Operating expenses increased $139.8 million, or 14%, in 2001. System operations expenses increased $58.2 million, or 22%, in 2001. System operations expenses include charges from other telecommunications service providers for the Company’s customers’ use of their facilities, as well as for the Company’s inbound roaming traffic on these facilities. Also included are costs related to local interconnection to the landline network, long-distance charges and outbound roaming expenses. The increase in system operations expenses in 2001 was due to the following factors: - a 15% increase in the number of cell sites within the Company’s systems, to 2,804 in 2001 from 2,430 in 2000, as the Company continues to expand and enhance coverage in its service areas;
- a $5.3 million, or 36%, increase in employee-related expenses, driven by the addition of employees throughout 2001 to maintain the Company’s systems and improve service quality;
- increases in minutes of use both on the Company’s systems and by the Company’s customers using other systems when roaming;
- the ongoing reduction both in the per-minute cost of usage on the Company’s systems and in negotiated roaming rates, which partially offset the above factors.
As a result of the above factors, the components of system operations expenses were affected as follows: - expenses incurred when the Company’s customers used other systems when roaming increased $27.4 million, or 19%;
- maintenance, utility and cell site expenses increased $15.7 million, or 25%; and
- the cost of minutes used on the Company’s systems increased $14.8 million, or 28%.
In total, management expects system operations expenses to increase over the next few years, driven by increases in the number of cell sites within the Company’s systems and increases in minutes of use both on the Company’s systems and by the Company’s customers on other systems when roaming. Marketing and selling expenses decreased $507,000, or less than 1%, in 2001. Marketing and selling expenses primarily consist of salaries, commissions and expenses of field sales and retail personnel and offices; agent expenses; corporate marketing department salaries and expenses; local advertising; and public relations expenses. Marketing cost per gross customer activation, which includes marketing and selling expenses and equipment subsidies, decreased 6% to $311 in 2001 from $331 in 2000. The decrease in cost per gross customer activation in 2001 was primarily due to reductions in equipment subsidies per gross customer activation, part of which was driven by the increase in equipment sales revenues related to activation fees. -6- Cost of equipment sold decreased $5.3 million, or 5%, in 2001. The effect of a slight increase in the number of units sold was offset by a decrease in the average cost of units sold, especially dual-mode units. General and administrative expenses increased $63.7 million, or 25%, in 2001. These expenses include the costs of operating the Company’s customer care centers and local business offices, the costs of serving and retaining customers and corporate expenses other than the corporate engineering and marketing departments. The increase includes the effect of increases in expenses required to serve the growing customer base in the Company’s markets and other expenses incurred related to the growth in the Company’s business. Driven by additional costs incurred in 2001 related to its customer care centers, which centralize certain customer service functions, administrative employee-related expenses increased $25.6 million, or 23%, in 2001. The Company also incurred additional costs in 2001 to retain customers and to provide dual-mode phone units to customers who migrated from analog to digital rate plans, and as of September 30, 2001, approximately two-thirds of the Company’s customers were using digital rate plans. Customer retention-related costs increased $17.0 million, or 45%, in 2001. Monthly general and administrative expenses per customer increased 5% to $11.00 in 2001 from $10.43 in 2000. General and administrative expenses represented 24% of service revenues in 2001 and 21% in 2000. Operating cash flow increased $21.4 million, or 5%, to $466.4 million in 2001. The improvement was primarily due to substantial growth in customers and service revenues, partially offset by an increase in cash expenses, primarily system operations expenses and general and administrative expenses. Operating cash flow margins (as a percent of service revenues) were 34.2% in 2001 and 36.1% in 2000. Depreciation expense increased $21.4 million, or 14%, in 2001. The increase reflects rising average fixed asset balances, which increased 20% in 2001. Increased fixed asset balances in 2001 resulted from the addition of new cell sites built to improve coverage and capacity in the Company’s markets and from upgrades to provide digital service in more of the Company’s service areas. Operating IncomeOperating income totaled $244.8 million in 2001, a decrease of $2.4 million, or 1%, from 2000. Operating income margins were 17.9% in 2001 and 20.0% in 2000. The reductions in operating income and operating income margins reflect the following factors: - increased revenues, driven by growth in both the number of customers served by the Company’s systems, and the number of minutes used by the Company’s customers and on the Company’s systems;
- increased system operations expenses, driven by the increase in minutes of use by both the Company's customers and inbound roamers using the Company's systems; and
- increased general and administrative expenses, driven by an increase in the cost to retain and service customers.
The Company expects each of the above factors to continue to have an effect on operating income and operating margins for the next several quarters. Any changes in the above factors, as well as the effects of other drivers of the Company’s operating results, may cause operating income and operating margins to fluctuate over the next several quarters. The Company expects service revenues to continue to grow during the remainder of 2001 and in 2002; however, management anticipates that average monthly revenue per customer will decrease, -7- as retail service and inbound roaming revenue per minute of use continue to decline. Additionally, the Company expects expenses to increase during the remainder of 2001 and in 2002 as it incurs costs associated with customer growth, service and retention and fixed assets added. Management continues to believe there exists a seasonality in both service revenues, which tend to increase more slowly in the first and fourth quarters, and operating expenses, which tend to be higher in the fourth quarter due to increased marketing activities and customer growth, which may cause operating income to vary from quarter to quarter. Additionally, competitors licensed to provide PCS have initiated service in certain of the Company’s markets over the past several years. The Company expects PCS operators to continue deployment of PCS throughout all of the Company’s clusters during 2001 and in 2002. Management continues to monitor other wireless communications providers’ strategies to determine how additional competition is affecting the Company’s results. The effects of additional wireless competition have significantly slowed customer growth in certain of the Company’s markets. Coupled with the recent downturn in the nation’s economy, the effect of increased competition has caused the Company’s customer growth in these markets to be slower than expected in 2001. Management anticipates that overall customer growth will continue to be slower in the future, primarily as a result of the increase in the number of competitors in its markets. Investment and Other IncomeInvestment and other income totaled $17.5 million in 2001 and $113.1 million in 2000. There were no gains on cellular and other investments in the first nine months of 2001.Gain on cellular and other investments totaled $96.1 million in the first nine months of 2000, from the sales of Company’s majority interest in one market and minority interests in two markets, and from cash received from the settlement of a legal matter. Investment income was $31.3 million in 2001 and $30.7 million in 2000. Investment income primarily represents the Company’s share of net income from the markets managed by others that are accounted for by the equity method. Interest income totaled $9.5 million in 2001 and $13.5 million in 2000. The decrease is primarily due to the decrease in average cash balances in 2001. Interest expense totaled $26.2 million in 2001 and $28.1 million in 2000. Interest expense in 2001 is primarily related to Liquid Yield Option Notes (“LYONs”) ($7.6 million); the Company’s 7.25% Notes (the “Notes”) ($13.9 million); and the Company’s revolving credit facility with a series of banks (“Revolving Credit Facility”) ($3.5 million). Interest expense in 2000 is primarily related to LYONs ($13.1 million) and the Notes ($13.9 million). Income TaxesIncome tax expense was $107.4 million in 2001 and $156.5 million in 2000. In 2000, $45.7 million of income tax expense related to gains on cellular and other investments. The overall effective tax rates were 41% in 2001 and 43% in 2000. In 2001, income tax expense was reduced by $4.5 million to reflect one-time tax adjustments. In 2000, the effective tax rate was affected by sales of cellular and other investments, which were taxed at varying rates. TDS and the Company are parties to a Tax Allocation Agreement, pursuant to which the Company is included in a consolidated federal income tax return with other members of the TDS consolidated group. For financial reporting purposes, the Company computes federal income taxes as if it was filing a separate return as its own affiliated group and was not included in the TDS group. -8- Extraordinary ItemExtraordinary item - loss on extinguishment of debt, net of taxtotaled $6.9 million in the first nine months of 2001, or $.08 per diluted share, and $29.5 million in 2000, or $.32 per diluted share. In 2001, the Company satisfied $55.5 million face value ($24.2 million carrying value) of converted LYONs by paying $30.8 million in cash ($612,000 of which was included in accounts payable at September 30, 2001) to the holders. In 2000, the Company repurchased $41.0 million face value ($16.9 million carrying value) of LYONs and satisfied $72.5 million face value ($30.3 million carrying value) of converted LYONs for an aggregate of $75.8 million in cash ($10.9 million of which was included in accounts payable at September 30, 2001) paid to the holders. In each year, the loss resulted from the difference between the conversion price, which approximated market value, and the accreted value of the LYONs repurchased or converted. These losses are not deductible for tax purposes. Cumulative Effect of Accounting ChangeCumulative effect of accounting change, net of taxtotaled $(4.7) million in 2000, or $(.05) per diluted share, reflecting the Company’s implementation of SAB No. 101. The Company now defers certain activation fees charged to its customers when initiating service through its retail and direct channels and reconnect fees charged to its customers when resuming service after suspension, and records the related revenue over periods from six to 48 months. Prior to implementing SAB No. 101, the Company recorded these fees as operating revenues in the period they were charged to the customer. The cumulative effect represents the aggregate impact of this accounting change for periods prior to 2000. Net IncomeNet income totaled $140.9 million in 2001 and $162.8 million in 2000.Diluted earnings per sharewas $1.61 in 2001 and $1.85 in 2000. In 2001, net income and earnings per share included an extraordinary loss, representing $(6.9) million and $(.08) per share. Net income and earnings per share in 2000 included significant after-tax gains on cellular and other investments, representing $50.3 million and $.55 per share; an extraordinary loss, representing $(29.5) million and $(.32) per share; and the cumulative effect of a change in accounting principle, representing $(4.7) million and $(.05) per share. Excluding the after-tax effect of these gains, extraordinary losses and cumulative effect of a change in accounting principle, net income would have been $147.8 million, or $1.69 per share, in 2001; and $146.6 million, or $1.67 per share, in 2000. Three Months Ended 9/30/01 Compared to Three Months Ended 9/30/00Operating revenues totaled $501.0 million in the third quarter of 2001, up $49.6 million, or 11%, over 2000. Average monthly service revenue per customer decreased to $47.92 in the third quarter of 2001 compared to $50.91 in the same period of 2000 for reasons generally the same as the first nine months of 2001. Revenues from retail customers increased $43.2 million, or 14%, in 2001 primarily due to the increased number of customers served. Average monthly local retail minutes of use per customer totaled 230 in the third quarter of 2001 compared to 170 in 2000. Also, as the number of customers and amount of revenue earned continued to grow, average revenue per minute of use continued to decline. As a result, average monthly retail service revenue per customer decreased 3% to $36.06 in the third quarter of 2001 compared to $37.25 in 2000. Inbound roaming revenue decreased $334,000, or less than 1%, in 2001 as the increase in inbound roaming minutes of use was more than offset by a decrease in the average inbound roaming revenue per minute of use. Monthly inbound roaming revenue per customer averaged $7.78 in 2001 compared to $9.17 in 2000. -9- Long-distance and other revenue increased $2.6 million, or 7%, in 2001. The effect of an increase in the volume of long-distance calls billed by the Company, primarily from inbound roamers using the Company’s systems to make long-distance calls, was partially offset by price reductions primarily related to long-distance charges on roaming minutes of use. Monthly long-distance and other revenue per customer averaged $4.08 in 2001 and $4.49 in 2000. Equipment sales revenue increased $4.1 million, or 24%, primarily reflecting the recognition of previously deferred revenues, which increased revenue by $5.2 million in 2001. Although gross customer activations increased 5% to 296,000 in 2001 from 283,000 in 2000, the revenue per unit sold declined due to an overall decline in the price of units sold, particularly dual-mode units provided to customers who initiated digital service. Operating expenses totaled $408.3 million in the third quarter of 2001, up $49.5 million, or 14%, over 2000. System operations expenses increased $25.3 million, or 27%, in 2001 as a result of increases in minutes of use and costs associated with maintaining 15% more cell sites than in 2000, partially offset by decreases in cost per minute for outbound roaming and toll transactions. Marketing and selling expenses increased $375,000, or 1%, in 2001. The increase was primarily due to a 5% increase in the number of gross customer activations. Cost per gross customer activation was $285 in 2001 and $321 in 2000. Cost of equipment sold decreased $2.7 million, or 8%, in 2001. The decrease primarily reflects the decline in the per unit cost of dual-mode units, partially offset by the 5% increase in gross customer activations. General and administrative expenses increased $15.9 million, or 18%, in 2001, for reasons generally the same as the first nine months of 2001. Operating cash flow increased $10.7 million, or 7%, to $170.0 million in 2001; operating cash flow margins totaled 35.5% in 2001 and 36.7% in 2000. Depreciation expense increased $9.9 million, or 19%, in 2001, reflecting a 25% increase in average fixed asset balances. Operating income totaled $92.7 million in 2001 compared to $92.5 million in 2000, a less than 1% increase. The operating income margin decreased to 19.3% in 2001 from 21.3% in 2000. The decline in operating income margin was primarily the result of increased system operations and general and adminstrative expenses, slightly offset by increased revenues. Investment and other income decreased $77.3 million to $7.2 million in 2001. There were no gains on cellular and other investments in 2001; these gains totaled $78.2 million in 2000, resulting from the sale of the Company’s majority interest in one market and minority interest in another market, and from cash received from the settlement of a legal matter. Investment income increased $3.2 million, or 29%, in 2001, as the aggregate net income from the markets in which the company had interests in both periods increased in 2001. Total interest expense decreased $690,000, or 7%, in 2001. Income tax expense totaled $43.0 million in 2001 and $80.6 million in 2000. In 2000, $39.2 million of income tax expense related to gains on cellular and other investments. Extraordinary (loss), net of tax totaled ($1.8) million in 2001 and ($23.4) million in 2000. -10- Net income totaled $53.1 million in 2001 compared to $70.6 million in 2000. Both net income and earnings per share in both years were affected by extraordinary losses and gains on cellular and other investments. A summary of the after-tax effect of the extraordinary losses on net income and diluted earnings per share is shown below. |
