to investors regarding U.S. Cellular's financial condition and results of operations because it highlights certain key cash and non-cash items and their impacts on cash flows from operating activities.
(3)	Free cash flow is defined as cash flows from operating activities less Cash used for additions to property, plant and equipment. Free cash flow is a non-GAAP financial measure. U.S. Cellular believes that free cash flow as reported by U.S. Cellular may be useful to investors and other users of its financial information in evaluating the amount of cash generated by business operations, after consideration of capital expenditures.