Edgar Filing: UNITED STATES CELLULAR CORP

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 September 30, 2010

¨ 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 September 30, 2010

Common Shares, $1 par value

52,737,943 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 September 30, 2010

Index

			Page No.
Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited)	3

		Consolidated Statement of Operations Three and Nine Months Ended September 30, 2010 and 2009	3

		Consolidated Statement of Cash Flows Nine Months Ended September 30, 2010 and 2009	4

		Consolidated Balance Sheet September 30, 2010 and December 31, 2009	5

		Consolidated Statement of Changes in Equity Nine Months Ended September 30, 2010 and 2009	7

		Notes to Consolidated Financial Statements	9

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

		Overview	20
		Results of Operations	24
		Recent Accounting Pronouncements	31
		Financial Resources	31
		Liquidity and Capital Resources	33
		Application of Critical Accounting Policies and Estimates	36
		Safe Harbor Cautionary Statement	37

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

	Item 4.	Controls and Procedures	41

Part II.	Other Information		42

	Item 1.	Legal Proceedings	42

	Item 1A.	Risk Factors	42

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

	Item 5.	Other Information	43

	Item 6.	Exhibits	44

Signatures			46

Table of Contents

Part I. Financial Information
Item 1. Financial Statements

United States Cellular Corporation

Consolidated Statement of Operations
(Unaudited)

			Three Months Ended						Nine Months Ended
			September 30,						September 30,
(Dollars and shares in thousands, except per share amounts)			2010			2009			2010			2009


Operating revenues
	Service		$	983,503		$	983,918		$	2,921,087		$	2,941,720
	Equipment sales			77,278			73,377			193,444			212,062
		Total operating revenues		1,060,781			1,057,295			3,114,531			3,153,782

Operating expenses
	System operations (excluding Depreciation, amortization and accretion reported below)			218,021			205,611			638,677			600,308
	Cost of equipment sold			189,291			189,354			512,361			531,110
	Selling, general and administrative (including charges from affiliates of $22.9 million and $27.7 million, respectively, for the three months, and $77.0 million and $82.6 million, respectively, for the nine months)			446,938			454,645			1,321,720			1,274,261
	Depreciation, amortization and accretion			144,717			146,052			432,405			422,707
	Loss on asset disposals, net			1,981			2,085			8,407			8,641
		Total operating expenses		1,000,948			997,747			2,913,570			2,837,027

Operating income				59,833			59,548			200,961			316,755

Investment and other income (expense)
	Equity in earnings of unconsolidated entities			23,971			23,126			74,418			73,247
	Interest and dividend income			1,101			1,420			2,984			2,648
	Interest expense			(15,956	)		(19,782	)		(48,918	)		(59,065	)
	Other, net			(620	)		905			(213	)		1,183
		Total investment and other income (expense)		8,496			5,669			28,271			18,013

Income before income taxes				68,329			65,217			229,232			334,768
	Income tax expense			25,051			25,279			86,894			117,026

Net income				43,278			39,938			142,338			217,742
	Less: Net income attributable to noncontrolling interests, net of tax			(5,920	)		(5,606	)		(16,858	)		(17,583	)
Net income attributable to U.S. Cellular shareholders			$	37,358		$	34,332		$	125,480		$	200,159

Basic weighted average shares outstanding				85,992			86,848			86,329			87,011
Basic earnings per share attributable to U.S. Cellular shareholders			$	0.43		$	0.40		$	1.45		$	2.30

Diluted weighted average shares outstanding				86,428			87,128			86,706			87,216
Diluted earnings per share attributable to U.S. Cellular shareholders			$	0.43		$	0.39		$	1.45		$	2.29

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)

			Nine Months Ended
			September 30,
(Dollars in thousands)			2010			2009


Cash flows from operating activities
	Net income		$	142,338		$	217,742
	Add (deduct) adjustments to reconcile net income to net cash flows from operating activities
		Depreciation, amortization and accretion		432,405			422,707
		Bad debts expense		56,244			73,100
		Stock-based compensation expense		13,539			13,000
		Deferred income taxes, net		50,180			44,486
		Equity in earnings of unconsolidated entities		(74,418	)		(73,247	)
		Distributions from unconsolidated entities		59,149			51,306
		Loss on asset disposals, net		8,407			8,641
		Other operating activities		106			1,824
	Changes in assets and liabilities from operations
		Accounts receivable		(46,293	)		(106,380	)
		Inventory		32,673			(4,509	)
		Accounts payable - trade		(50,720	)		(13,432	)
		Accounts payable - affiliate		(8,440	)		(980	)
		Customer deposits and deferred revenues		1,972			(6,185	)
		Accrued taxes		(19,491	)		68,695
		Accrued interest		9,295			9,787
		Other assets and liabilities		(22,933	)		(68,861	)
				584,013			637,694

Cash flows from investing activities
	Additions to property, plant and equipment			(379,692	)		(357,770	)
	Cash paid for acquisitions and licenses			(10,501	)		(12,527	)
	Cash paid for investments			(190,250	)		(275	)
	Cash received for investments			25,330			—
	Other investing activities			656			1,682
				(554,457	)		(368,890	)

Cash flows from financing activities
	Common shares reissued for benefit plans, net of tax payments			738			(119	)
	Common shares repurchased			(40,520	)		(24,283	)
	Payment of debt issuance costs			—			(4,416	)
	Distributions to noncontrolling interests			(5,828	)		(5,855	)
	Other financing activities			(9,065	)		(233	)
				(54,675	)		(34,906	)

Net increase (decrease) in cash and cash equivalents				(25,119	)		233,898

Cash and cash equivalents
	Beginning of period			294,411			170,996
	End of period		$	269,292		$	404,894

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

Table of Contents

United States Cellular Corporation

Consolidated Balance Sheet — Assets
(Unaudited)

			September 30,		December 31,
(Dollars in thousands)			2010		2009


Current assets
	Cash and cash equivalents		$	269,292	$	294,411
	Short-term investments			120,771		330
	Accounts receivable
		Customers and agents, less allowances of $24,600 and $26,260, respectively		312,493		339,825
		Roaming		39,044		28,450
		Affiliated		318		135
		Other, less allowances of $1,676 and $364, respectively		63,252		56,647
	Inventory			119,882		152,556
	Prepaid income taxes			32,086		717
	Prepaid expenses			70,759		63,463
	Net deferred income tax asset			21,570		21,570
	Other current assets			49,111		51,013
				1,098,578		1,009,117
Investments
	Licenses			1,445,501		1,435,000
	Goodwill			494,737		494,737
	Customer lists, net of accumulated amortization of $96,042 and $92,829, respectively			869		4,083
	Investments in unconsolidated entities			177,075		161,481
	Notes and interest receivable — long-term			4,107		4,214
	Long-term investments			46,156		—
				2,168,445		2,099,515
Property, plant and equipment
	In service and under construction			6,203,085		5,884,307
	Less: Accumulated depreciation			3,649,212		3,282,969
				2,553,873		2,601,338

Other assets and deferred charges				38,195		38,776

Total assets			$	5,859,091	$	5,748,746

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)

					September 30,			December 31,
(Dollars and shares in thousands)					2010			2009


Current liabilities
	Current portion of long-term debt				$	91		$	76
	Accounts payable
		Affiliated				6,291			14,732
		Trade				245,542			296,288
	Customer deposits and deferred revenues					142,220			140,248
	Accrued taxes					78,686			57,507
	Accrued compensation					57,207			62,242
	Other current liabilities					88,216			92,884
						618,253			663,977

Deferred liabilities and credits
	Net deferred income tax liability					559,746			513,994
	Other deferred liabilities and credits					269,333			262,412

Long-term debt						867,790			867,522

Commitments and contingencies

Noncontrolling interests with redemption features						791			727

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 85,744 shares (33,006 Series A Common and 52,738 Common Shares) and 86,540 shares (33,006 Series A Common and 53,534 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				1,364,266			1,356,322
		Treasury shares, at cost, 2,330 and 1,534 Common Shares, respectively				(97,109	)		(69,616	)
		Retained earnings				2,126,825			2,013,633
			Total U.S. Cellular shareholders’ equity			3,482,056			3,388,413

	Noncontrolling interests					61,122			51,701

				Total equity		3,543,178			3,440,114

Total liabilities and equity					$	5,859,091		$	5,748,746

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, 2009	$	88,074	$	1,356,322		$	(69,616	)	$	2,013,633		$	3,388,413		$	51,701		$	3,440,114
Add (Deduct)
Net income attributable to U.S. Cellular shareholders		—		—			—			125,480			125,480			—			125,480
Net income attributable to noncontrolling interests classified as equity		—		—			—			—			—			16,829			16,829
Repurchase of Common Shares		—		—			(40,520	)		—			(40,520	)		—			(40,520	)
Incentive and compensation plans		—		605			13,027			(12,288	)		1,344			—			1,344
Adjust investment in subsidiaries for noncontrolling interest purchases		—		(4,247	)		—			—			(4,247	)		(1,580	)		(5,827	)
Stock-based compensation awards		—		13,539			—			—			13,539			—			13,539
Tax windfall (shortfall) from stock awards		—		(1,953	)		—			—			(1,953	)		—			(1,953	)
Distributions to noncontrolling interests		—		—			—			—			—			(5,828	)		(5,828	)
Balance, September 30, 2010	$	88,074	$	1,364,266		$	(97,109	)	$	2,126,825		$	3,482,056		$	61,122		$	3,543,178

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, 2008	$	88,074		$	1,340,146	$	(50,258	)	$	1,822,073		$	3,200,035		$	48,567	$	3,248,602
Add (Deduct)
Net income attributable to U.S. Cellular shareholders		—			—		—			200,159			200,159			—		200,159
Net income attributable to noncontrolling interests classified as equity		—			—		—			—			—			17,463		17,463
Repurchase of Common Shares		—			—		(24,283	)		—			(24,283	)		—		(24,283	)
Incentive and compensation plans		—			1,391		10,629			(11,558	)		462			—		462
Stock-based compensation awards		—			13,000		—			—			13,000			—		13,000
Tax windfall (shortfall) from stock awards		—	<