UNITED STATES CELLULAR CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
United States Cellular Corporation ("U.S. Cellular") owns, operates and invests
in wireless markets throughout the United States. U.S. Cellular is an 84%-owned
subsidiary of Telephone and Data Systems, Inc. ("TDS") as of March 31, 2012.
U.S. Cellular provides wireless telecommunications services to approximately
5.8 million customers in five geographic market areas in 26 states. As of March
31, 2012, U.S. Cellular's average penetration rate in its consolidated operating
markets was 12.4%. 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
The following discussion and analysis should be read in conjunction with U.S.
Cellular's interim consolidated financial statements and notes 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 U.S. Cellular's Annual
Report on Form 10-K ("Form 10-K") for the year ended December 31, 2011.
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.
Financial and operating highlights in the three months ended March 31, 2012
included the following:
† Total customers were 5,837,000 at March 31, 2012, including 5,570,000
† In late March 2012, U.S. Cellular, in conjunction with King Street
Wireless L.P., began offering fourth generation Long-term Evolution ("4G LTE")
service; as of March 31, 2012, the 4G LTE network covered approximately 25
percent of U.S. Cellular's customers. 4G LTE enhances the wireless experience by
significantly increasing both the speed and data capacity available compared to
3G networks. See Note 10 - Variable Interest Entities (VIEs) in the Notes to the
Consolidated Financial Statements for additional information about King Street
† Retail customer net losses were 34,000 in 2012 compared to net losses of
31,000 in 2011. In the postpaid category, there was a net loss of 38,000 in
2012 compared to a net loss of 22,000 in 2011. Prepaid net additions were 4,000
in 2012 compared to net losses of 9,000 in 2011.
† Postpaid customers comprised approximately 94% of U.S. Cellular's retail
customers as of March 31, 2012. The postpaid churn rate was 1.6% in 2012
compared to 1.4% in 2011.
† Postpaid customers on smartphone service plans increased to 34% as of
March 31, 2012 compared to 20% as of March 31, 2011. In addition, smartphones
represented 54% of all devices sold in 2012 compared to 42% in 2011.
† Service revenues of $1,023.8 million increased $38.7 million
year-over-year, primarily due to continued growth in both data revenues from
U.S. Cellular customers and inbound data roaming revenues.
† Cash flows from operating activities were $257.0 million. At March 31,
2012, Cash and cash equivalents and Short-term investments totaled $627.4
million and there were no outstanding borrowings under the revolving credit
† Additions to Property, plant and equipment totaled $201.3 million,
including expenditures to construct cell sites, increase capacity in existing
cell sites and switches, deploy 4G LTE equipment, 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 3% year-over-year to 7,875.
† U.S. Cellular continued its efforts on a number of multi-year initiatives
including the development of a Billing and Operational Support System ("B/OSS")
with 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 and thereby build and improve customer
relationships; and a new Internet/Web platform to enable customers to complete a
wide range of transactions and to manage their accounts online.
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† In March 2012, U.S. Cellular sold the majority of the assets and
liabilities of a wireless market for $49.8 million in cash net of working
capital adjustments. In connection with the sale, a $4.2 million gain was
recorded in (Gain) loss on asset disposals, net in the Consolidated Statement of
† Operating income increased $26.5 million, or 45%, to $85.2 million in 2012
from $58.7 million in 2011. An increase in system operations expense partly
offset the impact of higher revenues.
† Net income attributable to U.S. Cellular shareholders increased $27.3
million, or 78%, to $62.5 million in 2012 compared to $35.2 million in 2011,
primarily due to higher operating income as well as a lower effective tax rate.
Basic earnings per share was $0.74 in 2012, which was $0.33 higher than in 2011,
and Diluted earnings per share was $0.73, which was $0.32 higher than in 2011.
U.S. Cellular anticipates that its future results will be affected by the
† The impact of the Belief Project on long-term profitability. Under the
Belief Project, U.S. Cellular offers several innovative services, including no
contract after the first contract; simplified national rate plans; a loyalty
rewards program; overage protection, caps and forgiveness; a phone replacement
program; and discounts for paperless billing and automatic payment. U.S.
Cellular believes that offering these services will increase postpaid gross
additions over the next several years and contribute to incremental growth in
average revenue per customer and improvement in the postpaid churn rate. As of
March 31, 2012, 3.3 million new and existing customers had subscribed to Belief
† Continued uncertainty related to current economic conditions and their
impact on customer purchasing and payment behaviors;
† Relative ability to attract and retain customers, including the ability to
reverse recent customer net losses, in a competitive marketplace in a cost
† Effects of industry competition on service and equipment pricing and
roaming revenues as well as the impacts associated with the expanding presence
of carriers and other retailers offering low-priced, unlimited prepaid service;
† Potential increases in prepaid customers, who generally generate lower
ARPU, as a percentage of U.S. Cellular's customer base in response to changes in
customer preferences and industry dynamics;
† A change in the nature and rate of growth 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 and costs related to data products and
services and lower growth or declines in revenues from voice services;
† Rapid growth in the demand for new data devices and services which may
result in increased cost of equipment sold and other operating expenses and the
need for additional investment in network capacity;
† 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;
† Uncertainty related to various rulemaking proceedings underway at the
Federal Communications Commission ("FCC"), including uncertainty relating to the
impacts on universal service funding, intercarrier compensation and other
matters of the Connect America Fund & Intercarrier Compensation Reform Order and
Further Notice of Proposed Rulemaking issued by the FCC on October 27, 2011;
† The FCC's adoption of mandatory 4G roaming rules which will be of
assistance in the negotiation of data roaming agreements with other wireless
operators in the future; and
† Exclusive arrangements between manufacturers of wireless devices and other
carriers, or other economic or competitive factors, that restrict U.S.
Cellular's access to devices desired by customers.
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Cash Flows and Investments
U.S. Cellular believes that existing cash and investments balances, 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.
U.S. Cellular's estimates of full-year 2012 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, 2012. Such forward?looking statements should not be assumed to
be current 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.
The following is unchanged from guidance as disclosed in U.S. Cellular's Annual
Report on Form 10-K for the year ended December 31, 2011.
2012 Estimated Results (1)
Service revenues $4,050-$4,150 million
Operating income $200-$300 millionDepreciation, amortization and accretion expenses,
and net gain or loss 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
impairments 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.
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 and
competitive conditions in the markets served by U.S. Cellular have created a
challenging 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 wireless devices 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 distribution channels, enhance 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, 2012 Compared to Three Months Ended March 31, 2011
Following is a table of summarized operating data for U.S. Cellular's
As of March 31, (1) 2012 2011
Customers Customers on postpaid service plans in which the
end user is a customer of U.S. Cellular
("postpaid customers") 5,261,000 5,394,000
Customers on prepaid service plans in which the
end user is a customer of U.S. Cellular
("prepaid customers") 309,000 304,000
Total retail customers 5,570,000 5,698,000
End user customers acquired through U.S.
Cellular's agreements with third parties
("reseller customers") 267,000 335,000
Total customers 5,837,000 6,033,000
Total market population of consolidated
operating markets (2) 46,966,000 46,774,000
Market penetration in consolidated operating
markets (2) 12.4 % 12.9 %
Total market population of consolidated
operating and non-operating markets (2) 92,684,000 91,090,000
Market penetration in consolidated operating and
non-operating markets (2) 6.3 % 6.6 %
Full-time employees 7,651 8,247
Part-time employees 1,026 1,066
Total employees 8,677 9,313
Cell sites in service 7,875 7,663
Smartphone penetration (3)(4) 34.4 % 20.3 %
For the Three Months Ended March 31, (5) 2012 2011
Net retail customer additions (losses) (6) (34,000 ) (31,000 )
Net customer additions (losses) (6) (49,000 ) (39,000 )
Average monthly service revenue per customer (7)
Service revenues per Consolidated Statement of
Operations (000s) $ 1,023,820 $ 985,113
Divided by total average customers during period
(000s) 5,863 6,048
Divided by number of months in each period 3 3
Average monthly service revenue per customer $ 58.21 $
Postpaid churn rate (8) 1.6 % 1.4 %
Smartphones sold as a percent of total devices
sold (3) 54.1 % 42.5 %
(1) Amounts include results for U.S. Cellular's consolidated markets as of
(2) Calculated using 2011 and 2010 Claritas population estimates for 2012 and
2011, 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).
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The total market population and penetration measures for consolidated operating
markets apply to markets in which U.S. Cellular provides wireless service to
customers. The total market population and penetration measures for
consolidated operating and non-operating markets apply to all consolidated
markets in which U.S. Cellular owns an interest.
(3) Smartphones represent wireless devices which run on an AndroidTM,
BlackBerry® or Windows Mobile® operating system, excluding tablets.
(4) Smartphone penetration is calculated by dividing postpaid smartphone
customers by total postpaid customers.
(5) Amounts include results for U.S. Cellular's consolidated operating markets
for the period January 1 through March 31; operating markets acquired during a
particular period are included as of the acquisition date.
(6) "Net retail customer additions (losses)" represents the number of net
customers added to (deducted from) U.S. Cellular's retail customer base through
its marketing distribution channels; this measure excludes activity related to
reseller customers and customers transferred through acquisitions, divestitures
or exchanges. "Net customer additions (losses)" represents the number of net
customers added to (deducted from) U.S. Cellular's overall customer base through
its marketing distribution channels; this measure includes activity related to
reseller customers but excludes activity related to customers transferred
through acquisitions, divestitures or exchanges.
(7) Management uses these measurements to assess the amount of revenue that
U.S. Cellular generates each month on a per customer basis. Average monthly
revenue per customer is calculated as shown in the table above. Average
customers during the period is calculated by adding the number of total
customers at the beginning of the first month of the period and at the end of
each month in the period and dividing by the number of months in the period plus
one. Acquired and divested customers are included in the calculation on a
prorated basis for the amount of time U.S. Cellular included such customers
during each period.
(8) Postpaid churn rate represents the percentage of the postpaid customer
base that disconnects service each month. This amount represents the average
postpaid churn rate for the three months of the respective year.
Components of Operating Income
Three Months Ended March 31, 2012 2011 Change Percentage Change
(Dollars in thousands)
Retail service $ 888,527 $ 864,602 $ 23,925 3 %
Inbound roaming 80,132 64,386 15,746 24 %
Other 55,161 56,125 (964 ) (2 )%
Service revenues 1,023,820 985,113 38,707 4 %
Equipment sales 68,301 71,979 (3,678 ) (5 )%
Total operating revenues 1,092,121 1,057,092 35,029 3 %
System operations (excluding
Depreciation, amortization and accretion
reported below) 233,164 217,603 15,561 7 %
Cost of equipment sold 187,036 194,360 (7,324 ) (4 )%
Selling, general and administrative 442,244 442,004 240 -
Depreciation, amortization and accretion 146,685 143,340
3,345 2 %
(Gain) loss on asset disposals, net (2,210 ) 1,037 (3,247 ) >(100 )%
Total operating expenses 1,006,919 998,344 8,575 1 %
Operating income $ 85,202 $ 58,748 $ 26,454 45 %
Service revenues consist primarily of: (i) charges for access, airtime, roaming,
recovery of regulatory costs and value?added services, including data products
and services, provided to U.S. Cellular's retail customers and to end users
through third?party resellers ("retail service"); (ii) charges to other wireless
carriers whose customers use U.S. Cellular's wireless systems when roaming,
including long-distance roaming ("inbound roaming"); and (iii) amounts received
from the Federal Universal Service Fund ("USF").
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Retail service revenues
Retail service revenues increased by $23.9 million, or 3%, in 2012 to $888.5
million as the impact of an increase in billed ARPU was partially offset by a
decrease in U.S. Cellular's average customer base.
Billed ARPU increased to $50.52 in 2012 from $47.65 in 2011. This overall
increase reflects an increase in Postpaid ARPU to $54.00 in 2012 from $51.21 in
2011, reflecting increases in revenues from data products and services.
The average number of customers decreased to 5,863,000 in 2012 from 6,048,000 in
2011, driven primarily by reductions in postpaid and reseller customers.
U.S. Cellular expects continued pressure on revenues in the foreseeable future
due to industry competition for customers and related effects on pricing of
service plan offerings.
As discussed in the Overview section above, U.S. Cellular's Belief Project
allows customers selecting Belief Plans to earn loyalty reward points. U.S.
Cellular accounts for loyalty reward points under the deferred revenue method.
Under this method, U.S. Cellular allocates a portion of the revenue billed to
customers under the Belief Plans to the loyalty reward points. The revenue
allocated to these points is initially deferred in the Consolidated Balance
Sheet and is recognized in future periods when the loyalty reward points are
redeemed or used. Application of the deferred revenue method of accounting
related to loyalty reward points resulted in deferring net revenues of $6.4
million and $7.7 million in the three months ended March 31, 2012 and 2011,
respectively. These amounts are included in the Customer deposits and deferred
revenues in the Consolidated Balance Sheet.
Inbound roaming revenues
Inbound roaming revenues increased by $15.7 million, or 24%, in 2012 to $80.1
million. The growth was driven primarily by increased data usage by customers of
other carriers who used U.S. Cellular's networks when roaming. U.S. Cellular
expects continued growth in Inbound roaming revenue but expects that the rate of
growth in the future will be less than recent growth rates.
Other revenues decreased by $1.0 million, or 2%, in 2012 to $55.2 million,
primarily due to a decrease in amounts received from the Federal USF. Such
revenues recorded in 2012 were $39.7 million compared to $41.8 million in 2011,
reflecting revisions to amounts received in prior years as determined by the
Universal Service Administrative Company.
On November 18, 2011 the FCC released a Report and Order and Further Notice of
Proposed Rulemaking ("Reform Order") adopting reforms of its universal service
and intercarrier compensation mechanisms, and proposing further rules to advance
reform. The Reform Order substantially revises the current USF high cost
program and intercarrier compensation regime. The current USF program, which
supports voice services, is to be phased out over time and replaced with the
Connect America Fund ("CAF"), a new Mobility Fund and a Remote Area Fund, which
will collectively support broadband-capable networks. Mobile wireless carriers
such as U.S. Cellular are eligible to receive funds in both the CAF and the
Mobility Fund, although some areas that U.S. Cellular currently serves may be
declared ineligible for support if they are already served, or are subject to
certain rights of first refusal by incumbent carriers.
U.S. Cellular is contemplating participating in the Mobility Fund proceedings,
and the CAF, but it is uncertain whether U.S. Cellular will obtain support
through any of these mechanisms. If U.S. Cellular is successful in obtaining
support, it will be required to meet certain regulatory conditions to obtain and
retain the right to receive support including, for example, allowing other
carriers to collocate on U.S. Cellular's towers, allowing voice and data roaming
on U.S. Cellular's network, and submitting various reports and certifications to
retain eligibility each year. It is possible that additional regulatory
requirements will be imposed pursuant to the Commission's Further Notice of
U.S. Cellular's current USF support is scheduled to be phased down. Support for
2012 (excluding certain adjustments) was frozen on January 1, 2012 using support
for 2011 as a baseline and will be reduced by 20% starting in July, 2012.
Support will be reduced by 20% in July of each subsequent year; however, if the
Phase II Mobility Fund is not operational by July 2014, the phase down will halt
at that time with a 40% reduction in support, until such time as the Phase II
Mobility Fund is operational.
At this time, U.S. Cellular cannot predict the net effect of the FCC's changes
to the USF high cost support program in the Reform Order or whether reductions
in support will be offset with additional support from the CAF or the Mobility
Fund. Accordingly, U.S. Cellular cannot predict whether such changes will have
a material adverse effect on U.S. Cellular's business, financial condition or
results of operations.
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Equipment sales revenues
Equipment sales revenues include revenues from sales of wireless devices
(handsets, modems and tablets) and related accessories to both new and existing
customers, as well as revenues from sales of devices and accessories to agents.
All Equipment sales revenues are recorded net of rebates.
U.S. Cellular strives to offer a competitive line of quality wireless devices to
both new and existing customers. U.S. Cellular's customer acquisition and
retention efforts include offering new devices to customers at discounted
prices; in addition, customers on the Belief Plans receive loyalty reward points
that may be used to purchase a new device or accelerate the timing of a
customer's eligibility for a device upgrade at promotional pricing. U.S.
Cellular also continues to sell devices to agents; this practice enables U.S.
Cellular to provide better control over the quality of devices sold to its
customers, establish roaming preferences and earn volume discounts from device
manufacturers which are passed along to agents. U.S. Cellular anticipates that
it will continue to sell devices to agents in the future.
The decrease in 2012 Equipment sales revenues of $3.7 million, or 5%, to $68.3
million was driven by a decrease of 5% in average revenue per device sold as
well as a decrease of 3% in total devices sold. Average revenue per device sold
decreased due to more aggressive promotional customer equipment pricing.
System operations expenses (excluding Depreciation, amortization and accretion)
System operations expenses (excluding Depreciation, amortization, and accretion)
include charges from telecommunications service providers for U.S. Cellular's
customers' use of their facilities, costs related to local interconnection to
the wireline network, charges for cell site rent and maintenance of U.S.
Cellular's network, long-distance charges, outbound roaming expenses and
payments to third?party data product and platform developers.
Key components of the $15.6 million, or 7%, increase in System operations
expenses to $233.2 million were as follows:
† Maintenance, utility and cell site expenses increased $10.8 million, or
12%, driven in part by an increase in the number of cell sites within U.S.
Cellular's network. The number of cell sites totaled 7,875 at March 31, 2012 and
7,663 at March 31, 2011, as U.S. Cellular continued to expand and enhance
coverage in its existing markets. Expenses also increased to support rapidly
growing demand for data services and the deployment of 4G LTE networks.
† Customer usage expenses increased by $2.5 million, or 3%, primarily due to
an increase in data usage and increases in network capacity.
† Expenses incurred when U.S. Cellular's customers used other carriers'
networks while roaming increased $2.3 million, or 4%, primarily due to higher
data roaming expenses offset by a decline in voice roaming expenses.
U.S. Cellular expects total system operations expenses to increase on a
year-over-year basis in the foreseeable future to support the continued growth
in cell sites and other network facilities as it continues to add capacity,
enhance quality and deploy new technologies to support increases in total
customer usage, particularly data usage.
Cost of equipment sold
Cost of equipment sold decreased by $7.3 million, or 4%, in 2012 to $187.0
million. The decrease was driven by a 3% decrease in the average cost per device
sold as well as a decrease of 3% in total devices sold. Average cost per device
sold decreased due primarily to competitive pricing conditions and the
introduction of lower cost smartphones into the portfolio. The impact of lower
acquisition costs across all categories of devices was partially offset by a
shift in the mix of sales to smartphones.
U.S. Cellular's loss on equipment, defined as Equipment sales revenues less Cost
of equipment sold, was $118.7 million and $122.4 million for 2012 and 2011,
respectively. U.S. Cellular expects loss on equipment to continue to be a
significant cost in the foreseeable future as wireless carriers continue to use
device availability and pricing as a means of competitive differentiation. In
addition, U.S. Cellular expects increasing sales of data centric wireless
devices such as smartphones and tablets to result in higher equipment subsidies
over time; these devices generally have higher purchase costs which cannot be
recovered through proportionately higher selling prices to customers.
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Selling, general and administrative expenses
Selling, general and administrative expenses include salaries, commissions and
expenses of field sales and retail personnel and facilities; telesales
department salaries and expenses; agent commissions and related expenses;
corporate marketing and merchandise management; and advertising expenses.
Selling, general and administrative expenses also include bad debts expense,
costs of operating customer care centers and corporate expenses.
Selling, general and administrative expenses in 2012 of $442.2 million remained
flat in comparison to 2011.
For the full year 2012, U.S. Cellular expects Selling, general and
administrative expenses to be relatively flat on a year-over-year basis.
Depreciation, amortization and accretion
Depreciation, amortization and accretion increased $3.3 million, or 2%, in 2012
to $146.7 million due to an increase in Property, plant and equipment reflecting
significant capital expenditures in 2011 and 2012.
See "Financial Resources" and "Liquidity and Capital Resources" for a discussion
of U.S. Cellular's capital expenditures.
Components of Other Income (Expense)
Three Months Ended March 31, 2012 2011 Change Change
(Dollars in thousands, except per
Operating income $ 85,202 $ 58,748 $ 26,454 45 %
Equity in earnings of unconsolidated
entities 21,614 20,891 723 3 %
Interest and dividend income 1,043 849 194 23 %
Interest expense (13,411 ) (15,186 ) 1,775 12 %
Other, net 202 (125 ) 327 >(100 )%
Total investment and other income
(expense) 9,448 6,429 3,019 47 %
Income before income taxes 94,650 65,177 29,473 45 %
Income tax expense 25,638 24,747 891 4 %
Net income 69,012 40,430 28,582 71 %
Less: Net income attributable to
noncontrolling interests, net of tax (6,520 ) (5,269 ) (1,251 ) (24 )%
Net income attributable to U.S.
Cellular shareholders $ 62,492 $ 35,161 $ 27,331 78 %
Basic earnings per share
attributable to U.S. Cellular
shareholders $ 0.74 $ 0.41 $ 0.33 80 %
Diluted earnings per share
attributable to U.S. Cellular
shareholders $ 0.73 $ 0.41 $ 0.32 78 %
Equity in earnings of unconsolidated entities
Equity in earnings of unconsolidated entities represents U.S. Cellular's share
of net income from entities accounted for by the equity method of accounting.
U.S. Cellular generally follows the equity method of accounting for
unconsolidated entities in which its ownership interest is less than or equal to
50% but equals or exceeds 20% for corporations and 3% for partnerships and
limited liability companies.
U.S. Cellular's investment in the LA Partnership contributed $17.1 million to
Equity in earnings of unconsolidated entities in 2012 compared to $13.0 million
in 2011. The remaining change resulted from decreases in net income from other
Interest expense decreased year-over-year due primarily to the capitalization of
interest for multi-year projects.
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Income tax expense
See Note 4 - Income Taxes in the Notes to Consolidated Financial Statements for
a discussion of income tax expense and the overall effective tax rate on Income
before income taxes.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements are not expected to have a significant effect
on U.S. Cellular's financial condition or results of operations. See Note 1
- Basis of Presentation in the Notes to Consolidated Financial Statements for
U.S. Cellular operates a capital? and marketing?intensive business. U.S.
Cellular utilizes cash from its operating activities, cash proceeds from
divestitures, short-term credit facilities and long-term debt financing to fund
its acquisitions (including licenses), construction costs, operating expenses
and Common Share repurchases. Cash flows may fluctuate from quarter to quarter
and year to year due to seasonality, the timing of acquisitions, capital
expenditures and other factors. The table below and the following discussion in
this Financial Resources section summarize U.S. Cellular's cash flow activities
in the three months ended March 31, 2012 compared to the three months ended
March 31, 2011.
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