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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, 2012

OR

¨            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, 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, 2012

Common Shares, $1 par value

 

51,723,966 Shares

Series A Common Shares, $1 par value

 

33,005,877 Shares

 


 
 

United States Cellular Corporation

 

Quarterly Report on Form 10-Q

For the Quarterly Period Ended June 30, 2012

 

Index

 

 

Page No.

Part I.

Financial Information

 

 

    

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

Consolidated Statement of Operations Three and Six Months Ended June 30, 2012 and 2011

3

 
 

 

Consolidated Statement of Cash Flows Six Months Ended June 30, 2012 and 2011

4

 

 

 

Consolidated Balance Sheet June 30, 2012 and December 31, 2011

5

 

 

 

Consolidated Statement of Changes in Equity Six Months Ended June 30, 2012 and 2011 

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

23 

 

Recent Accounting Pronouncements

32 

 

Financial Resources

32

 

Liquidity and Capital Resources

35

 

Application of Critical Accounting Policies and Estimates

38

  

Certain Relationships and Related Transactions

41

 

Safe Harbor Cautionary Statement

42

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

45

 

 

 

Item 4.

Controls and Procedures

46

 

 

Part II.

Other Information

47

 

 

 

Item 1.

Legal Proceedings

47 

 

 

 

Item 1A.

Risk Factors

47 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47 

 

 

 

Item 5.  

Other Information

48

 

 

 

Item 6.

Exhibits

49 

 

  

Signatures

  

 

 

 


 

 

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)

2012 

 

2011 

 

2012 

 

2011 

 

Operating revenues

 

Service

$

1,029,742

 

  

$

1,002,030

 

 

$

2,053,562

 

 

$

1,987,143

 

 

Equipment sales

 

74,658

 

  

 

74,152

 

 

 

142,959

 

 

 

146,131

 

 

 

Total operating revenues

 

1,104,400

 

 

 

1,076,182

 

 

 

2,196,521

 

 

 

2,133,274

 

 

Operating expenses

 

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

   243,227       

227,801

     

476,391

         445,404    

 

Cost of equipment sold

 

191,700

 

 

 

170,833

 

 

 

378,736

 

 

 

367,488

 

 

Selling, general and administrative (including charges from affiliates of $25.9 million and $25.8 million, respectively, for the three months, and $51.9 million and $51.9 million, respectively, for the six months)

 

435,053

 

 

 

423,953

 

 

 

877,297

 

 

 

863,662

 

 

Depreciation, amortization and accretion

 

147,555

 

 

 

146,577

 

 

 

294,240

 

 

 

289,917

 

 

Loss on asset disposals, net

 

2,702

 

 

 

2,922

 

 

 

492

 

 

 

3,959

 

 

Total operating expenses

 

1,020,237

 

 

 

972,086

 

 

 

2,027,156

 

 

 

1,970,430

 

 

Operating income

 

84,163

 

 

 

104,096

 

 

 

169,365

 

 

 

162,844

 

 

Investment and other income (expense)

 

Equity in earnings of unconsolidated entities

 

25,154

 

 

 

22,469

 

 

 

46,768

 

 

 

43,360

 

 

Interest and dividend income

 

 845

 

 

 

748

 

 

 

1,888

 

 

 

1,597

 

 

Gain (loss) on investment

 

(3,728

)

 

 

13,373

 

 

 

(3,728

)

 

 

13,373

 

 

Interest expense

 

(12,360

)

 

 

(25,197

)

 

 

(25,771

)

 

 

 (40,383

)

 

Other, net

 

(229

)

 

 

175

 

 

 

(27

)

 

 

50

 

 

 

Total investment and other income (expense)

 

9,682

 

 

 

11,568

 

 

 

19,130

 

 

 

17,997

 

 

Income before income taxes

 

93,845

 

 

 

115,664

 

 

 

188,495

 

 

 

180,841

 

 

Income tax expense

 

34,597

 

 

 

34,732

 

 

 

60,235

 

 

 

59,479

 

 

Net income

 

59,248

   

 

 

80,932

 

 

 

128,260

 

 

 

121,362

 

 

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

 

(6,563

)

 

 

(5,993

)

 

 

(13,083

)

 

 

(11,262

)

Net income attributable to U.S. Cellular shareholders

$

52,685

 

$

74,939

$

115,177

 

$

110,100

 

 

Basic weighted average shares outstanding

 

84,707

 

 

 

84,930

 

 

 

84,638

 

 

 

85,206

 

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

$

0.62

 

 

$

0.88

 

 

$

1.36

 

  

$

1.29

  

 

Diluted weighted average shares outstanding

 

85,061

 

 

 

85,397

 

 

 

85,076

 

  

 

85,739

 

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

 

0.62

 

 

$

0.88

 

 

$

1.35

 

  

$

1.28

 

 

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

 

3

 


 

 

United States Cellular Corporation

 

Consolidated Statement of Cash Flows  

(Unaudited)

 

 

Six Months Ended

 

June 30,

(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 from 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

 

 

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

 

4

 


 

 

United States Cellular Corporation

 

 

 

  

 

 

 

 

 

Consolidated Balance Sheet — Assets

(Unaudited)

 

  

 

  

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

(Dollars in thousands)

2012 

 

2011 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

$

437,624

 

$

424,155

 

Short-term investments

 

100,738

 

 

127,039

 

Accounts receivable

 

 

 

 

 

 

 

Customers and agents, less allowances of $21,953 and $21,337, respectively

 

316,933

 

 

341,439

 

 

Roaming

 

42,146

 

 

36,557

 

 

Affiliated

 

32

 

 

621

 

 

Other, less allowances of $2,358 and $2,200, respectively

 

71,650

 

 

63,204

 

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 of accumulated amortization of $96,742 and $96,597, respectively

 

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

 

 

 

 

 

 

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

 

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

 

5

 


 

 

United States Cellular Corporation

  

Consolidated Balance Sheet — Liabilities and Equity

(Unaudited)

 

 

June 30,

  

 

December 31,

  

(Dollars and shares in thousands)

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

 

 

Commitments and contingencies

 

 

 

 

 

 

Noncontrolling interests with redemption features

 

1,050

 

 

 

1,005

 

 

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 84,730 shares (33,006 Series A Common and 51,724 Common Shares) and 84,557 shares (33,006 Series A Common and 51,551 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

 

1,399,010

 

 

 

1,387,341

 

 

 

Treasury shares, at cost, 3,344 and 3,517 Common Shares, respectively

 

(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

 

 

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

 

6

 


 

 

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, 2011

$

88,074

 

 

$

1,387,341

 

  

$

(152,817

)

  

$

2,297,363

 

  

$

3,619,961

 

  

$

55,956

 

  

$

3,675,917

  

Add (Deduct)

 

Net income attributable to U.S. Cellular shareholders

 

 

 

 

 

  

 

 

 

 

115,177

 

 

 

115,177

 

 

 

 

 

 

115,177

 

Net income attributable to noncontrolling  interests classified as equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,038

 

 

 

13,038

 

Incentive and compensation plans

 

 

 

 

165

 

 

 

6,760

 

 

 

(9,228

)

 

 

(2,303

)

 

 

 

 

 

(2,303

)

Stock-based compensation awards

 

 

 

 

10,960

 

 

 

 

 

 

 

 

 

10,960

 

 

 

 

 

 

10,960

 

Tax windfall (shortfall) from stock awards

 

 

 

 

544

 

 

 

 

 

 

 

 

 

544

 

 

 

 

 

 

544

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(643

)

 

 

(643

)

Balance, June 30, 2012

$

88,074

 

 

$

1,399,010

 

  

$

(146,057

)

  

$

2,403,312

  

 

$

3,744,339

 

 

$

68,351

 

  

$

3,812,690

 

 

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

 

7

 


 

 

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

)

 

$

2,135,507

 

 

$

3,486,452

 

 

$

53,518

 

 

$

3,539,970

 

Add (Deduct)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to U.S. Cellular  shareholders

 

 

 

 

 

 

 

 

 

 

110,100

 

 

 

110,100

 

 

 

 

 

 

110,100

 

Net income attributable to noncontrolling  interests classified as equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,254

 

 

 

11,254

 

Repurchase of Common Shares

 

 

 

 

 

 

 

(62,308

)

 

 

 

 

 

(62,308

)

 

 

 

 

 

(62,308

)

Incentive and compensation plans

 

 

 

 

79

 

 

 

14,399

 

 

 

(13,184

)

 

 

1,294

 

 

 

 

 

 

1,294

 

Stock-based compensation awards

 

 

 

 

10,798

 

 

 

 

 

 

 

 

 

10,798

 

 

 

 

 

 

10,798

 

Tax windfall (shortfall) from stock awards

 

 

 

 

(1,198

)

 

 

 

 

 

 

 

 

(1,198

)

 

 

 

 

 

(1,198

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(877

)

 

 

(877

)

Balance, June 30, 2011

$

88,074

 

 

$

1,378,166

 

 

$

(153,525

)

 

$

2,232,423

 

 

$

3,545,138

 

 

$

63,895

 

 

$

3,609,033

 

 

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

 

8

 


 

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 84%-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, 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 2012 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, 2011.

 

The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items, unless otherwise disclosed) necessary for a fair statement of the financial position as of June 30, 2012 and December 31, 2011, and the results of operations for the three and six months ended June 30, 2012 and 2011 and cash flows and changes in equity for the six months ended June 30, 2012 and 2011.  The Consolidated Statement of Comprehensive Income was not included because comprehensive income for the three and six months ended June 30, 2012 and 2011 equaled net income.  The results of operations for the three and six months ended June 30, 2012 and 2011 and cash flows and changes in equity for the six months ended June 30, 2012 and 2011 are not necessarily indicative of the results to be expected for the full year.

 

Recent Accounting Pronouncements

 

On July 27, 2012, the FASB issued Accounting Standards Update 2012-02, Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). ASU 2012-02 is intended to reduce the cost and complexity of the annual indefinite-lived intangible assets impairment testing by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. As such, there is the possibility that quantitative assessments would not need to be performed if it is more likely than not that no impairment exists. U.S. Cellular is required to adopt the provisions of ASU 2012-02, which is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of ASU 2012-02 is not expected to have a significant impact on U.S. Cellular’s financial position or results of operations.

 

Agent Liabilities

 

U.S. Cellular has relationships with agents, which are independent businesses that obtain customers for U.S. Cellular.  At June 30, 2012 and December 31, 2011, U.S. Cellular had accrued $50.2 million and $75.3 million, respectively, for amounts due to agents, including rebates and commissions.  These amounts are included in Other current liabilities in the Consolidated Balance Sheet.

 

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 imposing governmental authority, then amounts collected from customers and remitted to governmental authorities are recorded on a net basis within a tax liability account in the Consolidated Balance Sheet.  If the tax is assessed upon U.S. Cellular, then amounts collected from customers as recovery of the tax are recorded in Service revenues and amounts remitted to governmental authorities are recorded in Selling, general and administrative expenses in the Consolidated Statement of Operations. The amounts recorded gross in revenues that are billed to customers and remitted to governmental authorities totaled $34.7 million and $69.9 million for the three and six months ended June 30, 2012, respectively, and $31.1 million and $62.4 million for the three and six months ended June 30, 2011, respectively.

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2.   Revision of Prior Period Amounts

 

In preparing its Consolidated Statement of Cash Flows for the year ended December 31, 2011, U.S. Cellular discovered certain errors related to the classification of outstanding checks with the right of offset and the classification of Accounts payable-trade for Additions to property, plant and equipment. These errors resulted in the misstatement of Cash and cash equivalents and Accounts payable-trade as of December 31, 2010 and each quarterly period in 2011, and the misstatement of Cash flows from operating activities and Cash flows from investing activities for the years ended December 31, 2010 and 2009 and each of the quarterly periods in 2011 and 2010. 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, in order to provide consistency in the Consolidated Statement of Cash Flows and as permitted by SAB 108, revisions for these immaterial amounts to previously reported amounts were reflected in the financial information as of and for the periods ended December 31, 2011, are reflected in the financial information herein and will be reflected in future filings containing such financial information.

 

In preparing its financial statements for the nine months ended September 30, 2011, U.S. Cellular discovered certain errors related to accounting for asset retirement obligations and asset retirement costs. These errors resulted in the overstatement of Total operating expenses, Property, plant and equipment, net and Other deferred liabilities and credits in the first and second quarter 2011 interim financial statements and in the 2010, 2009 and 2008 annual periods reported in the Company’s December 31, 2010 financial statements.  The December 31, 2007 Retained earnings balance presented in the December 31, 2010 annual financial statements also was overstated as a result of these errors. In accordance with 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, amendments of previously filed reports were not required. However, if the adjustments to correct the cumulative errors had been recorded in the third quarter 2011, U.S. Cellular believes that the impact would have been significant to the third quarter results and would have impacted comparisons to prior periods. As permitted by SAB 108, revisions for these immaterial amounts to previously reported annual and quarterly results were reflected in the financial information as of and for the periods ended September 30, 2011 and December 31, 2011, and are reflected in the financial information herein. 

 

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In accordance with SAB 108, the combined effects of the foregoing revisions to the Consolidated Statement of Operations and the Consolidated Statement of Cash Flows were as follows:

 

Consolidated Statement of Operations— Three Months Ended June 30, 2011

As previously

reported (1)

(Dollars in thousands except per share amounts)

Adjustment

Revised

Depreciation, amortization and accretion

$

148,283

$

(1,706

)

$

146,577

Total operating expenses

973,792

(1,706

)

972,086

Operating income

102,390

1,706

104,096

Income before income taxes

113,958

1,706

115,664

Income tax expense

34,077

655

34,732

Net income

79,881

1,051

80,932

Net income attributable to U.S. Cellular shareholders

73,888

1,051

74,939

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

0.87

0.01

0.88

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

0.87

0.01

0.88

 

Consolidated Statement of Operations— Six Months Ended June 30, 2011

As previously

reported (1)

(Dollars in thousands except per share amounts)

Adjustment

Revised

Depreciation, amortization and accretion

$

293,328

$

(3,411

)

$

289,917

Total operating expenses

1,973,841

(3,411

)

1,970,430

Operating income

159,433

3,411

162,844

Income before income taxes

177,430

3,411

180,841

Income tax expense

58,169

1,310

59,479

Net income

119,261

2,101

121,362

Net income attributable to U.S. Cellular shareholders

107,999

2,101

110,100

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

1.27

0.02

1.29

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

1.26

0.02

1.28

 

Consolidated Statement of Cash Flows— Six Months Ended June 30, 2011

As previously

reported (1)

(Dollars in thousands)

Adjustment

Revised

Net income

$

119,261

$

2,101

$

121,362

Depreciation, amortization and accretion

293,328

(3,411

)

289,917

Change in Accounts payable-trade

8,588

15,247

23,835

Change in Accrued taxes

10,215

1,310

11,525

Change in Other assets and liabilities

(74,549

)

(579

)

(75,128

)

Cash flows from operating activities

423,432

14,668

438,100

Cash used for additions to property, plant and equipment

(258,040

)

(7,354

)

(265,394

)

Cash flows from investing activities

(222,516

)

(7,354

)

(229,870

)

Net increase (decrease) in cash and cash equivalents

134,199

7,314

141,513

 

(1)     In Quarterly Report on Form 10-Q for the period ended June 30, 2011, filed on August 8, 2011.

 

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3.   Fair Value Measurements

 

As of June 30, 2012 and December 31, 2011, U.S. Cellular did not have any financial assets or liabilities that were required to be recorded at fair value in its Consolidated Balance Sheet in accordance with GAAP. 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 as displayed below.

 

Under the provisions of GAAP, fair value is a market-based measurement and not an entity-specific measurement, based on an exchange transaction in which the entity sells an asset or transfers a liability (exit price).  The provisions also establish a fair value hierarchy that contains three levels for inputs used in fair value measurements.  Level 1 inputs include quoted market prices for identical assets or liabilities in active markets.  Level 2 inputs include quoted market prices for similar assets and liabilities in active markets or quoted market prices for identical assets and liabilities in inactive markets.  Level 3 inputs are unobservable.  A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  A financial instrument’s level within the fair value hierarchy is not representative of its expected performance or its overall risk profile and, therefore, Level 3 assets are not necessarily higher risk than Level 2 assets or Level 1 assets. 

 

Level within

June 30,

December 31,

the Fair Value

2012 

2011 

Hierarchy

Book Value

Fair Value

Book Value

Fair Value

(Dollars in thousands)

Cash and cash equivalents

$

437,624

$

437,624

$

424,155

$

424,155

Short-term investments (1)(2)

Government-backed securities (3)

100,738

100,738

127,039

127,039

Long-term investments (1)(4)

Government-backed securities (3)

55,468

55,468

30,057

30,140

Long-term debt (5)

6.95% Senior Notes

342,000

366,624

342,000

364,162

6.7% Senior Notes

534,338

540,928

534,111

534,860

 

(1)     Designated as held-to-maturity investments and recorded at amortized cost in 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.

 

(5)     Excludes capital lease obligations and current portion of Long-term debt.

 

 

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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 values of Long-term investments were estimated using quoted market prices for the individual issuances. The fair value of Long-term debt, excluding capital lease obligations and the current portion of such Long- term debt, was estimated using market prices for the 6.95% Senior Notes, which are publicly traded, and discounted cash flow analysis using an estimated yield to maturity of 6.75% for the 6.7% Senior Notes, which are not publicly traded.

 

As of June 30, 2012 and December 31, 2011, U.S. Cellular did not have nonfinancial assets or liabilities that required the application of fair value accounting for purposes of reporting such amounts in the Consolidated Balance Sheet.

 

4.   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 and six months ended June 30, 2012 was 36.9% and 32.0%, respectively, and for the three and six months ended June 30, 2011 was 30.0% and 32.9%, respectively. 

 

The effective tax rate for the three months ended June 30, 2011 was lower than the rate for the three months ended June 30, 2012 primarily as a result of tax benefits from the expiration of the statutes of limitation for certain tax years in 2011. The benefits from this change, along with other discrete items, decreased income tax expense for the three months ended June 30, 2011 by $4.5 million; absent these benefits, the effective tax rate for such period would have been higher by 8.4 percentage points.

 

The effective tax rate for the six months ended June 30, 2012 was lower than the rate for the six months ended June 30, 2011 primarily as a result of tax benefits related to the expiration of the statutes of limitation for certain tax years in 2012 and correction of deferred tax balances related to certain partnership investments in 2012. The amount of the correction was $3.7 million and relates to the quarter ended December 31, 2011. The benefits from this change, along with other discrete items, decreased income tax expense for the six months ended June 30, 2012 by $8.4 million; absent these benefits, the effective tax rate for such period would have been higher by 4.5 percentage points.

 

U.S. Cellular incurred a federal net operating loss in 2011 largely attributable to 100% bonus depreciation applicable to qualified capital expenditures.  U.S. Cellular carried back this federal net operating loss to prior tax years, and received a $58.2 million refund in 2012 for carrybacks to 2009 and 2010 tax years.  U.S. Cellular’s future federal income tax liabilities associated with the benefits realized from bonus depreciation are accrued as a component of Net deferred income tax liability (noncurrent) in the Consolidated Balance Sheet.  The bonus depreciation rate for federal income tax purposes is 50% for 2012 and will expire at the end of the year.  U.S. Cellular expects federal income tax payments to substantially increase beginning in 2012 and