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2011 Annual Report
uscellular.com

Table of contents

  • Page 1
    2011 Annual Report uscellular.com

  • Page 2
    ... $400 $200 $200 0 09 10 11 0 07 08 09 10 11 In its Annual Report on Form 10-K for the year ended Dec. 31, 2011, U.S. Cellular revised cash ï¬,ows from operating activities for the years ended Dec. 31, 2010 and Dec. 31, 2009. This chart includes only the periods that have been revised to reï¬,ect...

  • Page 3
    ... cellular corporation operates on a customer satisfaction strategy, driving loyalty and performance by providing a comprehensive range of wireless services and products, superior customer support and a high-quality network. 2011 Performance Highlights U.S. Cellular improved its financial performance...

  • Page 4
    ... data use has significantly increased traffic across our network, we kept pace with that growth and received our twelfth consecutive award for wireless call quality from J.D. Power and Associates in 2011, and received our thirteenth award in early 2012. In conjunction with our partner, King Street...

  • Page 5
    ... We enhanced the online customer experience with web-only promotions, instant Online Sales Support, a Data Estimator Tool, and Ask & Answer self-help capability. By early 2012, U.S. Cellular customers could purchase devices and accessories, change plans and redeem rewards online. We also implemented...

  • Page 6
    ... at least 13 new Android®-, Windows Mobile®-, and BlackBerry ®-based smartphones, and tiered data plans to meet a wide range of customer needs. U.S. Cellular will introduce at least 20 total devices in 2012, and continue to balance higher-end smartphones with lower-cost devices to manage costs...

  • Page 7
    ... other financial information for the year ended December 31, 2011, represent U.S. Cellular's annual report to shareholders as required by the rules and regulations of the Securities and Exchange Commission (''SEC''). The following information was filed with the SEC on February 27, 2012 as Exhibit...

  • Page 8
    ... Sheet-Assets ...Consolidated Balance Sheet-Liabilities and Equity ...Consolidated Statement of Changes in Equity ...Notes to Consolidated Financial Statements ...Reports of Management ...Report of Independent Registered Public Accounting Firm ...Selected Consolidated Financial and Operating Data...

  • Page 9
    ...; a phone replacement program; and discounts for paperless billing and automatic payment. As of December 31, 2011, 3.1 million new and existing customers had subscribed to Belief Plans. • Retail customer net losses were 125,000 in 2011 compared to net losses of 15,000 in 2010. In the postpaid...

  • Page 10
    ... existing office systems. Total cell sites in service increased by 237, or 3%, year-over-year to 7,882. • 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...

  • Page 11
    ...service pricing and equipment pricing; - 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...

  • Page 12
    ... 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...

  • Page 13
    ... operating data for U.S. Cellular's consolidated operations. As of December 31,(1) 2011 2010 2009 Customers Customers on customer of Customers on customer of postpaid service plans in which the end user is a U.S. Cellular (''postpaid customers'') ...prepaid service plans in which the end user...

  • Page 14
    ... average postpaid churn rate for the twelve months of the respective year. Components of Operating Income Year Ended December 31, (Dollars in thousands) 2011 Increase/ Percentage (Decrease) Change 2010 Increase/ Percentage (Decrease) Change 2009 Retail service ...$3,486,522 $ 26,976 Inbound roaming...

  • Page 15
    ...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...

  • Page 16
    ... 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 wireless devices to customers at discounted prices; in addition, customers on the new Belief Plans receive loyalty reward points that...

  • Page 17
    ... new technologies as well as to support increases in total customer usage, particularly data usage. Cost of equipment sold Cost of equipment sold increased by 5% in 2011 compared to 2010 and remained relatively flat in 2010 compared to 2009. In both years, a decline in total wireless devices sold...

  • Page 18
    ... a discrete adjustment to property tax expense and continued cost containment efforts. See footnotes to Consolidated Quarterly Information for additional information. 2010- • Selling and marketing expenses increased by $9.3 million, or 1%, primarily due to higher sales related expenses and...

  • Page 19
    ... and Exchanges in the Notes to Consolidated Financial Statements for additional information. Interest expense Interest expense increased in 2011 compared to 2010 primarily due to the write-off of unamortized debt issuance costs of $8.2 million for U.S. Cellular's $330 million, 7.5% senior notes...

  • Page 20
    ... 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 related to the classification of Accounts payable for Additions to property, plant and equipment as non...

  • Page 21
    ... 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. 2011 (Dollars in thousands) 2010 2009 Operating income ...Non-cash...

  • Page 22
    ... 530.8 million in 2011, 2010 and 2009, respectively. These expenditures were made to construct new cell sites, increase capacity in existing cell sites and switches, deploy 4G LTE technology, develop new and enhance existing office systems, and construct new and remodel existing retail stores. 14

  • Page 23
    ... 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 capital expenditures. 2011 (Dollars in thousands) 2010 2009 Cash flows from operating activities ...Cash used...

  • Page 24
    ...have access to public and private capital markets to help meet its financing needs. Consumer spending significantly impacts U.S. Cellular's operations and performance. Factors that influence levels of consumer spending include: unemployment rates, increases in fuel and other energy costs, conditions...

  • Page 25
    ... due for the next five years represent less than 1% of the total long-term debt obligation at December 31, 2011. Refer to Market Risk-Long-Term Debt for additional information regarding required principal payments and the weighted average interest rates related to U.S. Cellular's long-term debt. 17

  • Page 26
    ...'s retail store network; • Develop and enhance office systems; and • Develop new billing and other customer management related systems and platforms. U.S. Cellular plans to finance its capital expenditures program for 2012 using cash flows from operating activities, existing cash balances...

  • Page 27
    ... future lease costs related to office space, retail sites, cell sites and equipment. See Note 14-Commitments and Contingencies in the Notes to Consolidated Financial Statements for additional information. (3) Includes obligations payable under non-cancellable contracts, commitments for network...

  • Page 28
    ... 540 The increase in the Weighted-average expected revenue growth rate (next four years) between November 1, 2011 and 2010 was due to improved forecasts for market participants. The carrying value of each U.S. Cellular reporting unit as of November 1, 2011 was as follows: Reporting unit (Dollars in...

  • Page 29
    ..., the discount rate would have to increase to a range of 9.1% to 9.9% to yield estimated fair values of licenses in the respective units of accounting that equal their respective carrying values at November 1, 2011. Non-operating market licenses (''unbuilt licenses'') For purposes of performing...

  • Page 30
    ... in larger or smaller charges for depreciation expense. Factors used in determining useful lives include technology changes, regulatory requirements, obsolescence and type of use. U.S. Cellular did not materially change the useful lives of its property, plant and equipment in 2011, 2010 or 2009. 22

  • Page 31
    ...service contracts and for equipment sales, by agents for sales of equipment to them and by other wireless carriers whose customers have used U.S. Cellular's wireless systems. The allowance for doubtful accounts is the best estimate of the amount of probable credit losses related to existing accounts...

  • Page 32
    ... by the rules of the New York Stock Exchange. PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY STATEMENT This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Annual Report contain statements that are not based on...

  • Page 33
    ...on U.S. Cellular's business, financial condition or results of operations. • Advances or changes in telecommunications technology, such as Voice over Internet Protocol (''VoIP''), High-Speed Packet Access (''HSPA''), WiMAX or Long-Term Evolution (''LTE''), could render certain technologies used by...

  • Page 34
    ...Securities and Exchange Commission (''SEC''). Such amendments or restatements and related matters, including resulting delays in filing periodic reports with the SEC, could have an adverse effect on U.S. Cellular's business, financial condition or results of operations. • The existence of material...

  • Page 35
    ... of these risks as set forth under ''Risk Factors'' in U.S. Cellular's Annual Report on Form 10-K for the year ended December 31, 2011. U.S. Cellular undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Readers...

  • Page 36
    ... from Long-term debt in the Consolidated Balance Sheet due to the $9.9 million unamortized discount related to the 6.7% Senior Notes. See Note 13-Debt in the Notes to Consolidated Financial Statements for additional information. (2) Represents the weighted average interest rates at December 31, 2011...

  • Page 37
    ...per share amounts) 2011 2010 2009 Operating revenues Service ...Equipment sales ...Total operating revenues ...Operating expenses System operations (excluding Depreciation, amortization and accretion reported below) ...Cost of equipment sold ...Selling, general and administrative (including charges...

  • Page 38
    ... Statement of Cash Flows Year Ended December 31, (Dollars in thousands) 2011 2010 2009 Cash flows from operating activities Net income ...Add (deduct) adjustments to reconcile net income to net operating activities Depreciation, amortization and accretion ...Bad debts expense ...Stock-based...

  • Page 39
    ... States Cellular Corporation Consolidated Balance Sheet-Assets December 31, (Dollars in thousands) 2011 2010 Current assets Cash and cash equivalents ...Short-term investments ...Accounts receivable Customers and agents, less allowances of $21,337 and $24,455, respectively ...Roaming ...Affiliated...

  • Page 40
    United States Cellular Corporation Consolidated Balance Sheet-Liabilities and Equity December 31, (Dollars and shares in thousands) 2011 2010 Current liabilities Current portion of long-term debt ...Accounts payable Affiliated ...Trade ...Customer deposits and deferred revenues Accrued taxes ......

  • Page 41
    ... of Common Shares ...Incentive and compensation plans ...Adjust investment in subsidiaries for noncontrolling interest purchase ...Stock-based compensation awards ...Tax windfall (shortfall) from stock awards ...Distributions to noncontrolling interests ... Balance, December 31, 2009 ... The...

  • Page 42
    ... of Common Shares ...Incentive and compensation plans ...Adjust investment in subsidiaries for noncontrolling interest purchase ...Stock-based compensation awards ...Tax windfall (shortfall) from stock awards ...Distributions to noncontrolling interests ... Balance, December 31, 2010 ... The...

  • Page 43
    ...Common Shares ...Incentive and compensation plans ...Adjust investment in subsidiaries for noncontrolling interest purchases ...Stock-based compensation awards ...Tax windfall (shortfall) from stock awards ...Distributions to noncontrolling interests ... - (62,294) 15,093 Balance, December 31, 2011...

  • Page 44
    ... revised consolidation guidance related to VIEs effective January 1, 2010 did not change U.S. Cellular's consolidated reporting entities. The Consolidated Statement of Comprehensive Income was not included because comprehensive income for the years ended December 31, 2011, 2010 and 2009 equaled net...

  • Page 45
    ... not have any off-balance sheet credit exposure related to its customers. The changes in the allowance for doubtful accounts during the years ended December 31, 2011, 2010 and 2009 were as follows: (Dollars in thousands) 2011 2010 2009 Beginning balance ...Additions, net of recoveries ...Deductions...

  • Page 46
    ... Communications Commission (''FCC'') licenses to provide wireless service. These costs include amounts paid to license applicants and owners of interests in entities awarded licenses and all direct and incremental costs related to acquiring the licenses. U.S. Cellular has determined that wireless...

  • Page 47
    ... build-out of the company's wireless network, infrastructure, and related costs are projected based on market participant information. Calculated cash flows, along with a terminal value, are discounted to the present and summed to determine the estimated fair value. For units of accounting...

  • Page 48
    ... reviewed throughout the year to determine if changes in technology or other business changes would warrant accelerating the depreciation of those specific assets. U.S. Cellular did not materially change the useful lives of its property, plant and equipment in 2011, 2010 or 2009. Impairment of Long...

  • Page 49
    ...to sell), an impairment loss is recognized for the difference. Quoted market prices in active markets are the best evidence of fair value of a tangible long-lived asset and are used when available. If quoted market prices are not available, the estimate of fair value is based on the best information...

  • Page 50
    ... ACCOUNTING PRONOUNCEMENTS (Continued) Revenue Recognition Revenues from wireless operations consist primarily of: • Charges for access, airtime, roaming, long distance, data and other value added services provided to U.S. Cellular's retail customers and to end users through third-party resellers...

  • Page 51
    ... account) in the Consolidated Balance Sheet, as customers may redeem their reward points within the current period. Cash-based discounts and incentives, including discounts to customers who pay their bills through the use of on-line bill payment methods, are recognized as a reduction of Operating...

  • Page 52
    ... these plans is required. U.S. Cellular values its share-based payment transactions using a Black-Scholes valuation model. Stockbased compensation cost recognized during the period is based on the portion of the share-based payment awards that is ultimately expected to vest. Accordingly, stock-based...

  • Page 53
    ...million in 2011, 2010 and 2009, respectively. Operating Leases U.S. Cellular is a party to various lease agreements for office space, retail stores, cell sites and equipment that are accounted for as operating leases. Certain leases have renewal options and/or fixed rental increases. Renewal options...

  • Page 54
    ... 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 related to the classification of Accounts payable-trade for Additions to property, plant and equipment as non...

  • Page 55
    ... AMOUNTS (Continued) Consolidated Statement of Cash Flows-Year Ended December 31, 2010 (Dollars in thousands) As previously reported(1) Adjustment Revised Change in Accounts payable-trade ...Change in Other assets and liabilities ...Cash flows from operating activities ...Cash used for additions to...

  • Page 56
    ... current portion of such long-term debt, was estimated using market prices for the 6.95% Senior Notes at December 31, 2011 and 7.5% Senior Notes at December 31, 2010, and discounted cash flow analysis for the 6.7% Senior Notes at December 31, 2011 and 2010. NOTE 5 INCOME TAXES U.S. Cellular's Income...

  • Page 57
    UNITED STATES CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 5 INCOME TAXES (Continued) Income tax expense is summarized as follows: Year Ended December 31, (Dollars in thousands) 2011 2010 2009 Current Federal . State . . Deferred Federal . State . . ... $ (90,...

  • Page 58
    ... follows: 2011 (Dollars in thousands) 2010 2009 Unrecognized tax benefits balance at January 1, . Additions for tax positions of current year ...Additions for tax positions of prior years ...Reductions for tax positions of prior years ...Reductions for settlements of tax positions ...Reductions for...

  • Page 59
    ...19.3 million at December 31, 2011 and 2010, respectively. A summary of U.S. Cellular's deferred tax asset valuation allowance is as follows: 2011(1) (Dollars in thousands) 2010 2009 Balance at January 1 ...Charged to costs and expenses ...Charged to other accounts ...Balance at December 31, ... $29...

  • Page 60
    ... in Carroll Wireless, Barat Wireless, King Street Wireless and Aquinas Wireless will become exercisable in 2013, 2017, 2019 and 2020, respectively. The put option price is determined pursuant to a formula that takes into consideration fixed interest rates and the market value of U.S. Cellular...

  • Page 61
    ... Common Shares are as follows: Year ended December 31, (Dollars and shares in thousands, except earnings per share) 2011 2010 2009 Net income attributable to U.S. Cellular shareholders ...Weighted average number of shares used in basic earnings per share Effect of dilutive securities: Stock options...

  • Page 62
    ... received, calculated using a market approach valuation method, and the carrying value of the licenses surrendered. This gain was recorded in (Gain) loss on asset disposals and exchanges, net in the Consolidated Statement of Operations for the year ended December 31, 2011. The Indiana PCS spectrum...

  • Page 63
    ...U.S. Cellular's licenses and goodwill are presented below. See Note 8-Acquisitions, Divestitures and Exchanges for information regarding transactions which affected licenses and goodwill during the periods. Licenses Year Ended December 31, (Dollars in thousands) 2011 2010 Balance, beginning of year...

  • Page 64
    ...accounting policies related to licenses and goodwill. Impairment Assessments U.S. Cellular performs its annual impairment assessment of its licenses and goodwill in the fourth quarter of each year. No impairment of goodwill or licenses resulted from the assessments performed in 2011 or 2010. In 2009...

  • Page 65
    ... tables, which are based on information provided in part by third parties, summarize the combined assets, liabilities and equity, and the combined results of operations of U.S. Cellular's equity method investments: December 31, (Dollars in thousands) 2011 2010 Assets Current ...Due from affiliates...

  • Page 66
    ...2010 were as follows: December 31, (Dollars in thousands) Useful Lives (Years) 2011 2010 Land ...Buildings ...Leasehold and land improvements ...Cell site equipment ...Switching equipment ...Office furniture and equipment ...Other operating assets and equipment System development ...Work in process...

  • Page 67
    ... current or previous revolving credit facilities in 2011, 2010 or 2009 except for letters of credit. U.S. Cellular's interest cost on its revolving credit facility is subject to increase if its current credit ratings from Standard & Poor's Rating Services, Moody's Investors Service or Fitch Ratings...

  • Page 68
    ...costs related to the revolving credit facility which is included in Other assets and deferred charges in the Consolidated Balance Sheet. Long-Term Debt Long-term debt at December 31, 2011 and 2010 was as follows: December 31, (Dollars in thousands) Issuance date Maturity date Call date (1) 2011 2010...

  • Page 69
    ... Lease Commitments U.S. Cellular is a party to various lease agreements, both as lessee and lessor, for office space, retail store sites, cell sites and equipment which are accounted for as operating leases. Certain leases have renewal options and/or fixed rental increases. Renewal options that...

  • Page 70
    ..., the low end of the range is accrued. The assessment of the expected outcomes of legal proceedings is a highly subjective process that requires judgments about future events. The legal proceedings are reviewed at least quarterly to determine the adequacy of accruals and related financial statement...

  • Page 71
    ... and prior authorizations, were as follows: Year Ended December 31, (Dollars and share amounts in thousands) Number of Shares Average Cost Per Share Amount 2011 U.S. Cellular Common Shares ...2010 U.S. Cellular Common Shares ...2009 U.S. Cellular Common Shares ... 1,276 1,235 887 $48.82 $42...

  • Page 72
    .... U.S. Cellular estimated the fair value of stock options granted during 2011, 2010, and 2009 using the Black-Scholes valuation model and the assumptions shown in the table below. 2011 2010 2009 Expected life ...Expected volatility ...Dividend yield ...Risk-free interest rate ...Estimated annual...

  • Page 73
    ... years, to key employees. U.S. Cellular estimates the fair value of restricted stock units based on the closing market price of U.S. Cellular shares on the date of grant. The fair value is then recognized as compensation cost on a straight-line basis over the requisite service periods of the awards...

  • Page 74
    ... STATES CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 16 STOCK-BASED COMPENSATION (Continued) stock issued under these plans was required. Compensation cost is measured as the difference between the cost of the shares to plan participants and the market value of...

  • Page 75
    ... CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 17 SUPPLEMENTAL CASH FLOW DISCLOSURES (Continued) Following are supplemental cash flow disclosures regarding transactions related to stock-based compensation awards: Year Ended December 31, (Dollars in thousands) 2011...

  • Page 76
    ... that were based on management's best estimates and judgments. Management also prepared the other information in the annual report and is responsible for its accuracy and consistency with the financial statements. PricewaterhouseCoopers LLP , an independent registered public accounting firm, has...

  • Page 77
    ...'s management, including its Chief Executive Officer and Chief Financial Officer, U.S. Cellular conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control-Integrated Framework issued by...

  • Page 78
    ... balance sheets and the related consolidated statements of operations, changes in equity, and cash flows present fairly, in all material respects, the financial position of United States Cellular Corporation and its subsidiaries at December 31, 2011 and 2010, and the results of their operations...

  • Page 79
    risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP Chicago, Illinois February 24, 2012 71

  • Page 80
    ... Cellular Corporation SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA Year Ended or at December 31, (Dollars in thousands, except per share amounts) 2011 2010 2009 2008 2007 Statement of Operations data Service revenues ...$4,053,797 $3,913,001 $3,927,128 $3,939,695 $3,672,724 Equipment sales...

  • Page 81
    ... in first and second quarter 2011 and all 2010 interim financial statements. (2) The high, low and closing sales prices as reported by the New York Stock Exchange (''NYSE''). (3) During the quarter ended December 31, 2010, U.S. Cellular recorded adjustments to reduce its liability for transactional...

  • Page 82
    ...the New York Stock Exchange under the symbol ''USM'' and in the newspapers as ''US Cellu.'' As of January 31, 2012, the last trading day of the month, U.S. Cellular's Common Shares were held by 340 record owners. All of the Series A Common Shares were held by TDS. No public trading market exists for...

  • Page 83
    ...and other members of the investment community should be directed to: Jane W. McCahon, Vice President-Corporate Relations Telephone and Data Systems, Inc. 30 North LaSalle Street, Suite 4000 Chicago, IL 60602 312.592.5379 312.630.9299 (fax) [email protected] Directors and executive officers See...

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  • Page 87
    ... growth. • Earn rewards and use them to get new phones faster, plus free accessories and ringtones • Find a plan to fit your lifestyle-from single lines, to family plans, to prepaid plans. Our plans are the best value in wireless. • Enjoy the highest call quality and network satisfaction of...

  • Page 88
    ... Perez Vice President, Marketing and Sales Operations Ljubica A. Petrich Vice President and Controller Thomas S. Weber Vice President, Financial and Real Estate Services Nick B. Wright Vice President, Sales, West Region LeRoy T. Carlson, Jr. Chairman, U.S. Cellular President and Chief Executive Of...