UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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x | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 20152016
or
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o | | 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 1-04721
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SPRINT CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware | 46-1170005 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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6200 Sprint Parkway, Overland Park, Kansas | 66251 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (855) 848-3280
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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 o
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
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.
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Large accelerated filer | x | | Accelerated filer | o |
Non-accelerated filer | o | (Do not check if a smaller reporting company) | Smaller reporting company | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No x
COMMON SHARES OUTSTANDING AT FEBRUARY 2, 2016:3, 2017:
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Sprint Corporation Common Stock | 3,971,223,2323,987,167,109 |
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SPRINT CORPORATION
TABLE OF CONTENTS
| | | | Page Reference | | Page Reference |
Item | PART I — FINANCIAL INFORMATION | | PART I — FINANCIAL INFORMATION | |
1. | | | | |
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2. | | | | |
3. | | | | |
4. | | | | |
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| PART II — OTHER INFORMATION | | PART II — OTHER INFORMATION | |
1. | | | | |
1A. | | | | |
2. | | | | |
3. | | | | |
4. | | | | |
5. | | | | |
6. | | | | |
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PART I — FINANCIAL INFORMATION
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Item 1. | Financial Statements (Unaudited) |
SPRINT CORPORATION
CONSOLIDATED BALANCE SHEETS
| | | December 31, | | March 31, | December 31, | | March 31, |
| 2015 | | 2015 | 2016 | | 2016 |
| (in millions, except share and per share data) | (in millions, except share and per share data) |
ASSETS | Current assets: | | | | | | |
Cash and cash equivalents | $ | 2,175 |
| | $ | 4,010 |
| $ | 3,707 |
| | $ | 2,641 |
|
Short-term investments | 41 |
| | 166 |
| 2,349 |
| | — |
|
Accounts and notes receivable, net of allowance for doubtful accounts and deferred interest of $38 and $204, respectively | 1,033 |
| | 2,290 |
| |
Accounts and notes receivable, net of allowance for doubtful accounts and deferred interest of $46 and $39, respectively | | 1,236 |
| | 1,099 |
|
Device and accessory inventory | 995 |
| | 1,359 |
| 1,296 |
| | 1,173 |
|
Deferred tax assets | — |
| | 62 |
| |
Prepaid expenses and other current assets | 2,317 |
| | 1,890 |
| 1,984 |
| | 1,920 |
|
Total current assets | 6,561 |
| | 9,777 |
| 10,572 |
| | 6,833 |
|
Property, plant and equipment, net | 20,645 |
| | 19,721 |
| 19,333 |
| | 20,297 |
|
Intangible assets |
|
| | |
|
| | |
Goodwill | 6,575 |
| | 6,575 |
| 6,579 |
| | 6,575 |
|
FCC licenses and other | 40,052 |
| | 39,987 |
| 40,556 |
| | 40,073 |
|
Definite-lived intangible assets, net | 4,807 |
| | 5,893 |
| 3,582 |
| | 4,469 |
|
Other assets | 911 |
| | 1,077 |
| 673 |
| | 728 |
|
Total assets | $ | 79,551 |
| | $ | 83,030 |
| $ | 81,295 |
| | $ | 78,975 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY | Current liabilities: | | | | | | |
Accounts payable | $ | 3,078 |
| | $ | 4,347 |
| $ | 2,894 |
| | $ | 2,899 |
|
Accrued expenses and other current liabilities | 4,474 |
| | 5,293 |
| 4,189 |
| | 4,374 |
|
Deferred tax liabilities | 186 |
| | — |
| |
Current portion of long-term debt, financing and capital lease obligations | 3,324 |
| | 1,300 |
| 6,554 |
| | 4,690 |
|
Total current liabilities | 11,062 |
| | 10,940 |
| 13,637 |
| | 11,963 |
|
Long-term debt, financing and capital lease obligations | 30,429 |
| | 32,531 |
| 30,759 |
| | 29,268 |
|
Deferred tax liabilities | 13,773 |
| | 13,898 |
| 14,238 |
| | 13,959 |
|
Other liabilities | 3,954 |
| | 3,951 |
| 3,665 |
| | 4,002 |
|
Total liabilities | 59,218 |
| | 61,320 |
| 62,299 |
| | 59,192 |
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Commitments and contingencies |
| |
|
| |
|
Stockholders' equity: | | | | | | |
Common stock, voting, par value $0.01 per share, 9.0 billion authorized, 3.970 billion and 3.967 billion issued, respectively | 40 |
| | 40 |
| |
Common stock, voting, par value $0.01 per share, 9.0 billion authorized, 3.985 billion and 3.975 billion issued, respectively | | 40 |
| | 40 |
|
Paid-in capital | | 27,694 |
| | 27,563 |
|
Treasury shares, at cost | — |
| | (7 | ) | — |
| | (3 | ) |
Paid-in capital | 27,536 |
| | 27,468 |
| |
Accumulated deficit | (6,824 | ) | | (5,383 | ) | (8,301 | ) | | (7,378 | ) |
Accumulated other comprehensive loss | (419 | ) | | (408 | ) | (437 | ) | | (439 | ) |
Total stockholders' equity | 20,333 |
| | 21,710 |
| 18,996 |
| | 19,783 |
|
Total liabilities and stockholders' equity | $ | 79,551 |
| | $ | 83,030 |
| $ | 81,295 |
| | $ | 78,975 |
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See Notes to the Consolidated Financial Statements
SPRINT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| December 31, | | December 31, | December 31, | | December 31, |
| 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 | | 2016 | | 2015 |
| (in millions, except per share amounts) | (in millions, except per share amounts) |
Net operating revenues: | | | | | | | | | | | | | | |
Service | $ | 6,683 |
| | $ | 7,272 |
| | $ | 20,600 |
| | $ | 22,404 |
| $ | 6,323 |
| | $ | 6,683 |
| | $ | 19,252 |
| | $ | 20,600 |
|
Equipment | 1,424 |
| | 1,701 |
| | 3,509 |
| | 3,846 |
| 2,226 |
| | 1,424 |
| | 5,556 |
| | 3,509 |
|
| 8,107 |
| | 8,973 |
| | 24,109 |
|
| 26,250 |
| 8,549 |
| | 8,107 |
| | 24,808 |
|
| 24,109 |
|
Net operating expenses: | | | | | | | | | | | | | | |
Cost of services (exclusive of depreciation and amortization included below) | 2,348 |
| | 2,330 |
| | 7,194 |
| | 7,279 |
| 1,925 |
| | 2,348 |
| | 6,125 |
| | 7,194 |
|
Cost of products (exclusive of depreciation and amortization included below) | 1,589 |
| | 2,952 |
| | 4,244 |
| | 7,482 |
| 1,985 |
| | 1,589 |
| | 5,097 |
| | 4,244 |
|
Selling, general and administrative | 2,129 |
| | 2,647 |
| | 6,540 |
| | 7,232 |
| 2,080 |
| | 2,129 |
| | 5,992 |
| | 6,540 |
|
Impairments | — |
| | 2,133 |
| | — |
| | 2,133 |
| |
Severance and exit costs | 209 |
| | 22 |
| | 247 |
| | 333 |
| 19 |
| | 209 |
| | 30 |
| | 247 |
|
Depreciation | 1,549 |
| | 940 |
| | 4,202 |
| | 2,706 |
| 1,837 |
| | 1,549 |
| | 5,227 |
| | 4,202 |
|
Amortization | 316 |
| | 380 |
| | 994 |
| | 1,189 |
| 255 |
| | 316 |
| | 813 |
| | 994 |
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Other, net | 164 |
| | 109 |
| | 386 |
| | 109 |
| 137 |
| | 164 |
| | 230 |
| | 386 |
|
| 8,304 |
| | 11,513 |
| | 23,807 |
|
| 28,463 |
| 8,238 |
| | 8,304 |
| | 23,514 |
|
| 23,807 |
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Operating (loss) income | (197 | ) | | (2,540 | ) | | 302 |
|
| (2,213 | ) | |
Other expense: | | | | | | | | |
Operating income (loss) | | 311 |
| | (197 | ) | | 1,294 |
|
| 302 |
|
Other (expense) income: | | | | | | | | |
Interest expense | (546 | ) | | (506 | ) | | (1,630 | ) | | (1,528 | ) | (619 | ) | | (546 | ) | | (1,864 | ) | | (1,630 | ) |
Other income, net | 4 |
| | 10 |
| | 13 |
| | 19 |
| |
Other (expense) income, net | | (60 | ) | | 4 |
| | (67 | ) | | 13 |
|
| (542 | ) | | (496 | ) | | (1,617 | ) |
| (1,509 | ) | (679 | ) | | (542 | ) | | (1,931 | ) |
| (1,617 | ) |
Loss before income taxes | (739 | ) | | (3,036 | ) | | (1,315 | ) |
| (3,722 | ) | (368 | ) | | (739 | ) | | (637 | ) |
| (1,315 | ) |
Income tax (expense) benefit | (97 | ) | | 657 |
| | (126 | ) | | 601 |
| |
Income tax expense | | (111 | ) | | (97 | ) | | (286 | ) | | (126 | ) |
Net loss | $ | (836 | ) | | $ | (2,379 | ) | | $ | (1,441 | ) |
| $ | (3,121 | ) | $ | (479 | ) | | $ | (836 | ) | | $ | (923 | ) |
| $ | (1,441 | ) |
| | | | | | | | | | | | | | |
Basic net loss per common share | $ | (0.21 | ) | | $ | (0.60 | ) | | $ | (0.36 | ) | | $ | (0.79 | ) | $ | (0.12 | ) | | $ | (0.21 | ) | | $ | (0.23 | ) | | $ | (0.36 | ) |
Diluted net loss per common share | $ | (0.21 | ) | | $ | (0.60 | ) | | $ | (0.36 | ) | | $ | (0.79 | ) | $ | (0.12 | ) | | $ | (0.21 | ) | | $ | (0.23 | ) | | $ | (0.36 | ) |
Basic weighted average common shares outstanding | 3,970 |
| | 3,957 |
| | 3,969 |
| | 3,950 |
| 3,983 |
| | 3,970 |
| | 3,979 |
| | 3,969 |
|
Diluted weighted average common shares outstanding | 3,970 |
| | 3,957 |
| | 3,969 |
| | 3,950 |
| 3,983 |
| | 3,970 |
| | 3,979 |
| | 3,969 |
|
| | | | | | | | | | | | | | |
Other comprehensive (loss) income, net of tax: | | | | | | | | | | | | | | |
Net unrealized holding losses on securities and other | $ | (9 | ) | | $ | (12 | ) | | $ | (16 | ) | | $ | (18 | ) | $ | (5 | ) | | $ | (9 | ) | | $ | — |
| | $ | (16 | ) |
Net unrecognized net periodic pension and other postretirement benefits | 2 |
| | (208 | ) | | 5 |
| | (209 | ) | — |
| | 2 |
| | 2 |
| | 5 |
|
Other comprehensive loss | (7 | ) | | (220 | ) | | (11 | ) | | (227 | ) | |
Other comprehensive (loss) income | | (5 | ) | | (7 | ) | | 2 |
| | (11 | ) |
Comprehensive loss | $ | (843 | ) | | $ | (2,599 | ) | | $ | (1,452 | ) | | $ | (3,348 | ) | $ | (484 | ) | | $ | (843 | ) | | $ | (921 | ) | | $ | (1,452 | ) |
See Notes to the Consolidated Financial Statements
SPRINT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | Nine Months Ended | Nine Months Ended |
| December 31, | December 31, |
| 2015 | | 2014 | 2016 | | 2015 |
| (in millions) | (in millions) |
Cash flows from operating activities: | | | | | | |
Net loss | $ | (1,441 | ) | | $ | (3,121 | ) | $ | (923 | ) | | $ | (1,441 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | |
Impairments | — |
| | 2,133 |
| |
Depreciation and amortization | 5,196 |
| | 3,895 |
| 6,040 |
| | 5,196 |
|
Provision for losses on accounts receivable | 385 |
| | 730 |
| 406 |
| | 385 |
|
Share-based and long-term incentive compensation expense | 58 |
| | 89 |
| 57 |
| | 58 |
|
Deferred income tax expense (benefit) | 120 |
| | (634 | ) | |
Deferred income tax expense | | 276 |
| | 120 |
|
Gains from asset dispositions and exchanges | | (354 | ) | | — |
|
Amortization of long-term debt premiums, net | (236 | ) | | (226 | ) | (234 | ) | | (236 | ) |
Loss on disposal of property, plant and equipment | 228 |
| | — |
| 368 |
| | 228 |
|
Contract terminations | | 96 |
| | — |
|
Other changes in assets and liabilities: | | | | | | |
Accounts and notes receivable | (1,482 | ) | | (1,356 | ) | (542 | ) | | (1,482 | ) |
Deferred purchase price from sale of receivables | | (220 | ) | | 2,048 |
|
Inventories and other current assets | (117 | ) | | (1,044 | ) | (2,254 | ) | | (2,165 | ) |
Accounts payable and other current liabilities | (816 | ) | | 1,183 |
| (97 | ) | | (816 | ) |
Non-current assets and liabilities, net | 112 |
| | (281 | ) | (313 | ) | | 112 |
|
Other, net | 596 |
| | 106 |
| 594 |
| | 596 |
|
Net cash provided by operating activities | 2,603 |
| | 1,474 |
| 2,900 |
| | 2,603 |
|
Cash flows from investing activities: | | | | | | |
Capital expenditures - network and other | (3,958 | ) | | (3,814 | ) | (1,421 | ) | | (3,958 | ) |
Capital expenditures - leased devices | (1,724 | ) | | (143 | ) | (1,530 | ) | | (1,724 | ) |
Expenditures relating to FCC licenses | (75 | ) | | (121 | ) | (46 | ) | | (75 | ) |
Reimbursements relating to FCC licenses | — |
| | 95 |
| |
Proceeds from sales and maturities of short-term investments | 377 |
| | 2,913 |
| 2,649 |
| | 377 |
|
Purchases of short-term investments | (252 | ) | | (1,947 | ) | (4,998 | ) | | (252 | ) |
Proceeds from sales of assets and FCC licenses | 36 |
| | 114 |
| 126 |
| | 36 |
|
Proceeds from sale-leaseback transaction | 1,136 |
| | — |
| — |
| | 1,136 |
|
Other, net | (25 | ) | | (9 | ) | 26 |
| | (25 | ) |
Net cash used in investing activities | (4,485 | ) | | (2,912 | ) | (5,194 | ) | | (4,485 | ) |
Cash flows from financing activities: | | | | | | |
Proceeds from debt and financings | 755 |
| | 300 |
| 6,830 |
| | 755 |
|
Repayments of debt, financing and capital lease obligations | (727 | ) | | (390 | ) | (3,266 | ) | | (727 | ) |
Debt financing costs | (1 | ) | | (37 | ) | (272 | ) | | (1 | ) |
Proceeds from issuance of common stock, net | 10 |
| | 50 |
| |
Other, net | 10 |
| | — |
| 68 |
| | 20 |
|
Net cash provided by (used in) financing activities | 47 |
| | (77 | ) | |
Net decrease in cash and cash equivalents | (1,835 | ) | | (1,515 | ) | |
Net cash provided by financing activities | | 3,360 |
| | 47 |
|
Net increase (decrease) in cash and cash equivalents | | 1,066 |
| | (1,835 | ) |
Cash and cash equivalents, beginning of period | 4,010 |
| | 4,970 |
| 2,641 |
| | 4,010 |
|
Cash and cash equivalents, end of period | $ | 2,175 |
| | $ | 3,455 |
| $ | 3,707 |
| | $ | 2,175 |
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See Notes to the Consolidated Financial Statements
SPRINT CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in millions)
| | | Common Stock | | Paid-in Capital | | Treasury Shares | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total | Common Stock | | Paid-in Capital | | Treasury Shares | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total |
| Shares | | Amount | Shares | | Amount | Shares | | Amount | Shares | | Amount |
Balance, March 31, 2015 | 3,967 |
| | $ | 40 |
| | $ | 27,468 |
| | 1 |
| | $ | (7 | ) | | $ | (5,383 | ) | | $ | (408 | ) | | $ | 21,710 |
| |
Balance, March 31, 2016 | | 3,974 |
| | $ | 40 |
| | $ | 27,563 |
| | 1 |
| | $ | (3 | ) | | $ | (7,378 | ) | | $ | (439 | ) | | $ | 19,783 |
|
Net loss | | | | | | | | | | | (1,441 | ) | | | | (1,441 | ) | | | | | | | | | | | (923 | ) | | | | (923 | ) |
Other comprehensive loss, net of tax | | | | | | | | | | | | | (11 | ) | | (11 | ) | |
Other comprehensive income, net of tax | | | | | | | | | | | | | | 2 |
| | 2 |
|
Issuance of common stock, net | 3 |
| | | | 3 |
| | (1 | ) | | 7 |
| |
| | | | 10 |
| 11 |
| | | | 32 |
| | (1 | ) | | 3 |
| |
| | | | 35 |
|
Share-based compensation expense | | | | | 55 |
| | | | | | | | | | 55 |
| | | | | 56 |
| | | | | | | | | | 56 |
|
Capital contribution by SoftBank | | | | | 10 |
| | | | | | | | | | 10 |
| | | | | 6 |
| | | | | | | | | | 6 |
|
Balance, December 31, 2015 | 3,970 |
| | $ | 40 |
| | $ | 27,536 |
| | — |
| | $ | — |
| | $ | (6,824 | ) | | $ | (419 | ) | | $ | 20,333 |
| |
Other, net | | | | | | 37 |
| | | | | | | | | | 37 |
|
Balance, December 31, 2016 | | 3,985 |
| | $ | 40 |
| | $ | 27,694 |
| | — |
| | $ | — |
| | $ | (8,301 | ) | | $ | (437 | ) | | $ | 18,996 |
|
See Notes to the Consolidated Financial Statements
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INDEX
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SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| |
Note 1. | Basis of Presentation |
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim financial information. All normal recurring adjustments considered necessary for a fair presentation have been included. Certain disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been omitted. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes contained in our annual report on Form 10-K for the year ended March 31, 2015.2016. Unless the context otherwise requires, references to "Sprint," "we," "us," "our" and the "Company" mean Sprint Corporation and its consolidated subsidiaries for all periods presented, and references to "Sprint Communications" are to Sprint Communications, Inc. and its consolidated subsidiaries.
The preparation of the unaudited interim consolidated financial statements requires management of the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities at the date of the unaudited interim consolidated financial statements. These estimates are inherently subject to judgment and actual results could differ.
Certain prior period amounts have been reclassified to conform to the current period presentation.
| |
Note 2. | New Accounting Pronouncements |
In AprilMay 2014, the Financial Accounting Standards Board (FASB) issued authoritative guidance regarding Reporting of Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The updated guidance defines discontinued operations as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. Additionally, the disclosure requirements for discontinued operations were expanded and new disclosures for individually significant dispositions that do not qualify as discontinued operations are required. The guidance is effective prospectively for fiscal years and interim reporting periods within those years beginning after December 15, 2014, with early adoption permitted for transactions that have not been reported in financial statements previously issued or available for issuance. The standard was effective for the Company's fiscal year beginning April 1, 2015 and will be applied to relevant transactions.
In May 2014, the FASB issued new authoritative literature, Revenue from Contracts with Customers.Customers, and has subsequently modified several areas of the standard in order to provide additional clarity and improvements. The issuance is part of a joint effort by the FASB and the International Accounting Standards Board (IASB) to enhance financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards and, thereby, improving the consistency of requirements, comparability of practices and usefulness of disclosures. The new standard will supersede much of the existing authoritative literature for revenue recognition. In July 2015, the FASB deferred the effective date of this standard. As a result, the standard and related amendments will be effective for the Company for itsCompany's fiscal year beginning April 1, 2018, including interim periods within that fiscal year. Early application is permitted, but not before the original effective date of April 1, 2017. Entities
Two adoption methods are allowed to transitionavailable for implementation of the standard update related to the new standard by either retrospective application orrecognition of revenue from contracts with customers. Under one method, the guidance is applied retrospectively to contracts for each reporting period presented, subject to allowable practical expedients. Under the other method, the guidance is applied only to the most current period presented, recognizing the cumulative effect.effect of the change as an adjustment to the beginning balance of retained earnings, and also requires additional disclosures comparing the results to the previous guidance. The Company is currently evaluating the guidance, including which transitionimplementation approach will be applied and the estimated impact it will have on our consolidated financial statements.
In June 2014, the FASB issued authoritative guidance regarding Compensation - Stock Compensation, which provides guidance on how to treat performance targets that can be achieved after the requisite service period. The updated guidance requires that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition and accounted for under current guidance as opposed to a nonvesting condition that would impact the grant-date fair value of the award. The guidance is effective for the Company for its fiscal year and interim periods within those fiscal years beginning April 1, 2016 with early adoption permitted. Entities may apply the amendments either (i) prospectively to all awards granted or modified after the effective date; or (ii) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter with the cumulative effect as an adjustment to the opening retained earnings balance as of the beginning of the earliest annual period presented. The Company does notapplied. We expect the adoption of this guidance to have a material effectimpact on our consolidated financial statements.
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In August 2014, the FASB issued authoritative guidance regarding Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which requires management to assess an entity’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. The updated guidance requires management to perform interim and annual assessments on whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued and to provide related disclosures, if required. The standard will be effective for the Company’s fiscal year beginning April 1, 2016, including interim reporting periods within that fiscal year, although early adoption is permitted. The Company will evaluate the standard, as necessary, upon adoption.
In January 2015, the FASB issued authoritative guidance on Extraordinary and Unusual Items, eliminating the concept of extraordinary items. The issuance is part of the FASB’s initiative to reduce complexity in accounting standards. Under the current guidance, an entity is required to separately classify, present and disclose events and transactions that meet the criteria for extraordinary classification. Under the new guidance, reporting entities will no longer be required to consider whether an underlying event or transaction is extraordinary, however, presentation and disclosure guidance for items that are unusual in nature or occur infrequently was retained and expanded to include items that are both unusual in nature and infrequently occurring. The amendments are effective for the Company’s fiscal year beginning April 1, 2016, although early adoption is permitted if applied from the beginning of a fiscal year. The Company doesand did not expect the adoption of this guidance to have a material effectimpact on our consolidated financial statements.
In February 2015, the FASB issued authoritative guidance regarding Consolidation, which provides guidance to management when evaluating whether they should consolidate certain legal entities. The updated guidance modifies evaluation criteria of limited partnerships and similar legal entities, eliminates the presumption that a general partner should consolidate a limited partnership, and affects the consolidation analysis of reporting entities that are involved with variable interest entities, particularly those that have fee arrangements and related party relationships. All legal entities will be subject to reevaluation under the revised consolidation model. The standard will beis effective for the Company’s fiscal year beginning April 1, 2016, including interim reporting periods within thatthis fiscal year although early adoption is permitted. The Company is currently evaluating the guidance and assessing thedid not have a material impact it will have on our consolidated financial statements.
In April 2015,
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In July 2015, the FASB issued authoritative guidance regarding Inventory, which simplifies the subsequent measurement of certain inventories by replacing today’s lower of cost or market test with a lower of cost and net realizable value test. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, although early adoption is permitted. The standard will be effective for the Company’s fiscal year beginning April 1, 2017.2017, including interim periods within this fiscal year. The Company does not expect the adoption of this guidance to have a material effectimpact on our consolidated financial statements.
In September 2015, the FASB issued authoritative guidance amending Business Combinations, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, including the cumulative effect of the change in provisional amount as if the accounting had been completed at the acquisition date. The adjustments related to previous reporting periods since the acquisition date must be disclosed by income statement line item either on the face of the income statement or in the notes. The guidance isamendments are effective for the Company's fiscal years andyear beginning April 1, 2016, including interim reporting periods within those years beginning after December 15, 2015, with early application permitted for financial statements that have not been issued.this fiscal year and, will be applied, as necessary, to future business combinations. The amendments are to be
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
applied prospectively to adjustments that occur after the effective date. The amendments will be effective for the Company for the fiscal year beginning April 1, 2016 and will be applied, as necessary, to future business combinations.
In November 2015, the FASB issued authoritative guidance regarding Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes by requiring all deferred income tax liabilities and assets be classified as noncurrent on the consolidated balance sheets. The guidance is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2016, with early adoption permitted. The standard would be effective for the Company’s fiscal year beginning April 1, 2017, however, we expect to early adopt the provisions of this standard effective January 1, 2016 on a prospective basis. The Company does not expect the early adoption of this guidance to have a material effect on our consolidated financial statements.
In January 2016, the FASB issued authoritative guidance regarding Financial Instruments, which amended guidance on the classification and measurement of financial instruments. Under the new guidance, entities will be required to measure equity investments that are not consolidated or accounted for under the equity method at fair value with any changes in fair value recorded in net income, unless the entity has elected the new practicability exception. For financial liabilities measured using the fair value option, entities will be required to separately present in other comprehensive income the portion of the changes in fair value attributable to instrument-specific credit risk. Additionally, the guidance amends certain disclosure requirements associated with the fair value of financial instruments. The standard will be effective for the Company’s fiscal year beginning April 1, 2018, including interim reporting periods within that fiscal year. The Company does not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued authoritative guidance regarding Leases. The new standard will supersede much of the existing authoritative literature for leases. This guidance requires lessees, among other things, to recognize right-of-use assets and liabilities on their balance sheet for all leases with lease terms longer than twelve months. The standard will be effective for the Company for its fiscal year beginning April 1, 2019, including interim periods within that fiscal year, with early application permitted. Entities are required to use modified retrospective application for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements with the option to elect certain transition reliefs. The Company is currently evaluating the guidance and expects it to have a material impact on our consolidated financial statements, however we are still assessing the overall impact.
In June 2016, the FASB issued authoritative guidance regarding Financial Instruments - Credit Losses, which requires entities to use a Current Expected Credit Loss impairment model based on expected losses rather than incurred losses. Under this model, an entity would recognize an impairment allowance equal to its current estimate of all contractual cash flows that the entity does not expect to collect from financial assets measured at amortized cost. The entity's estimate would consider relevant information about past events, current conditions and reasonable and supportable forecasts, which will result in recognition of lifetime expected credit losses. The standard will be effective for the Company's fiscal year beginning April 1, 2020, including interim reporting periods within that fiscal year, although early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In August 2016, the FASB issued authoritative guidance regarding Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. It provides guidance on eight specific cash flow issues. The standard will be effective for the Company for its fiscal years beginning after April 1, 2018, including interim periods within that fiscal year, with early adoption permitted. The Company is currently evaluating the guidance and assessing the impact it will have on our consolidated financial statements.
In October 2016, the FASB issued authoritative guidance regarding Income Taxes, which amended guidance for the income tax consequences of intra-entity transfers of assets other than inventory. Under the new guidance, entities will be required to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, thereby eliminating the recognition exception within current guidance. The standard will be effective for the
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Company’s fiscal year beginning April 1, 2018, including interim reporting periods within that fiscal year. The Company is currently evaluating the guidance and assessing the impact it will have on our consolidated financial statements.
In November 2016, the FASB issued authoritative guidance regarding Statement of Cash Flows: Restricted Cash, requiring that amounts generally described as restricted cash or restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard will be effective for the Company’s fiscal year beginning April 1, 2018, including interim reporting periods within that fiscal year, with early adoption permitted. The Company is currently evaluating the guidance and assessing the impact it will have on our consolidated financial statements.
In January 2017, the FASB issued authoritative guidance amending Business Combinations: Clarifying the Definition of a Business, to clarify the definition of a business with the objective of providing a more robust framework to assist management when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard will be effective for the Company for its fiscal year beginning April 1, 2018, including interim periods within that fiscal year, with early application permitted. The amendments are to be applied prospectively to business combinations that occur after the effective date.
Our device leasing and installment billing programs require a greater use of operating cash flows in the earlier part of the device contracts as our subscribers will generally pay less upfront than a traditional subsidized programs.subsidy program. The Accounts Receivable Facility and the Handset Sale-Leaseback transactions described below were designed in large part to mitigate the significant use of cash from purchasing devices from OEMsoriginal equipment manufacturers (OEMs) to fulfill our installment billing and leasing programs. We also entered into the Network Equipment Sale-Leaseback transaction in April 2016 to sell and leaseback certain network equipment to unrelated bankruptcy-remote special purpose entities (SPEs) that provided $2.2 billion in cash proceeds. Additionally, in October 2016 we entered into a spectrum financing transaction whereby a portion of our spectrum holdings was used as collateral to issue $3.5 billion in senior secured notes.
Accounts Receivable Facility
Transaction Overview
Our accounts receivable facilityAccounts Receivable Facility (Receivables Facility), which provides us the opportunity to sell eligiblecertain wireless service, and installment receivables, to unaffiliated third parties (Purchasers), was amended in November 2015 to includeand future amounts due from customers who lease certain devices from us.us to unaffiliated third parties (the Purchasers). The amendment increased the maximum funding limit under the Receivables Facility tois $4.3 billion and extended thewith an expiration toof November 2017. The amount available under the2017 (see Note 16. Subsequent Events). The Receivables Facility fluctuates over timewas amended in November 2016 to, among other things, reallocate the Purchasers' commitments between service, installment and future lease receivables. The amendment was in response to changing trends in the financing methods selected by customers. While we have the right to decide how much cash to receive from each sale, the maximum amount of cash available to us varies based on a number of factors and currently represents approximately 50% of the total amount of the eligible receivables generated duringsold to the normal course of our business.Purchasers. As of December 31, 2015, the total borrowing capacity available under the facility was approximately $2.0 billion. However, as a result of sales we have completed to date,2016, the total amount available to be drawn as of December 31, 2015was $778was $6 million. The proceeds from the sale of these receivables are comprised of a combination of cash and a deferred purchase price receivable (DPP). While it's at Sprint's election to decide how much cash it chooses to receive from each sale, the maximum amount of proceeds varies based on a number of factors and currently represents approximately 50% of the total amount of the receivables sold to the Purchasers. The DPP is realized by us upon the ultimate collection of the underlying receivables sold to the Purchasers or until Sprint electsupon Sprint's election to receive additional amountsadvances in cash from the Purchasers subject to the total availability under the Receivables Facility. As of December 31, 2015, we have elected not to sell future receivables associated with certain devices leased by our customers.
Wireless service and installment receivables sold are treated as a sale of financial assets and Sprint derecognizes these receivables, as well as the related allowances, and recognizes the net proceeds received in cash provided by operating activities on the consolidated statements of cash flows. The net amount drawn for wireless service and installment receivables was $1.8 billion as of December 31, 2016. The fees associated with these sales are recognized in "Selling, general and administrative" onin the consolidated statements of comprehensive loss. The sale of future lease receivables will be recordedis treated as a financing transaction. Accordingly, the proceeds received will beare reflected as cash provided by financing activities on the consolidated statements of cash flows and the fees will beare recognized as "Interest expense" onin the consolidated statements of comprehensive loss.
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Transaction Structure
Sprint contributes eligiblecertain wireless service, installment and future lease receivables, as well as the associated leased devices to Sprint's wholly-owned consolidated bankruptcy-remote special purpose entities (SPEs).SPEs. At Sprint's direction, the SPEs have sold, and will continue to sell, wireless service, installment and installmentfuture lease receivables to Purchasers or to a bank agent on behalf of the Purchasers. Leased devices will remain with the SPEs once sales are initiated, and continue to be depreciated over their estimated useful life. At December 31, 2016, the net book value of devices contributed to the SPEs was approximately $965 million.
Each SPE is a separate legal entity with its own separate creditors who will be entitled, prior to and upon the liquidation of the SPE, to be satisfied out of the SPE’s assets prior to any assets in the SPE becoming available to Sprint. Accordingly, the assets of the SPE are not available to pay creditors of Sprint or any of its affiliates (other than any other SPE), although collections from these receivables in excess of amounts required to payrepay the investment,advances, yield and fees of the Purchasers and other creditors of the SPEs may be remitted to Sprint during and after the term of the Receivables Facility.
Sprint has no retained interest in the receivables sold, other than collection and administrative responsibilities and its right to the DPP. Sales of eligible receivables by the SPEs generally occur daily and are settled on a monthly basis. Sprint pays a fee for the drawn and undrawn portions of the Receivables Facility. A subsidiary of Sprint services the receivables in exchange for a monthly servicing fee, and Sprint guarantees the performance of the servicing obligations under the Receivables Facility.
DPP
The DPP related to our wireless service and installment receivables, which amounted to approximately $1.4 billion and $1.2 billion as of December 31, 2016 and March 31, 2016, respectively, is classified as a trading security within "Prepaid expenses and other current assets" onin the consolidated balance sheets and is recorded at its estimated fair value. The fair value of the DPP is estimated using a discounted cash flow model, which relies principally on unobservable inputs such as the nature and credit class of the sold receivables and subscriber payment history, and for installment receivables sold, the estimated timing of upgrades and upgrade payment amounts for those with upgrade options. Accretable yield on the DPP is recognized as interest revenue within net operating service revenue on the consolidated statements of comprehensive loss and other changes in the fair value of the DPP are recognized in "Selling, general and administrative" onin the consolidated statements of comprehensive loss. Changes in the fair value of the DPP did not have a material impact on our statements of comprehensive loss for the three and nine-month periods ended December 31, 2015.2016. Changes to the unobservable inputs used to determine the fair value did not and are not expected to result in a material change in the fair value of the DPP.
Wireless Service Receivable Sales
On MarchDuring the nine-month period ended December 31, 2015,2016, we sold approximately $1.8 billionremitted $185 million of wireless service receivables in exchange for $500 million in cash (reflected within the change in accounts and notes receivable on the consolidated statement of cash flows) and a DPP of $1.3 billion, with an estimated fair value of $1.2 billion. In accordance with our rights under the Receivables Facility, in April 2015 Sprint elected to temporarily suspend sales of receivables by the SPEs and remitted payments receivedfunds to the Purchasers to reduce the funded amount to zero.
In September 2015, we sold wireless service receivables of approximately $1.9 billion in exchange for $400 million in cash and $1.5 billion of DPP, with an estimated fair value of $1.4 billion. In October 2015, we elected to receive $300 million of cash and reducedbecause the amount of cash proceeds received by us under the associatedfacility exceeded the maximum funding limit, which increased the total amount of the DPP due to Sprint. AsWe also elected to receive $625 million of December 31, 2015,cash, which decreased the total amount available under the Receivables Facility associated with wireless service receivables was $193 million and the total fair value of the associated DPP was $1.1 billion.
Installment Receivable Sales
In October 2015, we sold installment receivables of approximately $1.2 billion under the Receivables Facility in exchange for $100 million in cash and $1.1 billion of DPP, with an estimated fair value of $1.0 billion. In November 2015, we elected to receive $400 million of cash and reduce the amount of the associated DPP due to Sprint. DuringIn addition, during the nine-month period from our initial sale in October toended December 31, 2015,2016, sales of new receivables exceeded cash collections on previously sold installment receivables exceeded sales of new receivables such that the DPP decreasedincreased by approximately $150 million. As of December 31, 2015, the total amount available under the Receivables Facility associated with installment receivables was $29 million and the total fair value of the associated DPP was $491 million.
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Future Lease Receivable Sales
As of December 31, 2015, we had not sold any future lease receivables. As of December 31, 2015, the amount available under the Receivables Facility associated with future lease receivables was $556$660 million.
Continuing Involvement
Sprint has continuing involvement in the receivables sold by the SPEs to the Purchasers because a subsidiary of Sprint services the receivables. Additionally, in accordance with the Receivables Facility, Sprint is required to repurchase aged receivables, or those that will be written off in accordance with Sprint's credit and collection policies, both of which result from subscriber non-payment. Sprint recognizes assets and liabilities, as applicable, with respect to its continuing involvement at fair value. Sprint's continuing involvement did not have a material impact on its financial statements as of December 31, 2015.2016.
Variable Interest Entity
Sprint determined that certain of the Purchasers, which are multi-seller asset-backed commercial paper conduits (Conduits) are considered variable interest entities because they lack sufficient equity to finance their activities. Sprint's interest in the service and installment receivables purchased by the Conduits, which is comprised of the DPP due to Sprint, is not considered a variable interest because it is inconsists of assets that represent less than 50% of the total activity of the Conduits.
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Handset Sale-LeasebackSale-Leasebacks
In NovemberDecember 2015 Sprint entered into agreements (Handset Sale-Leaseback)and May 2016, we sold certain iPhone® devices being leased by our customers to sell and lease-back certain leased devices excluded from our Receivables Facility, which allowed us to monetize the devices including the device residual values. Under the agreements with Mobile Leasing Solutions, LLC (MLS), a company formed by a group of equity investors, including SoftBank Group Corp. (SoftBank), and then subsequently leased the devices back. Under the agreements, Sprint generally maintains the customer lease, will continueleases, continues to collect and record lease revenue from the customer and will remitremits monthly rental payments to MLS which are recognized as "Cost of products" on the consolidated statements of comprehensive loss during the lease-back period.leaseback periods.
In December 2015,Under the agreements, Sprint contributed $1.3 billion of certain leasedthe devices and the associated customer leases to wholly-owned consolidated bankruptcy-remote special purpose entities of Sprint (SPE Lessees). The SPE Lessees then sold the devices and transferred certain specified customer lease end rights and obligations, such as the right to receive the proceeds from customers who elect to purchase the device at the end of the customer lease term, to MLS in exchange for proceeds totaling $1.1 billion(Cash Purchase Price)a combination of cash and DPP. Settlement for the DPP occurs near the end of the agreement and can be reduced to the extent that MLS experiences a DPP of $126 million.
The difference betweenloss on the fair value anddevice (either not returned or sold at an amount less than the net bookexpected residual value of the devices sold was recognized as a loss on disposal of property, plant and equipment indevice), but only to the amount of $65 million and is included in "Other, net" on the consolidated statements of comprehensive loss. Simultaneously with the saleextent of the device's DPP balance. In the event that MLS sells the devices MLS leased back eachreturned from our customers at a price greater than the expected device residual value, Sprint has the potential to share some of the SPE Lessees pursuant to the Master Lease Agreement (Device Lease) in exchange for monthly rental payments to be made by the SPE Lessees to MLS. Monthly rental payments made to MLS totaled $60 million during the three and nine-month periods ended December 31, 2015. As of December 31, 2015, the minimum estimated amounts due to MLS were $176 million for the remaining fiscal year 2015, $673 million for fiscal year 2016, and $113 million for fiscal year 2017.excess proceeds.
The SPE Lessees retain all rights to the underlying customer leases, such as the right to receive the rental payments during the device lease-backleaseback period, other than the aforementioned certain specified customer lease end rights. Each SPE Lessee is a separate legal entity with its own separate creditors who will be entitled, prior to and upon the liquidation of the SPE Lessee, to be satisfied out of the SPE Lessee’s assets prior to any assets in the SPE Lessee becoming available to Sprint. Accordingly, the assets of the SPE Lessee are not available to pay creditors of Sprint or any of its affiliates. Settlement for the DPP occurs at the end of the agreement and can be reduced to the extent that MLS experiences a loss on the device (either not returned or sold at a loss), but only to the extent of the device's DPP balance. The DPP associated with the Handset Sale-Leaseback is recorded in “Other assets” in the consolidated balance sheets at its estimated net realizable value. Changes to the DPP prior to settlement with MLS are recorded as an adjustment to rent expense in “Cost of products” in the consolidated statements of comprehensive loss. Brightstar US, Inc. (Brightstar), a wholly-owned subsidiary of SoftBank, provides reverse logistics and remarketing services to MLS with respect to the devices.
Unless a Device Lease is terminated early, the SPE Lessees are obligated to pay the full monthly rental payments under each Device Lease,device lease to MLS regardless of whether our customers make lease payments on the devices leased to them or whether the customer lease is canceled. Sprint has guaranteed to MLS the performance of the agreements and undertakings of the SPE Lessees under the transaction documents.
Handset Sale-Leaseback Tranche 1 (Tranche 1)
In December 2015, Sprint transferred devices with a net book value of approximately $1.3 billion to MLS in exchange for cash proceeds totaling $1.1 billionand a DPP of $126 million. We recorded the sale, removed the devices from our balance sheet, and classified the leasebacks as operating leases. The difference between the fair value and the net book value of the devices sold was recognized as a loss on disposal of property, plant and equipment in the amount of $65 million and was included in "Other, net" in the consolidated statements of comprehensive loss for the three and nine-month periods ended December 31, 2015. The cash proceeds received in the transaction were reflected as cash provided by investing activities on the consolidated statements of cash flows and payments made to MLS under the leaseback are reflected as "Cost of products" in the consolidated statements of comprehensive loss. Rent expense related to MLS totaled $117 million and $494 million during the three and nine-month periods ended December 31, 2016, respectively, and is reflected within cash flows from operations. The monthly rental payments for the devices leased backed by us were expected to approximate the amount of cash received from the associated customer leases during the weighted average leaseback period. In December 2016, Sprint terminated Tranche 1 by repurchasing the devices and related customer lease end rights and obligations from MLS for consideration of $371 million of net cash payments and the DPP of $126 million. As a result of the transaction, Sprint recorded $477 million of property, plant and equipment, $16 million of other assets, and was released from certain liabilities. Additionally, the leaseback was canceled and there will be no future rental payments owed to MLS related to Tranche 1. The impact to the consolidated statements of comprehensive loss as a result of the termination was immaterial.
Handset Sale-Leaseback Tranche 2 (Tranche 2)
In May 2016, Sprint transferred devices with a net book value of approximately $1.3 billion to MLS in exchange for cash proceeds totaling $1.1 billion and a DPP of $186 million. Unlike Tranche 1, Tranche 2 was accounted for as a financing. Accordingly, the devices remain in "Property, plant and equipment, net" in the consolidated balance sheets and we continue to depreciate the assets to their estimated residual values over the respective customer lease terms. At December 31, 2016, the net book value of devices transferred to MLS was approximately $725 million.
The proceeds received are reflected as cash provided by financing activities in the consolidated statements of cash flows and payments made to MLS will be reflected as principal repayments and interest expense over the respective terms. We have elected to account for the financing obligation at fair value. Accordingly, changes in the fair value of the financing
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
obligation are recognized in "Other (expense) income, net" in the consolidated statements of comprehensive loss over the course of the arrangement.
Tranche 2 primarily includes devices from our iPhone Forever Program, whereas these devices were specifically excluded from Tranche 1. The iPhone Forever Program provides our leasing customers the ability to upgrade their devices and to enter into a new lease agreement, subject to certain conditions, upon Apple's release of a next generation device. Upon a customer lease is still in effect.exercising their iPhone Forever upgrade right, Sprint has guaranteedthe option to terminate the existing leaseback by immediately remitting all unpaid device leaseback payments and returning the device to MLS. Alternatively, Sprint is required to transfer the title in the new device to MLS in exchange for the performancetitle in the original device (Exchange Option). If Sprint elects the Exchange Option, we are required to continue to pay existing device leaseback rental related to the original device, among other requirements.
To address the introduction of the covenants, agreementsupgrade feature into the sale-leaseback structure, among other factors, numerous contractual terms from Tranche 1 were modified, which shifted certain risks of ownership in the devices away from MLS to Sprint and undertakings ofresulted in Tranche 2 being accounted for as a financing. For instance, the SPE Lessees underdevice leaseback periods are generally longer in Tranche 2 as compared to Tranche 1, and the resulting amounts committed to be paid by the Company represent the initial proceeds received from MLS plus interest. This mitigates MLS's exposure to certain risks for non-returned and damaged devices, as well as to declines in device residual values.
Network Equipment Sale-Leaseback
In April 2016, Sprint sold and leased back certain network equipment to unrelated bankruptcy-remote special purpose entities (collectively, "Network LeaseCo"). The network equipment acquired by Network LeaseCo was used by them as collateral to raise approximately $2.2 billion in borrowings from external investors, including SoftBank. Sprint's payments to Network LeaseCo during the leaseback period are used by Network LeaseCo to service their debt.
Network LeaseCo is a variable interest entity for which Sprint is the primary beneficiary. As a result, Sprint is required to consolidate Network LeaseCo and our consolidated financial statements include Network LeaseCo's debt and the related financing cash inflows. The network assets included in the transaction, documents.which had a net book value of approximately $3.0 billion and consisted primarily of equipment located at cell towers, remain on Sprint's consolidated financial statements and continue to be depreciated over their respective estimated useful lives. At December 31, 2016, these network assets had a net book value of approximately $2.5 billion.
All devices must be returnedThe proceeds received were reflected as cash provided by financing activities in the consolidated statements of cash flows and payments made to MLS, subjectNetwork LeaseCo are reflected as principal repayments and interest expense over the respective terms. Sprint has the option to purchase rights of the customers and provided that SPE Lessees have no obligation to return devices not returned by the customers to Sprint. Sprint will act as servicer for MLS, to the extent needed, afterequipment at the end of the device leaseback period. To secureterm for a nominal amount. All intercompany transactions between Network LeaseCo and Sprint are eliminated in our consolidated financial statements. Principal and interest payments on the obligationsborrowings from the external investors will be repaid in staggered, unequal payments through January 2018 with the first principal payment of approximately $300 million due in March 2017 followed by the remaining $1.9 billion of principal payments due in fiscal year 2017.
Spectrum Financing
In October 2016, Sprint transferred certain directly held and third-party leased spectrum licenses (collectively, "the Spectrum Portfolio") to wholly-owned bankruptcy-remote special purpose entities (collectively, "the Spectrum Financing SPEs"). The Spectrum Portfolio, which represents approximately 14% of Sprint's total spectrum holdings on a MHz-pops basis, was used as collateral to raise an initial $3.5 billion in senior secured notes at 3.36% from external investors under a $7.0 billion program. Sprint can utilize this financing structure to potentially raise up to an additional $3.5 billion subject to certain conditions. The notes will be repaid over a five-year term, with interest only payments over the first four quarters and amortizing quarterly principal and interest payments thereafter through September 2021.
Sprint Communications, Inc. simultaneously entered into a long-term lease with the Spectrum Financing SPEs for the ongoing use of the SPE Lessees underSpectrum Portfolio. Sprint Communications, Inc. is required to make monthly lease payments to the Device Lease, the SPE Lessees provide a security interest to MLS in, among other things, the customer leases. In the event that MLS is able to sell the returned devicesSpectrum Financing SPEs, at a price greater thanmarket rate in an amount sufficient to service the expected device residual value,notes. As the Spectrum Financing SPEs are wholly-owned Sprint subsidiaries, these entities are consolidated and all intercompany activity has the potential to share somebeen eliminated.
As a result of the excess proceeds.this transaction, our $2.5 billion unsecured financing facility was terminated.
| |
Note 4. | Installment Receivables |
Certain subscribers have the option to purchase their devices in installments up to a 24-month period. Short-term installment receivables are recorded in "Accounts and notes receivable, net" and long-term installment receivables are recorded in "Other assets" in the consolidated balance sheets. Beginning in October 2015, Sprint sold and derecognized all installment receivables as well as the related allowances and deferred interest.
The following table summarizes the installment receivables:
|
| | | |
| March 31, 2015 |
| (in millions) |
Installment receivables, gross | $ | 1,725 |
|
Deferred interest | (139 | ) |
Installment receivables, net of deferred interest | 1,586 |
|
Allowance for credit losses | (190 | ) |
Installment receivables, net | $ | 1,396 |
|
|
|
Classified on the consolidated balance sheets as: |
|
Accounts and notes receivable, net | $ | 1,035 |
|
Other assets | 361 |
|
Installment receivables, net | $ | 1,396 |
|
The balance and aging of installment receivables on a gross basis by credit category were as follows:
|
| | | | | | | | | | | |
| March 31, 2015 |
| Prime | | Subprime | | Total |
| (in millions) |
Unbilled | $ | 1,243 |
| | $ | 359 |
| | $ | 1,602 |
|
Billed - current | 65 |
| | 22 |
| | 87 |
|
Billed - past due | 21 |
| | 15 |
| | 36 |
|
Installment receivables, gross | $ | 1,329 |
|
| $ | 396 |
|
| $ | 1,725 |
|
Activity in the deferred interest and allowance for credit losses for the installment receivables is as follows:
|
| | | | | | | |
| Nine Months Ended December 31, | | Twelve Months Ended March 31, |
| 2015 | | 2015 |
| (in millions) |
Deferred interest and allowance for credit losses, beginning of period | $ | 329 |
| | $ | 124 |
|
Bad debt expense | 93 |
| | 398 |
|
Write-offs, net of recoveries | (105 | ) | | (255 | ) |
Change in deferred interest on short-term and long-term installment receivables | (43 | ) | | 62 |
|
Derecognition of deferred interest and allowance for credit losses | (274 | ) | | — |
|
Deferred interest and allowance for credit losses, end of period | $ | — |
|
| $ | 329 |
|
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| |
Note 5.4. | Financial Instruments |
The Company carries certain assets and liabilities at fair value. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs based on the observability as of the measurement date, is as follows: quoted prices in active markets for identical assets or liabilities; observable inputs other than the quoted prices in active markets for identical assets and liabilities; and unobservable inputs for which there is little or no market data, which require the Company to develop assumptions of what market participants would use in pricing the asset or liability.
The carrying amount of cash and cash equivalents, accounts and notes receivable, and accounts payable approximates fair value. Short-term investments (consisting primarily of time deposits and commercial paper), totaling approximately $41 million and $166 million as of December 31, 2015 and March 31, 2015, respectively, are recorded at amortized cost, and the respective carrying amounts approximate fair value. Short-term investments totaled approximately $2.3 billion as of December 31, 2016 and Sprint did not hold any short-term investments as of March 31, 2016. The fair value of marketable equity securities totaling $42$50 million and $40$46 million as of December 31, 20152016 and March 31, 20152016, respectively, are measured on a recurring basis using quoted prices in active markets.
Except for our financing transaction with MLS, current and long-term debt and our other financings are carried at amortized cost. The Company elected to measure the financing obligation with MLS at fair value as a means to better reflect the economic substance of the arrangement. The Tranche 2 financing obligation, which amounted to $554 million at December 31, 2016 and is reported in "Current portion of long-term debt, financing and capital lease obligations" in our consolidated balance sheets, is the only eligible financial instrument for which we have elected the fair value option.
The fair value of the financing obligation, which was determined at the outset of the arrangement using a discounted cash flow model, was derived by unobservable inputs such as customer churn rates, customer upgrade probabilities, and the likelihood that Sprint will elect the Exchange Option versus the termination option upon a customer upgrade. Any gains or losses resulting from changes in the fair value of the financing obligation are included in “Other (expense) income, net” on the consolidated statements of comprehensive loss. During the nine-month period ended December 31, 2016, the change in fair value of the financing obligation resulted in a loss of approximately $30 million. During the nine-month period ended December 31, 2016, the payments made to MLS totaled $502 million.
The estimated fair value of the majority of our current and long-term debt, excluding our credit facilities, future lease receivables and borrowings under our Network Equipment Sale-Leaseback and Tranche 2 transactions, is determined based on quoted prices in active markets or by using other observable inputs that are derived principally from, or corroborated by, observable market data.
The following table presents carrying amounts and estimated fair values of current and long-term debt:
|
| | | | | | | | | | | | | | | | | | | |
| Carrying amount at December 31, 2015 | | Estimated Fair Value Using Input Type |
| | Quoted prices in active markets | | Observable | | Unobservable | | Total estimated fair value |
| (in millions) |
Current and long-term debt | $ | 33,424 |
| | $ | 21,194 |
| | $ | 4,494 |
| | $ | 1,644 |
| | $ | 27,332 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Carrying amount at December 31, 2016 | | Estimated Fair Value Using Input Type |
| | Quoted prices in active markets | | Observable | | Unobservable | | Total estimated fair value |
| (in millions) |
Current and long-term debt | $ | 36,870 |
| | $ | 29,457 |
| | $ | 4,391 |
| | $ | 4,758 |
| | $ | 38,606 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Carrying amount at March 31, 2015 | | Estimated Fair Value Using Input Type |
| | Quoted prices in active markets | | Observable | | Unobservable | | Total estimated fair value |
| (in millions) |
Current and long-term debt | $ | 33,434 |
| | $ | 27,238 |
| | $ | 4,906 |
| | $ | 1,410 |
| | $ | 33,554 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Carrying amount at March 31, 2016 | | Estimated Fair Value Using Input Type |
| | Quoted prices in active markets | | Observable | | Unobservable | | Total estimated fair value |
| (in millions) |
Current and long-term debt | $ | 33,645 |
| | $ | 21,757 |
| | $ | 4,474 |
| | $ | 2,130 |
| | $ | 28,361 |
|
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| |
Note 6.5. | Property, Plant and Equipment |
Property, plant and equipment consists primarily of network equipment and other long-lived assets used to provide service to our subscribers. Non-cash accruals included in property, plant and equipment (excluding leased devices) totaled $763$325 million and $2.0 billion$763 million as of December 31, 2016 and 2015, and 2014, respectively.
The following table presents the components of property, plant and equipment and the related accumulated depreciation:
| | | December 31, 2015 | | March 31, 2015 | December 31, 2016 | | March 31, 2016 |
| (in millions) | (in millions) |
Land | $ | 266 |
| | $ | 266 |
| $ | 260 |
| | $ | 260 |
|
Network equipment, site costs and related software | 21,304 |
| | 18,990 |
| 21,696 |
| | 21,500 |
|
Buildings and improvements | 793 |
| | 754 |
| 808 |
| | 798 |
|
Non-network internal use software, office equipment, leased devices and other | 5,346 |
| | 2,979 |
| 8,450 |
| | 6,182 |
|
Construction in progress | 1,395 |
| | 2,090 |
| 1,460 |
| | 1,249 |
|
Less: accumulated depreciation | (8,459 | ) | | (5,358 | ) | (13,341 | ) | | (9,692 | ) |
Property, plant and equipment, net | $ | 20,645 |
| | $ | 19,721 |
| $ | 19,333 |
| | $ | 20,297 |
|
In September 2014, Sprint introduced a leasing program, whereby qualified subscribers can lease a device for a contractual period of time. At the end of the lease term, the subscriber has the option to turn in theirthe device, continue leasing theirthe device, or purchase the device. As of December 31, 2015, a majority2016, substantially all of our device leases were classified as operating leases. At lease inception, the devices leased through Sprint's direct channels are reclassified from inventory to property, plant and equipment. For those devices leased through indirect channels, Sprint purchases the device to be leased from the retailer at lease inception. The devices are then depreciated using the straight-line method to their estimated residual value generally over the estimated useful life, which is based onterm of the lease term.lease.
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table presents leased devices and the related accumulated depreciation:
| | | December 31, 2015 | | March 31, 2015 | December 31, 2016 | | March 31, 2016 |
| (in millions) | (in millions) |
Leased devices | $ | 4,120 |
| | $ | 1,974 |
| $ | 7,099 |
| | $ | 4,913 |
|
Less: accumulated depreciation | (799 | ) | | (197 | ) | (2,645 | ) | | (1,267 | ) |
Leased devices, net | $ | 3,321 |
| | $ | 1,777 |
| $ | 4,454 |
| | $ | 3,646 |
|
During the nine-month periods ended December 31, 20152016 and 2014,2015, there were non-cash transfers to leased devices of approximately $2.6$2.3 billion and $700 million,$2.6 billion, respectively, along with a corresponding decrease in "Device and accessory inventory." In addition, during the three-month period ended December 31, 2015, we sold devices totaling $1.3 billion (See Note 3. Funding Sources). Non-cash accruals included in leased devices totaled approximately $306$166 million and $150$306 million as of December 31, 20152016 and 2014,2015, respectively, for devices purchased from indirect dealers that were leased to our subscribers. Depreciation expense incurred on all leased devices was $837 million and $2.2 billion for the three and nine-month periods ended December 31, 2015 was2016, respectively, and $535 million and $1.2 billion for the same periods in 2015, respectively. Depreciation expense incurred on all leased devices for
During the three and nine-month periods ended December 31, 2014 was $542016, we recorded $137 million and $56$368 million, respectively.
respectively, of loss on disposal of property, plant and equipment, net of recoveries, which is included in "Other, net" in our consolidated statements of comprehensive loss. These losses primarily resulted from the write-off of leased devices associated with lease cancellations prior to the scheduled customer lease terms where customers did not return the devices to us. If customers continue to not return devices, we may continue to have similar losses in future periods. During the three and nine-month periods ended December 31, 2015, we recorded $78 million and $163 million, respectively, of loss on disposal of property, plant and equipment, net of recoveries, which is included in "Other, net" in our consolidated statements of comprehensive loss. These losses resulted from the write-off of leased devices associated with lease cancellations prior to the scheduled customer lease terms where customers did not return the devices to us and cell site construction costs and other network costs that are no longer recoverable as a result of changes in the Company's network plans.
Impairments
During the three-month period ended December 31, 2014, we also recorded an impairment loss of $233 million, which is included in “Impairments” in our consolidated statements of comprehensive loss, to reduce the carrying value of the Wireline asset group, which includes the Wireline long-lived assets, to its estimated fair value of $918 million as of December 31, 2014.
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| |
Note 7.6. | Intangible Assets |
Indefinite-Lived Intangible Assets
Our indefinite-lived intangible assets consist of FCC licenses, which were acquired primarily through FCC auctions and business combinations, certain of our trademarks, and goodwill. At December 31, 2015,2016, we held 1.9 GHz, 800 MHz and 2.5 GHz FCC licenses authorizing the use of radio frequency spectrum to deploy our wireless services. As long as the Company acts within the requirements and constraints of the regulatory authorities, the renewal and extension of these licenses is reasonably certain at minimal cost. Accordingly, we have concluded that FCC licenses are indefinite-lived intangible assets. Our Sprint and Boost Mobile trademarks have also been identified as indefinite-lived intangible assets. Goodwill represents the excess of consideration paid over the estimated fair value of net tangible and identifiable intangible assets acquired in business combinations.
The following provides the activity of indefinite-lived intangible assets within the consolidated balance sheets:
| | | March 31, 2015 | | Net Additions | | December 31, 2015 | March 31, 2016 | | Net Additions | | December 31, 2016 |
| (in millions) | (in millions) |
FCC licenses(1) | $ | 35,952 |
| | $ | 65 |
| | $ | 36,017 |
| $ | 36,038 |
| | $ | 483 |
| | $ | 36,521 |
|
Trademarks | 4,035 |
| | — |
| | 4,035 |
| 4,035 |
| | — |
| | 4,035 |
|
Goodwill | 6,575 |
| | — |
| | 6,575 |
| 6,575 |
| | 4 |
| | 6,579 |
|
| $ | 46,562 |
| | $ | 65 |
| | $ | 46,627 |
| $ | 46,648 |
| | $ | 487 |
| | $ | 47,135 |
|
_________________
| |
(1) | Net additions within FCC licenses includes $85 million of spectrum acquired from the Shentel transaction (see Note 8. Long-Term Debt, Financing and Capital Lease Obligations) and an increase from spectrum license exchanges described below during the nine-month period ended December 31, 2016. |
Spectrum License Exchanges
In thesecond quarter of fiscal year 2016, we exchanged certain spectrum licenses with other carriers in non-cash transactions. As a result, we recorded a non-cash gain of $354 million, which represented the difference between the fair value and the net book value of the spectrum transferred to the other carriers. The gain was presented in "Other, net" in the consolidated statements of comprehensive loss for the nine-month period ended December 31, 2016.
Assessment of Impairment
Our annual impairment testing date for goodwill and indefinite-lived intangible assets is January 1 of each year; however, we test for impairment between our annual tests if an event occurs or circumstances change that indicate that the asset may be impaired, or in the case of goodwill, that the fair value of the reporting unit is below its carrying amount. After the merger with SoftBank, actual results and expectations of net postpaid handset subscriber additions were lower than the forecasts used to allocate the purchase price to the assets acquired and liabilities assumed. During the quarter ended
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014, we determined that recoverability of the carrying amount of goodwill and the Sprint trade name should be evaluated forWe did not record an impairment and it was determined that the carrying value of the Sprint trade name exceeded its estimated fair value of $3.3 billion. Accordingly, during the quarternine-month period ended December 31, 2014 we recorded an impairment loss of $1.9 billion, which is included in “Impairments” in our consolidated statements of comprehensive loss.
The stock price at December 31, 2015 of $3.62 was below the net book value per share price of $5.12. Subsequent to the balance sheet date, the stock price has decreased further to $2.84 at February 3, 2016. The quoted market price of our stock is not the sole consideration of fair value. Other considerations include, but are not limited to, expectations of future results and an estimated control premium.
The determination of fair value requires considerable judgment and is highly sensitive to changes in underlying assumptions. Consequently, there can be no assurance that the estimates and assumptions made for the purposes of the goodwill, spectrum and trade namestrademarks impairment tests will prove to be an accurate prediction of the future. Continued, sustained declines in the Company’s operating results, future forecasted cash flows, growth rates and other assumptions, as well as significant, sustained declines in the Company’s stock price and related market capitalization could impact the underlying key assumptions and our estimated fair values, potentially leading to a future material impairment of goodwill or other indefinite-lived intangible assets.
Intangible Assets Subject to Amortization
Customer relationships are amortized using the sum-of-the-months' digits method, while all other definite-lived intangible assets are amortized using the straight line method over the estimated useful lives of the respective assets. We reduce the gross carrying value and associated accumulated amortization when specified intangible assets become fully amortized. Amortization expense related to favorable spectrum and tower leases is recognized in "Cost of services" in our consolidated statements of comprehensive loss.
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| | | | | December 31, 2015 | | March 31, 2015 | | | December 31, 2016 | | March 31, 2016 |
| Useful Lives | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | Useful Lives | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
| | | (in millions) | | | (in millions) |
Customer relationships | 4 to 8 years | | $ | 6,923 |
| | $ | (3,755 | ) | | $ | 3,168 |
| | $ | 6,923 |
| | $ | (2,791 | ) | | $ | 4,132 |
| 4 to 8 years | | $ | 6,923 |
| | $ | (4,824 | ) | | $ | 2,099 |
| | $ | 6,923 |
| | $ | (4,045 | ) | | $ | 2,878 |
|
Other intangible assets: | Other intangible assets: | | | | | | | | | | | | | Other intangible assets: | | | | | | | | | | | | |
Favorable spectrum leases | 23 years | | 884 |
| | (103 | ) | | 781 |
| | 884 |
| | (71 | ) | | 813 |
| 23 years | | 870 |
| | (129 | ) | | 741 |
| | 881 |
| | (110 | ) | | 771 |
|
Favorable tower leases | 3 to 7 years | | 589 |
| | (269 | ) | | 320 |
| | 589 |
| | (189 | ) | | 400 |
| 3 to 7 years | | 589 |
| | (367 | ) | | 222 |
| | 589 |
| | (302 | ) | | 287 |
|
Trademarks | 34 years | | 520 |
| | (39 | ) | | 481 |
| | 520 |
| | (27 | ) | | 493 |
| 34 years | | 520 |
| | (55 | ) | | 465 |
| | 520 |
| | (43 | ) | | 477 |
|
Other | 4 to 10 years | | 81 |
| | (24 | ) | | 57 |
| | 72 |
| | (17 | ) | | 55 |
| 4 to 10 years | | 90 |
| | (35 | ) | | 55 |
| | 83 |
| | (27 | ) | | 56 |
|
Total other intangible assets | Total other intangible assets | | 2,074 |
|
| (435 | ) |
| 1,639 |
|
| 2,065 |
|
| (304 | ) |
| 1,761 |
| Total other intangible assets | | 2,069 |
|
| (586 | ) |
| 1,483 |
|
| 2,073 |
|
| (482 | ) |
| 1,591 |
|
Total definite-lived intangible assets | Total definite-lived intangible assets | | $ | 8,997 |
|
| $ | (4,190 | ) |
| $ | 4,807 |
|
| $ | 8,988 |
|
| $ | (3,095 | ) |
| $ | 5,893 |
| Total definite-lived intangible assets | | $ | 8,992 |
|
| $ | (5,410 | ) |
| $ | 3,582 |
|
| $ | 8,996 |
|
| $ | (4,527 | ) |
| $ | 4,469 |
|
| |
Note 8.7. | Accounts Payable |
Accounts payable at December 31, 20152016 and March 31, 20152016 include liabilities in the amounts of $72$83 million and $90$66 million, respectively, for checkspayments issued in excess of associated bank balances but not yet presented for collection.
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| |
Note 9.8. | Long-Term Debt, Financing and Capital Lease Obligations |
| | | Interest Rates | | Maturities | | December 31, 2015 | | March 31, 2015 | Interest Rates | | Maturities | | December 31, 2016 | | March 31, 2016 |
| | | | | (in millions) | | | | | | | (in millions) |
Notes | | | | | | | | | | | | | | |
Senior notes | | | | | | | | | | | | | | |
Sprint Corporation | 7.13 | - | 7.88% | | 2021 | - | 2025 | | $ | 10,500 |
| | $ | 10,500 |
| 7.13 | - | 7.88% | | 2021 | - | 2025 | | $ | 10,500 |
| | $ | 10,500 |
|
Sprint Communications, Inc. | 6.00 | - | 11.50% | | 2016 | - | 2022 | | 9,280 |
| | 9,280 |
| 6.00 | - | 11.50% | | 2017 | - | 2022 | | 7,280 |
| | 9,280 |
|
Sprint Capital Corporation | 6.88 | - | 8.75% | | 2019 | - | 2032 | | 6,204 |
| | 6,204 |
| 6.88 | - | 8.75% | | 2019 | - | 2032 | | 6,204 |
| | 6,204 |
|
Senior secured notes | | | | | |
Sprint Spectrum Co LLC, Sprint Spectrum Co II LLC, Sprint Spectrum Co III LLC | | 3.36% | | 2021 | | 3,500 |
| | — |
|
Guaranteed notes | | | | | | | | |
Sprint Communications, Inc. | 7.00 | - | 9.00% | | 2018 | - | 2020 | | 4,000 |
| | 4,000 |
| 7.00 | - | 9.00% | | 2018 | - | 2020 | | 4,000 |
| | 4,000 |
|
Secured notes | | | | | | | | | | | | |
Clearwire Communications LLC (1) | 14.75% | | 2016 | | 300 |
| | 300 |
| 14.75% | | 2016 | | — |
| | 300 |
|
Exchangeable notes | | | | | | | | |
Clearwire Communications LLC (1) | 8.25% | | 2040 | | 629 |
| | 629 |
| |
Clearwire Communications LLC (1)(2) | | 8.25% | | 2017 | | 629 |
| | 629 |
|
Credit facilities | | | | | | | | |
Bank credit facility | 3.63% | | 2018 | | — |
| | — |
| 4.00% | | 2018 | | — |
| | — |
|
Export Development Canada (EDC) | 3.78 | - | 5.56% | | 2017 | - | 2019 | | 550 |
| | 800 |
| 4.48 | - | 6.23% | | 2017 | - | 2019 | | 550 |
| | 550 |
|
Secured equipment credit facilities | 1.99 | - | 2.75% | | 2017 | - | 2021 | | 960 |
| | 610 |
| 2.03 | - | 3.27% | | 2017 | - | 2021 | | 586 |
| | 805 |
|
Financing obligation | 6.10% | | 2021 | | 237 |
| | 275 |
| |
Capital lease obligations and other | 2.35 | - | 10.52% | | 2016 | - | 2023 | | 231 |
| | 127 |
| |
Net premiums | | | | 862 |
| | 1,106 |
| |
Financing obligations, capital lease and other obligations | | 2.35 | - | 10.63% | | 2017 | - | 2024 | | 3,881 |
| | 1,093 |
|
Net premiums and debt financing costs | | | | | 183 |
| | 597 |
|
| | | | | 33,753 |
| | 33,831 |
| | | | | 37,313 |
| | 33,958 |
|
Less current portion | | | | | (3,324 | ) | | (1,300 | ) | | | | | (6,554 | ) | | (4,690 | ) |
Long-term debt, financing and capital lease obligations | | | | | $ | 30,429 |
| | $ | 32,531 |
| | | | | $ | 30,759 |
| | $ | 29,268 |
|
________ _________________
| |
(1) | Notes of Clearwire Communications LLC are also direct obligations of Clearwire Finance, Inc. and are guaranteed by certain Clearwire subsidiaries. |
(1) Notes of Clearwire Communications LLC are also direct obligations of Clearwire Finance, Inc. and are guaranteed by certain Clearwire subsidiaries.
(2) The $629 million Clearwire 8.25% Exchangeable Notes have both a par call and put on December 1, 2017 resulting in the balance
being classified as a current debt obligation as of December 31, 2016.
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2015,2016, Sprint Corporation, the parent corporation, had $10.5 billion in aggregate principal amount of senior notes outstanding. In addition, as of December 31, 2015,2016, the outstanding principal amount of senior notes issued by Sprint Communications, Inc. and Sprint Capital Corporation, guaranteed notes issued by Sprint Communications, Inc., exchangeable notes issued by Clearwire Communications LLC, the EDC agreement, and the secured equipment credit facilities, totaling $21.8the installment payment obligations, and the Network Equipment Sale-Leaseback and Handset Sale-Leaseback Tranche 2 financing obligations, collectively totaled $22.3 billion in principal amount of our long-term debt issued by 100% owned subsidiaries, was fully and unconditionally guaranteed by Sprint Corporation. The indenture governing the secured notes of Clearwire Communications LLC restricts the ability of it and its subsidiaries to distribute cash to its parent. Although certain financing agreements restrict the ability of Sprint Communications, Inc. and its subsidiaries to distribute cash to Sprint Corporation, the ability of the subsidiaries to distribute cash to their respective parents, including to Sprint Communications, Inc., is generally not restricted.
Cash interest payments, net of amounts capitalized of $32 million and $40 million, totaled $1.9 billion and $41 million, totaled $1.8 billion during each of the nine-month periods ended December 31, 20152016 and 2014,2015, respectively.
Notes
As of December 31, 2015,2016, our outstanding notes consisted of senior notes, guaranteed notes, and exchangeable notes, all of which are unsecured, as well as senior secured notes of Clearwire Communications LLC, which are secured solely by assets of Clearwire Communications LLC and certain of its subsidiaries.associated with our Spectrum Financing transaction. Cash interest on all of the notes is generally payable semi-annually in arrears.arrears with the exception of the Spectrum Financing senior secured notes, which are payable quarterly. As of December 31, 2015, $30.12016, $31.3 billion aggregate principal amount of the notes was redeemable at the Company's discretion at the then-applicable redemption prices plus accrued interest.
As of December 31, 2015, approximately $21.62016, $25.1 billion aggregate principal amount of our senior notes and guaranteed notes provideprovided holders with the right to require us to repurchase the notes if a change of control triggering event (as defined in the applicable indentures and supplemental indentures) occurs. As of December 31, 2015, $300 million aggregate
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
principal amount of Clearwire Communications LLC notes provide holders with the right to require us to repurchase the notes if a change of control occurs (as defined in the applicable indentures and supplemental indentures). If we are required to make such a change of control offer, we will offer a cash payment equal to 101% of the aggregate principal amount of notes repurchased plus accrued and unpaid interest.
Upon the close of the acquisition of Clearwire Corporation (Clearwire Acquisition), the Clearwire Communications LLC 8.25% Exchangeable Notes due 2040 became exchangeable at any time, at the holder’s option, for a fixed amount of cash equal to $706.21 for each $1,000 principal amount of notes surrendered. As a result, $444 million, which isOn December 1, 2017 the total cash consideration payable upon an exchangeExchangeable Notes can be tendered at the holder’s option for 100% of all $629 million principal amount of notes outstanding, is nowthe par value plus accrued interest resulting in the entire balance being classified as a current debt obligation.obligation as of December 31, 2016.
During the three-month period ended December 31, 2016, the Company repaid $2.0 billion aggregate principal upon maturity of its outstanding Sprint Communications, Inc. 6% senior notes and $300 million in aggregate principal of its Clearwire Communications LLC 14.75% secured notes.
In October 2016, Sprint transferred the Spectrum Portfolio to the Spectrum Financing SPEs. The remaining carrying valueSpectrum Portfolio, which represents approximately 14% of theseSprint's total spectrum holdings on a MHz-pops basis, was used as collateral to raise an initial $3.5 billion in senior secured notes isat 3.36% from external investors under a $7.0 billion program. Sprint can utilize this financing structure to potentially raise up to an additional $3.5 billion, subject to certain conditions. The notes will be repaid over a five-year term, with interest only payments over the first four quarters and amortizing quarterly principal and interest payments thereafter through September 2021. As of December 31, 2016, approximately $219 million of the total principal outstanding was classified as a"Current portion of long-term debt" in the consolidated balance sheets. Total debt obligation.finance costs incurred and capitalized in connection with the issuance of notes were approximately $95 million.
Credit Facilities
Unsecured Financing Facility
During the three-month period ended June 30, 2016, Sprint Communications entered into an unsecured financing facility for $2.5 billion. In October 2016, this facility was terminated as a result of entering into the Spectrum Financing transaction described in Note 3. Funding Sources. During the three and nine-months periods ended December 31, 2016, the company recognized the remaining debt finance costs of $74 million associated with the terminated unsecured financing facility, which is included in "Other (expense) income, net" on the consolidated statements of comprehensive loss.
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Bank credit facilityCredit Facility
The Company has a $3.3 billion unsecured revolving bank credit facility that expires in February 2018. Borrowings under the revolving bank credit facility bear interest at a rate equal to the London Interbank Offered Rate (LIBOR)LIBOR plus a spread that varies depending on the Company’s credit ratings. As of December 31, 2015,2016, approximately $323$274 million in letters of credit were outstanding under this credit facility, including the letter of credit required by the Report and Order (see Note 12.11. Commitments and Contingencies). As a result of the outstanding letters of credit, which directly reduce the availability of borrowings, the Company had approximately $3.0 billion of borrowing capacity available under the revolving bank credit facility as of December 31, 2015. 2016. The required ratio (Leverage Ratio) of total indebtedness to trailing four quarters earnings before interest, taxes, depreciation and amortization and other non-recurring items, as defined by the credit facility (adjusted EBITDA), wasmay not to exceed 6.5 to 1.0 through the quarter ended December 31, 2015, and is not to exceed 6.25 to 1.0 through the quarter ending December 31, 2016 and 6.0 to 1.0 each fiscal quarter ending thereafter through expiration of the facility. The facility allows us to reduce our total indebtedness for purposes of calculating the Leverage Ratio by subtracting from total indebtedness the amount of any cash contributed into a segregated reserve account, provided that, after such cash contribution, our cash remaining on hand for operations exceeds $2.0 billion. Upon transfer, the cash contribution will remain restricted until and to the extent it is no longer required for the Leverage Ratio to remain in compliance.
EDC agreementAgreement
TheAs of December 31, 2016, the unsecured EDC agreement providesprovided for covenant terms similar to those of the unsecured revolving bank credit facility. However, under the terms of the EDC agreement, repayments of outstanding amounts cannot be re-drawn. In the quarter ended December 2015, we made a scheduled principal repayment of $500 million, leaving a principal balance of $300 million, which matures in December 2019. At the time of the repayment, the EDC agreement was also amended to increase the facility by $250 million through the addition of a new tranche due December 2017, which was fully drawn. Accordingly, asAs of December 31, 2015,2016, the total principal amount of our borrowings under the EDC facility was $550 million.
Secured equipment credit facilities
Eksportkreditnamnden (EKN)
The EKN secured equipment credit facility provides On February 3, 2017, we amended the EDC agreement to provide for security and covenant terms similar to those of theour new secured term loan and revolving bank credit facility.
Secured Equipment Credit Facilities
Eksportkreditnamnden (EKN)
In 2013, we had fully drawn and began to repay the EKN secured equipment credit facility totaling $1.0 billion, which was used to finance certain network-related purchases from Ericsson. We made regularly scheduled principal repayments totaling $127 million duringDuring the nine-month period ended December 31, 2015. The balance2016, we made principal repayments totaling $127 million on the facility, resulting in a total principal amount of $127 million outstanding at December 31, 2015 was $381 million.2016.
Finnvera plc (Finnvera)
The Finnvera secured equipment credit facility provides us with the ability to borrow up to $800 million to finance network-related purchases from Nokia.Nokia Solutions and Networks US LLC, USA. The facility, which initially could be drawn upon as many as three consecutive tranches, now has one tranche remaining and available for borrowing through October 2017. Such borrowings are contingent upon the amount and timing of Sprint's network-related purchases. During the nine-month period ended December 31, 2015, we drew $208 million on the facility, and2016, we made principal repayments totaling $28 million on the facility, resulting in a total principal amount of $224$168 million outstanding at December 31, 2015.2016.
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
K-sure
The K-sure secured equipment credit facility provides for the ability to borrow up to $750 million to finance network-related purchases from Samsung.Samsung Telecommunications America, LLC. The facility can be divided in up to three consecutive tranches of varying size with borrowings available until May 2018, contingent upon the amount of network-related purchases made by Sprint. During the nine-month period ended December 31, 2015,2016, we drew $266made principal repayments totaling $65 million on the facility, resulting in a total principal amount of $323$258 million outstanding at December 31, 2015.2016.
Delcredere | Ducroire (D/D)
The D/D secured equipment credit facility provides for the ability to borrow up to $250 million to finance network equipment-related purchases from Alcatel-Lucent. During the nine-month period ended December 31, 2015, we drew $32 million on the facility, resulting in a totalAlcatel-Lucent USA Inc. The principal amount of $32 millionbalance outstanding at December 31, 2015.2016 was $32 million.
Borrowings under the EKN, Finnvera, K-sure and D/D secured equipment credit facilities are each secured by liens on the respective equipment purchased pursuant to each facility's credit agreement. In addition, repayments of outstanding amounts borrowed under the secured equipment credit facilities cannot be redrawn. Each of these facilities is
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
fully and unconditionally guaranteed by both Sprint Communications, Inc. and Sprint Corporation. The covenants under eachAs of February 3, 2017, the four secured equipment credit facilities arehave certain key covenants similar to one anotherthose in our new secured term loan and to the covenants of our revolving bank credit facility and EDC agreement.facility.
Financing CapitalObligations
Financing of Future Lease Receivables
In the three-month period ended March 31, 2016, we sold approximately $1.2 billion in total of future amounts due from customers who lease certain devices from us in exchange for cash proceeds of $600 million through our Receivables Facility (see Note 3. Funding Sources). The difference between the amount sold and Other Obligationsthe cash received represents additional collateral to the lenders. The sale was accounted for as a financing and the $600 million cash proceeds were, accordingly, reflected as debt in our consolidated balance sheets. The associated leased devices continue to be reported as part of our "Property, plant and equipment, net" in our consolidated balance sheets and continue to be depreciated over their estimated useful life.
During the nine-month period ended December 31, 2016, we repaid $153 million to the Purchasers, which reduced the principal amount outstanding to $447 million as of December 31, 2016.
Network Equipment Sale-Leaseback
In April 2016, Sprint sold and leased back certain network equipment to Network LeaseCo. The network equipment acquired by Network LeaseCo, which is consolidated by us, was used by them as collateral to raise approximately $2.2 billion in borrowings from external investors, including SoftBank. Principal and interest payments on the borrowings from the external investors will be repaid in staggered, unequal payments through January 2018 with the first principal payment of approximately $300 million due in March 2017 followed by the remaining $1.9 billion of principal payments due in fiscal year 2017 (see Note 3. Funding Sources).
Handset Sale-Leaseback Tranche 2
In May 2016, Sprint entered into a second transaction with MLS to sell and leaseback certain iPhone® devices leased by our customers. Upon the transfer of devices with a net book value of approximately $1.3 billion to MLS, Sprint received cash proceeds of $1.1 billion. Unlike Tranche 1, the proceeds from Tranche 2 were accounted for as a financing (see Note 3. Funding Sources). During the nine-month period ended December 31, 2016, we repaid $502 million to MLS, which reduced the principal amount of the financing obligation to $554 million as of December 31, 2016.
Tower Financing
We have approximately 3,000 cell sites that we sold and subsequently leased back.back during 2008. Terms extend through 2021, with renewal options for an additional 20 years. These cell sites continue to be reported as part of our property,"Property, plant and equipment, net" in our consolidated balance sheets due to our continued involvement with the property sold and the transaction is accounted for as a financing. Our
Capital Lease and Other Obligations
On August 10, 2015, Shenandoah Telecommunications Company (Shentel) entered into a definitive agreement to acquire one of our wholesale partners, NTELOS Holdings Corp (nTelos). In connection with this definitive agreement, we entered into a series of agreements with Shentel to, among other things, acquire certain assets such as spectrum, terminate our existing wholesale arrangement with nTelos, and amend our existing affiliate agreement with Shentel to primarily include the subscribers formerly under the wholesale arrangement with nTelos. The agreements also expanded the area in which Shentel provides wireless service to Sprint customers and provided for more favorable economic terms. In April 2016, we received regulatory approval and the transaction closed in May 2016. The total consideration for this transaction included $181 million, on a net present value basis, of notes payable to Shentel. Sprint will satisfy its obligations under the notes payable over an expected term of five to six years. FCC licenses acquired from Shentel had a total value of $85 million. $96 million of the total purchase was recorded in “Other, net” in the consolidated statements of comprehensive loss as a contract termination in the quarter ended June 30, 2016, which related to the termination of our pre-existing wholesale arrangement with nTelos. The remainder of our capital lease and other obligations are primarily related tofor the use of wireless network equipment and inventory.equipment.
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Covenants
Certain indentures and other agreements require compliance with various covenants, including covenants that limit the ability of the Company and its subsidiaries to sell all or substantially all of its assets, limit the ability of the Company and its subsidiaries to incur indebtedness and liens, and require that we maintain certain financial ratios, each as defined by the terms of the indentures, supplemental indentures and financing arrangements.
As of December 31, 2015,2016, the Company was in compliance with all restrictive and financial covenants associated with its borrowings. A default under any of our borrowings could trigger defaults under certain of our other debt obligations, which in turn could result in the maturities being accelerated.
Under our revolving bank credit facility and certain other agreements, we are currently restricted from paying cash dividends because our ratio of total indebtedness to adjusted EBITDA (each as defined in the applicable agreements) exceeds 2.5 to 1.0.
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Note 10.9. | Severance and Exit Costs |
Severance and exit costs consist of lease exit costs primarily associated with tower and cell sites, access exit costs related to payments that will continue to be made under our backhaul access contracts for which we will no longer be receiving any economic benefit, and severance costs associated with reductions in our work force.
As a result ofThe following provides the United States Cellular (U.S. Cellular) asset acquisition, which closedactivity in May 2013, we recorded a liability related to network shutdown costs, which primarily consisted of leasethe severance and exit costs for which we agreed to reimburse U.S. Cellular. During the quarter ended June 30, 2015, we revised our estimate and, as a result, we reduced the reserve, resulting in approximately $20 million of incomeliability included in "Accounts payable," "Accrued expenses and other current liabilities" and "Other net" onliabilities" within the consolidated statements of comprehensive loss.balance sheets:
|
| | | | | | | | | | | | | | | |
| March 31, 2016 | | Net (Benefit) Expense | | Cash Payments and Other | | December 31, 2016 |
| (in millions) |
Lease exit costs | $ | 338 |
| | $ | (3 | ) | (1) | $ | (100 | ) | | $ | 235 |
|
Severance costs | 150 |
| | 15 |
| (2) | (145 | ) | | 20 |
|
Access exit costs | 37 |
| | 20 |
| (3) | (24 | ) | | 33 |
|
| $ | 525 |
| | $ | 32 |
| | $ | (269 | ) | | $ | 288 |
|
_________________
| |
(1) | For thethree and nine-month periods ended December 31, 2016, we recognized costs of $2 million (Wireless only) and a benefit of $3 million ($5 million benefit Wireless, $2 million costs Wireline), respectively. The Wireless benefit for the nine-month period resulted from the reversal of certain lease exit cost reserves associated with the shutdown of the Clearwire WiMAX network on March 31, 2016. |
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(2) | For the three and nine-month periods ended December 31, 2016, we recognized costs of $6 million (Wireless only) and $15 million (Wireless only), respectively. |
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(3) | For the three and nine-month periods ended December 31, 2016, $11 million ($6 millionWireless, $5 million Wireline) and $18 million ($8 million Wireless, $10 million Wireline), respectively, were recognized as "Severance and exit costs." For the nine-month period endedDecember 31, 2016, $2 million (Wireline only) was recognized as "Cost of services." |
We continually refine our network strategy and evaluate other potential network initiatives to improve the overall performance of our network. Additionally, we have commenced a major cost cuttingreduction initiative is underway, which is expected tomay include headcount reductions, among other actions, to reduce operating expenses and improve our operating cash flows. As a result of these ongoing activities, we may incur future material charges associated with lease and access exit costs, severance, asset impairments, and accelerated depreciation, among others.
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
impairments, and accelerated depreciation, among others. To date, we have specifically identified exit costs, which are expected to range between approximately $100 million to $175 million, primarily related to ceasing use of WiMAX technology and access exit costs, of which the majority is expected to be incurred by March 31, 2016.
The following provides the activity in the severance and exit costs liability included in "Accounts payable," "Accrued expenses and other current liabilities" and "Other liabilities" within the consolidated balance sheets:
|
| | | | | | | | | | | | | | | |
| March 31, 2015 | | Net Expense | | Cash Payments and Other | | December 31, 2015 |
| (in millions) |
Lease exit costs | $ | 291 |
| | $ | 30 |
| (1) | $ | (107 | ) | | $ | 214 |
|
Severance costs | 119 |
| | 194 |
| (2) | (129 | ) | | 184 |
|
Access exit costs | 44 |
| | 3 |
| (3) | (26 | ) | | 21 |
|
| $ | 454 |
| | $ | 227 |
| | $ | (262 | ) | | $ | 419 |
|
_________________
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(1) | In addition to the $20 million income (Wireless only) related to U.S. Cellular, we recognized costs of $32 million (Wireless only), and $50 million (Wireless only) for the three and nine-month periods ended December 31, 2015, respectively, included in "Severance and Exit Costs" on the consolidated statements of comprehensive loss. |
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(2) | For the three and nine-month periods ended December 31, 2015, we recognized costs of $176 million ($156 million Wireless, $20 million Wireline), and $194 million ($172 million Wireless, $22 million Wireline), respectively, included in "Severance and Exit Costs" on the consolidated statements of comprehensive loss. |
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(3) | For the three and nine-month periods ended December 31, 2015, we recognized costs of $1 million (Wireless only), and $3 million (Wireless only), respectively, included in "Severance and Exit Costs" on the consolidated statements of comprehensive loss. |
The differences that caused our effective income tax rates to varydiffer from the 35% U.S. federal statutory rate for income taxes were as follows:
| | | Nine Months Ended December 31, | Nine Months Ended December 31, |
| 2015 | | 2014 | 2016 | | 2015 |
| (in millions) | (in millions) |
Income tax benefit at the federal statutory rate | $ | 460 |
| | $ | 1,303 |
| $ | 223 |
| | $ | 460 |
|
Effect of: | | | | | | |
State income taxes, net of federal income tax effect | 33 |
| | 96 |
| 8 |
| | 33 |
|
State law changes, net of federal income tax effect | 23 |
| | — |
| 3 |
| | 23 |
|
Increase deferred tax liability on FCC licenses | | (46 | ) | | — |
|
Tax benefit from organizational restructuring | | 42 |
| | — |
|
Change in federal and state valuation allowance | (647 | ) | | (797 | ) | (522 | ) | | (647 | ) |
Other, net | 5 |
| | (1 | ) | 6 |
| | 5 |
|
Income tax (expense) benefit | $ | (126 | ) | | $ | 601 |
| |
Income tax expense | | $ | (286 | ) | | $ | (126 | ) |
Effective income tax rate | (9.6 | )% | | 16.1 | % | (44.9 | )% | | (9.6 | )% |
The realization of deferred tax assets, including net operating loss carryforwards, is dependent on the generation of future taxable income sufficient to realize the tax deductions, carryforwards and credits. However, our history of annual losses reduces our ability to rely on expectations of future income in evaluating the ability to realize our deferred tax assets. Valuation allowances on deferred tax assets are recognized if it is determined that it is more likely than not that the asset will not be realized. As a result, the Company recognized income tax expense to increase the valuation allowance by $522 million and $647 million during the nine-month periodperiods ended December 31, 2016 and 2015, respectively, on deferred tax assets primarily related to losses incurred during the period that were not currently realizable and expenses recorded during the period that were not currently deductible for income tax purposes. The Company recognized income tax expense to increase the valuation allowance by $797 million during the nine-month period ended December 31, 2014 primarily attributable to the net increase in deferred tax assets related to the federal and state net operating loss carryforwards generated during the period offset by a $73 million decrease related to the disposition of certain FCC licenses. The disposition of the FCC licenses resulted in the ability to schedule the reversal of the temporary difference to generate future taxable income during the net operating loss carryforward period when evaluating the ability to realize our deferred tax assets. We do not expect to record significant tax benefits on future net operating losses until our circumstances justify the recognition of such benefits.
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
We believe it is more likely than not that our remaining deferred income tax assets, net of the valuation allowance, will be realized based on current income tax laws and expectations of future taxable income stemming from the reversal of existing deferred tax liabilities. Uncertainties surrounding income tax law changes, shifts in operations between state taxing jurisdictions and future operating income levels may, however, affect the ultimate realization of all or some of these deferred income tax assets.
Income tax expense of $286 million for the nine-month period ended December 31, 2016 was primarily attributable to taxable temporary differences from the tax amortization of FCC licenses and tax expense on pre-tax gains from spectrum license exchanges during the period, partially offset by tax benefits from the reversal of certain state income tax valuation allowance on deferred tax assets. As a result of organizational restructuring, which drove a sustained increase in the profitability of specific legal entities, we revised our estimate regarding the realizability of the involved entities’ deferred state tax assets and recorded a state tax benefit of $42 million. Additionally, in conjunction with the Spectrum Financing and resulting change in state taxability footprint, we recognized tax expense of $46 million to increase the deferred tax liability for the temporary differences between the carrying amounts of our FCC licenses for financial statement purposes and their tax bases. Income tax expense of $126 million for the nine-month period ended December 31, 2015 was primarily attributable to taxable temporary differences from the tax amortization of FCC licenses, partially offset by tax benefits recorded from changes in state income tax laws enacted during the period. Income tax benefit of $601 million for the nine-month period ended December 31, 2014 was primarily attributable to recognition of a tax benefit on the $1.9 billion Sprint trade name impairment loss partially offset by tax expense on taxable temporary differences from the tax amortization of FCC licenses during the period. FCC licenses are amortized over 15 years for income tax purposes but, because these licenses have an indefinite life, they are not amortized for financial statement reporting purposes. These temporary differences result in net deferred income tax expense since they cannot be scheduled to reverse during the loss carryforward period.period against our deferred tax assets. As a result, a valuation allowance is recorded against our loss carryforward and other excess deferred tax assets resulting in a net deferred tax expense.
As of December 31, 20152016 and March 31, 2015,2016, we maintained unrecognized tax benefits of $167$176 million and $163$166 million, respectively. Cash paid for income taxes, net, was $34 million and $36 million for each of the nine-month periods ended December 31, 20152016 and December 31, 2014, respectively.2015.
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In March 2016, the FASB issued authoritative guidance on Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting which, in part, eliminates the additional paid-in capital pools and requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. The company has elected to early adopt this guidance effective April 1, 2016. The early adoption of this guidance did not have a material effect on our consolidated financial statements.
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Note 12.11. | Commitments and Contingencies |
Litigation, Claims and Assessments
In March 2009, a stockholder brought suit, Bennett v. Sprint Nextel Corp., in the U.S. District Court for the District of Kansas, alleging that Sprint Communications and three of its former officers violated Section 10(b) of the Exchange Act and Rule 10b-5 by failing adequately to disclose certain alleged operational difficulties subsequent to the Sprint-Nextel merger, and by purportedly issuing false and misleading statements regarding the write-down of goodwill. The plaintiff sought class action status for purchasers of Sprint Communications common stock from October 26, 2006 to February 27, 2008. On January 6, 2011, the Court denied the motion to dismiss. Subsequently, our motion to certify the January 6, 2011 order for an interlocutory appeal was denied. On March 27, 2014, the court certified a class including bondholders as well as stockholders. On April 11, 2014, we filed a petition to appeal that certification order to the Tenth Circuit Court of Appeals. The petition was denied on May 23, 2014. After mediation, the parties reached an agreement to settle the matter, and the settlement amount was substantially paid by the Company's insurers. The district court granted final approval of thea settlement in August 2015, and the case is now completed.
In addition, five relatedwhich did not have a material impact to our financial statements. Five stockholder derivative suits related to this 2009 stockholder suit were filed against Sprint Communications and certain of its present and/or former officers and directors. The first, Murphy v. Forsee, was filed in state court in Kansas on April 8, 2009, was removed to federal court, and was stayed by the court pending resolution of the motion to dismiss the Bennett case; the second, Randolph v. Forsee, was filed on July 15, 2010 in state court in Kansas, was removed to federal court, and was remanded back to state court; the third, Ross-Williams v. Bennett, et al., was filed in state court in Kansas on February 1, 2011; the fourth, Price v. Forsee, et al., was filed in state court in Kansas on April 15, 2011; and the fifth, Hartleib v. Forsee, et.et al., was filed in federal court in Kansas on July 14, 2011. These cases were essentially stayed while the Bennett case was pending, and we have reached an agreement in principle to settle the stay has been extendedmatters, by agreeing to allowsome governance provisions and by paying plaintiffs' attorneys fees in an immaterial amount. The court approved the partiessettlement but reduced the opportunity to pursue settlement. We do not expectplaintiff's attorneys fees; the resolution of these matters to have a material adverse effectattorneys fees issue is on our financial position or results of operations.appeal.
On April 19, 2012, the New York Attorney General filed a complaint alleging that Sprint Communications has fraudulently failed to collect and pay more than $100 million in New York sales taxes on receipts from its sale of wireless telephone services since July 2005. The complaint also seeks recovery of triple damages under the False Claims Act, as well as penalties and interest. Sprint Communications moved to dismiss the complaint on June 14, 2012. On July 1, 2013, the court entered an order denying the motion to dismiss in large part, although it did dismiss certain counts or parts of certain counts. Sprint Communications appealed that order and the intermediate appellate court affirmed the order of the trial court. On October 20, 2015, the Court of Appeals of New York affirmed the decision of the appellate court that the tax statute requires us to collect and remit the disputed taxes. Our petition for certiorari to the U.S. Supreme Court on grounds of federal preemption was denied. We have accrued $180 million during the nine-month periodyear ended
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December March 31, 20152016 associated with this matter. We will continue to defend this matter vigorously and we do not expect the resolution of this matter to have a material adverse effect on our financial position or results of operations.
Eight related stockholder derivative suits have been filed against Sprint Communications and certain of its current and former officers and directors. Each suit alleges generally that the individual defendants breached their fiduciary duties to Sprint Communications and its stockholders by allegedly permitting, and failing to disclose, the actions alleged in the suit filed by the New York Attorney General. One suit, filed by the Louisiana Municipal Police Employees Retirement System, was dismissed by a federal court. Two suits were filed in state court in Johnson County, Kansas and one of those suits was dismissed as premature; and five suits are pending in federal court in Kansas. The remaining Kansas suits werehave been stayed pending resolution of Sprint's motion to dismiss the Attorney General's suit and the appeals.suit. We do not expect the resolution of these matters to have a material adverse effect on our financial position or results of operations.
Sprint Communications, Inc. is also a defendant in a complaint filed by stockholders of Clearwire Corporation asserting claims for breach of fiduciary duty by Sprint Communications, and related claims and otherwise challenging the Clearwire Acquisition. ACP Master, LTD, et al. v. Sprint Nextel Corp., et al., was filed April 26, 2013, in Chancery Court in Delaware. Our motion to dismiss the suit was denied, and discovery is substantially complete. Plaintiffs in the ACP Master, LTD suit have also filed suit requesting an appraisal of the fair value of their Clearwire stock. DiscoveryTrial of those cases took place in that case was consolidated withOctober and November, 2016, and the breachparties are in the process of fiduciary duty case and is substantially complete. Sprint Communications intends to defend the ACP Master, LTD cases vigorously.submitting their post-trial briefings. We do not expect the resolution of these matters to have a material adverse effect on our financial position or results of operations.
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Sprint is currently involved in numerous court actions alleging that Sprint is infringing various patents. Most of these cases effectively seek only monetary damages. A small number of these cases are brought by companies that sell products and seek injunctive relief as well. These cases have progressed to various degrees and a small number may go to trial if they are not otherwise resolved. Adverse resolution of these cases could require us to pay significant damages, cease certain activities, or cease selling the relevant products and services. In many circumstances, we would be indemnified for monetary losses that we incur with respect to the actions of our suppliers or service providers. We do not expect the resolution of these cases to have a material adverse effect on our financial position or results of operations.
In October 2013, the FCC Enforcement Bureau began to issue notices of apparent liability (NALs) to other Lifeline providers, imposing fines for intracarrier duplicate accounts identified by the government during its audit function. Those audits also identified a small percentage of potentially duplicative intracarrier accounts related to our Assurance Wireless business. No NAL has yet been issued with respect to Sprint and we do not know if one will be issued. Further, we are not able to reasonably estimate the amount of any claim for penalties that might be asserted. However, based on the information currently available, if a claim is asserted by the FCC, Sprint does not believe that any amount ultimately paid would be material to the Company’s results of operations or financial position.
Various other suits, inquiries, proceedings and claims, either asserted or unasserted, including purported class actions typical for a large business enterprise and intellectual property matters, are possible or pending against us or our subsidiaries. During the nine-month period ended December 31, 2016, we recorded a $103 million charge associated with a state tax matter which is presented in our consolidated statements of comprehensive loss within "Other, net". If our interpretation of certain laws or regulations, including those related to various federal or state matters such as sales, use or property taxes, or other charges were found to be mistaken, it could result in payments by us. While it is not possible to determine the ultimate disposition of each of these proceedings and whether they will be resolved consistent with our beliefs, we expect that the outcome of such proceedings, individually or in the aggregate, will not have a material adverse effect on our financial position or results of operations.
Spectrum Reconfiguration Obligations
In 2004, the FCC adopted a Report and Order that included new rules regarding interference in the 800 MHz band and a comprehensive plan to reconfigure the 800 MHz band. The Report and Order provides for the exchange of a portion of our 800 MHz FCC spectrum licenses, and requires us to fund the cost incurred by public safety systems and other incumbent licensees to reconfigure the 800 MHz spectrum band. Also, in exchange, we received licenses for 10 MHz of nationwide spectrum in the 1.9 GHz band.
The minimum cash obligation is $2.8 billion under the Report and Order. We are, however, obligated to pay the full amount of the costs relating to the reconfiguration plan, even if those costs exceed $2.8 billion. As required under the terms of the Report and Order, a letter of credit has been secured to provide assurance that funds will be available to pay the
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
relocation costs of the incumbent users of the 800 MHz spectrum. The letter of credit was initially $2.5 billion, but has been reduced during the course of the proceeding to $256$189 million as of December 31, 2015.2016. Since the inception of the program, we have incurred payments of approximately $3.5 billion directly attributable to our performance under the Report and Order, including approximately $26$15 million and $62$43 million during the three and nine-month periods ended December 31, 2015,2016, respectively. When incurred, substantially all costs are accounted for as additions to FCC licenses with the remainder as property, plant and equipment. Although costs incurred through December 31, 20152016 have exceeded $2.8 billion, not all of those costs have been reviewed and accepted as eligible by the transition administrator. During the three-month period ended June 30, 2014, we received a cash payment of approximately $95 million, which represented a reimbursement of prior reconfiguration costs incurred by us that also benefited spectrum recently auctioned by the FCC. We do not expect any further reimbursements.
Completion of the 800 MHz band reconfiguration was initially required by June 26, 2008 and public safety reconfiguration is nearly complete across the country with the exception of the States of Washington, Arizona, California, Texas and New Mexico. The FCC continues to grant the remaining 800 MHz public safety licensees additional time to complete their band reconfigurations which, in turn, delays our access to our 800 MHz replacement channels in these areas. In the areas where band reconfiguration is complete, Sprint has received its replacement spectrum in the 800 MHz band and Sprint is deploying 3G CDMA and 4G LTE on this spectrum in combination with its spectrum in the 1.9 GHz and 2.5 GHz bands.
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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Note 13.12. | Per Share Data |
Basic net loss per common share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share adjusts basic net loss per common share, computed using the treasury stock method, for the effects of potentially dilutive common shares, if the effect is not antidilutive. Outstanding options and restricted stock units (exclusive of participating securities) that had no effect on our computation of dilutive weighted average number of shares outstanding as their effect would have been antidilutive were approximately 83118 million shares and 7883 million shares as of the periods ended December 31, 20152016 and 2014,2015, respectively, in addition to all62 million total shares issuable under warrants, of which 55 million relate to shares issuable under the warrant held by SoftBank. The warrant was issued to SoftBank at the close of the merger with SoftBank and is exercisable at $5.25 per share at the option of SoftBank, in whole or in part, at any time on or prior to July 10, 2018.
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Sprint operates two reportable segments: Wireless and Wireline.
Wireless primarily includes retail, wholesale, and affiliate revenue from a wide array of wireless voice and data transmission services and equipment revenue from the sale of wireless devices (handsets and tablets) and accessories in the U.S., Puerto Rico and the U.S. Virgin Islands.
Wireline primarily includes revenue from domestic and international wireline voice and data communication services provided to other communications companies and targeted business subscribers, in addition to our Wireless segment.
We define segment earnings as wireless or wireline operating (loss) income before other segment expenses such as depreciation, amortization, severance, exit costs, goodwill impairments, asset impairments, and other items, if any, solely and directly attributable to the segment representing items of a non-recurring or unusual nature. Expense and income items excluded from segment earnings are managed at the corporate level. Transactions between segments are generally accounted for based on market rates, which we believe approximate fair value. The Company generally re-establishes these rates at the beginning of each fiscal year. Over the past several years, there has been an industry-wide trend of lower rates due to increased competition from other wireline and wireless communications companies, as well as cable and Internet service providers.
Segment financial information is as follows:
|
| | | | | | | | | | | | | | | |
Statement of Operations Information | Wireless | | Wireline | | Corporate, Other and Eliminations | | Consolidated |
| (in millions) |
Three Months Ended December 31, 2016 | | | | | | | |
Net operating revenues | $ | 8,172 |
| | $ | 372 |
| | $ | 5 |
| | $ | 8,549 |
|
Inter-segment revenues(1) | — |
| | 125 |
| | (125 | ) | | — |
|
Total segment operating expenses | (5,775 | ) | | (449 | ) | | 125 |
| | (6,099 | ) |
Segment earnings | $ | 2,397 |
| | $ | 48 |
| | $ | 5 |
| | 2,450 |
|
Less: | | | | | | | |
Depreciation | | | | | | | (1,837 | ) |
Amortization | | | | | | | (255 | ) |
Other, net(2) | | | | | | | (47 | ) |
Operating income | | | | | | | 311 |
|
Interest expense | | | | | | | (619 | ) |
Other expense, net | | | | | | | (60 | ) |
Loss before income taxes | | | | | | | $ | (368 | ) |
| | | | | | | |
Statement of Operations Information | Wireless | | Wireline | | Corporate, Other and Eliminations | | Consolidated |
| (in millions) |
Three Months Ended December 31, 2015 | | | | | | | |
Net operating revenues | $ | 7,670 |
| | $ | 434 |
| | $ | 3 |
| | $ | 8,107 |
|
Inter-segment revenues(1) | — |
| | 147 |
| | (147 | ) | | — |
|
Total segment operating expenses | (5,804 | ) | | (548 | ) | | 143 |
| | (6,209 | ) |
Segment earnings | $ | 1,866 |
| | $ | 33 |
| | $ | (1 | ) | | 1,898 |
|
Less: | | | | | | | |
Depreciation | | | | | | | (1,549 | ) |
Amortization | | | | | | | (316 | ) |
Other, net(2) | | | | | | | (230 | ) |
Operating loss | | | | | | | (197 | ) |
Interest expense | | | | | | | (546 | ) |
Other income, net | | | | | | | 4 |
|
Loss before income taxes | | | | | | | $ | (739 | ) |
| | | | | | | |
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Segment financial information is as follows:
|
| | | | | | | | | | | | | | | |
Statement of Operations Information | Wireless | | Wireline | | Corporate, Other and Eliminations | | Consolidated |
| (in millions) |
Three Months Ended December 31, 2015 | | | | | | | |
Net operating revenues | $ | 7,670 |
| | $ | 434 |
| | $ | 3 |
| | $ | 8,107 |
|
Inter-segment revenues(1) | — |
| | 147 |
| | (147 | ) | | — |
|
Total segment operating expenses | (5,804 | ) | | (548 | ) | | 143 |
| | (6,209 | ) |
Segment earnings | $ | 1,866 |
| | $ | 33 |
| | $ | (1 | ) | | 1,898 |
|
Less: | | | | | | | |
Depreciation | | | | | | | (1,549 | ) |
Amortization | | | | | | | (316 | ) |
Other, net(2) | | | | | | | (230 | ) |
Operating loss | | | | | | | (197 | ) |
Interest expense | | | | | | | (546 | ) |
Other income, net | | | | | | | 4 |
|
Loss before income taxes | | | | | | | $ | (739 | ) |
| | | | | | | |
Statement of Operations Information | Wireless | | Wireline | | Corporate, Other and Eliminations | | Consolidated |
| (in millions) |
Three Months Ended December 31, 2014 | | | | | | | |
Net operating revenues | $ | 8,433 |
| | $ | 536 |
| | $ | 4 |
| | $ | 8,973 |
|
Inter-segment revenues(1) | — |
| | 156 |
| | (156 | ) | | — |
|
Total segment operating expenses | (7,399 | ) | | (681 | ) | | 151 |
| | (7,929 | ) |
Segment earnings | $ | 1,034 |
| | $ | 11 |
| | $ | (1 | ) | | 1,044 |
|
Less: | | | | | | | |
Depreciation | | | | | | | (940 | ) |
Amortization | | | | | | | (380 | ) |
Impairments(3) | | | | | | | (2,133 | ) |
Other, net(2) | | | | | | | (131 | ) |
Operating loss | | | | | | | (2,540 | ) |
Interest expense | | | | | | | (506 | ) |
Other income, net | | | | | | | 10 |
|
Loss before income taxes | | | | | | | $ | (3,036 | ) |
| | | | | | | |
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| | Statement of Operations Information | | Wireless | | Wireline | | Corporate, Other and Eliminations | | Consolidated |
| | (in millions) |
Nine Months Ended December 31, 2016 | | | | | | | | |
Net operating revenues | | $ | 23,620 |
| | $ | 1,177 |
| | $ | 11 |
| | $ | 24,808 |
|
Inter-segment revenues(1) | | — |
| | 386 |
| | (386 | ) | | — |
|
Total segment operating expenses | | (16,460 | ) | | (1,473 | ) | | 379 |
| | (17,554 | ) |
Segment earnings | | $ | 7,160 |
| | $ | 90 |
| | $ | 4 |
| | 7,254 |
|
Less: | | | | | | | | |
Depreciation | | | | | | | | (5,227 | ) |
Amortization | | | | | | | | (813 | ) |
Other, net(2) | | | | | | | | 80 |
|
Operating income | | | | | | | | 1,294 |
|
Interest expense | | | | | | | | (1,864 | ) |
Other expense, net | | | | | | | | (67 | ) |
Loss before income taxes | | | | | | | | $ | (637 | ) |
| | | | | | | | | | | | | | | | |
Statement of Operations Information | Wireless | | Wireline | | Corporate, Other and Eliminations | | Consolidated | Wireless | | Wireline | | Corporate, Other and Eliminations | | Consolidated |
| (in millions) | (in millions) |
Nine Months Ended December 31, 2015 | | | | | | | | | | | | | | |
Net operating revenues | $ | 22,726 |
| | $ | 1,372 |
| | $ | 11 |
| | $ | 24,109 |
| $ | 22,726 |
| | $ | 1,372 |
| | $ | 11 |
| | $ | 24,109 |
|
Inter-segment revenues(1) | — |
| | 448 |
| | (448 | ) | | — |
| — |
| | 448 |
| | (448 | ) | | — |
|
Total segment operating expenses | (16,807 | ) | | (1,749 | ) | | 435 |
| | (18,121 | ) | (16,807 | ) | | (1,749 | ) | | 435 |
| | (18,121 | ) |
Segment earnings | $ | 5,919 |
| | $ | 71 |
| | $ | (2 | ) | | 5,988 |
| $ | 5,919 |
| | $ | 71 |
| | $ | (2 | ) | | 5,988 |
|
Less: | | | | | | | | | | | | | | |
Depreciation | | | | | | | (4,202 | ) | | | | | | | (4,202 | ) |
Amortization | | | | | | | (994 | ) | | | | | | | (994 | ) |
Other, net(2) | | | | | | | (490 | ) | | | | | | | (490 | ) |
Operating income | | | | | | | 302 |
| | | | | | | 302 |
|
Interest expense | | | | | | | (1,630 | ) | | | | | | | (1,630 | ) |
Other income, net | | | | | | | 13 |
| | | | | | | 13 |
|
Loss before income taxes | | | | | | | $ | (1,315 | ) | | | | | | | $ | (1,315 | ) |
| | | | | | | | | | | | | | |
Statement of Operations Information | Wireless | | Wireline | | Corporate, Other and Eliminations | | Consolidated | |
| (in millions) | |
Nine Months Ended December 31, 2014 | | | | | | | | |
Net operating revenues | $ | 24,555 |
| | $ | 1,684 |
| | $ | 11 |
| | $ | 26,250 |
| |
Inter-segment revenues(1) | — |
| | 462 |
| | (462 | ) | | — |
| |
Total segment operating expenses | (20,358 | ) | | (2,073 | ) | | 438 |
| | (21,993 | ) | |
Segment earnings | $ | 4,197 |
| | $ | 73 |
| | $ | (13 | ) | | 4,257 |
| |
Less: | | | | | | | | |
Depreciation | | | | | | | (2,706 | ) | |
Amortization | | | | | | | (1,189 | ) | |
Impairments(3) | | | | | | | (2,133 | ) | |
Other, net(2) | | | | | | | (442 | ) | |
Operating loss | | | | | | | (2,213 | ) | |
Interest expense | | | | | | | (1,528 | ) | |
Other income, net | | | | | | | 19 |
| |
Loss before income taxes | | | | | | | $ | (3,722 | ) | |
| | | | | | | | |
Other Information | Wireless | | Wireline | | Corporate and Other | | Consolidated | Wireless | | Wireline | | Corporate and Other | | Consolidated |
| (in millions) | (in millions) |
Capital expenditures for the nine months ended December 31, 2016 | | $ | 2,654 |
| | $ | 74 |
| | $ | 223 |
| | $ | 2,951 |
|
Capital expenditures for the nine months ended December 31, 2015 | $ | 5,236 |
| | $ | 205 |
| | $ | 241 |
| | $ | 5,682 |
| $ | 5,236 |
| | $ | 205 |
| | $ | 241 |
| | $ | 5,682 |
|
Capital expenditures for the nine months ended December 31, 2014 | $ | 3,485 |
| | $ | 205 |
| | $ | 267 |
| | $ | 3,957 |
| |
_________________
| |
(1) | Inter-segment revenues consist primarily of wireline services provided to the Wireless segment for resale to, or use by, wireless subscribers. |
| |
(2) | Other, net for the three and nine-month periods ended December 31, 2016 consists of $19 million and $30 million expense, respectively, of severance and exit costs as well as a $28 million loss on disposal of property, plant and equipment related to cell site construction costs that are no longer recoverable as a result of changes in our network plans recognized in the three-month period ended December 31, 2016. In addition, the nine-month period ended December 31, 2016 includes a $354 million non-cash gain related to spectrum license exchanges with other carriers, a $103 million charge related to a state tax matter, and $113 million of contract termination costs primarily related to the termination of our pre-existing wholesale arrangement with nTelos as a result of the Shentel transaction. Losses totaling $109 million and $340 million relating to the write-off of leased devices associated with lease cancellations were excluded from Other, net and included within Wireless segment earnings for the three and nine-month periods ended December 31, 2016, respectively. Other, net for the three and nine-month periods ended December 31, 2015 consists of $209 million and $247 million, respectively, of severance and exit costs and $21 million and $178 million, respectively, of accruals for ongoing legal matters.reserves related to various pending legal suits and proceedings. In addition, the nine-month period ended December 31, 2015 includes an $85 million loss on disposal of property, plant and equipment related to cell site construction costs that are no longer recoverable as a result of changes in the Company'sour network plans and a $20 million release of liability reservesincome resulting from a revision to our estimate of a previously recorded reserve. Losses totaling approximately $143 million relating to the write-off of leased devices associated with lease cancellations of $78 million and the May 2013 U.S. Cellular asset acquisition.loss on sale of devices to MLS under the Handset Sale-Leaseback Tranche 1 transaction for $65 million were excluded from Other, net for the three and nine-month periods ended December 31, 2014 consists of $22 million and $333 million, respectively, of severance and exit costs. In addition, both the three and nine-month periods ended December 31, 2014 included $91 million for legal reserves related to various pending legal suits and proceedings and $59 million for a partial pension settlement, partially offset by a $41 million release of liability reserves associated with the May 2013 U.S. Cellular asset acquisition. |
| |
(3) | Impairmentswithin Wireless segment earnings for the three and nine-month periods ended December 31, 20142015 consist of a $1.9 billion Sprint trade name impairment related to the Wireless segment and a $233 million impairment related to Wireline long-lived assets..
|
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| | Operating Revenues by Service and Products | | Wireless | | Wireline | | Corporate, Other and Eliminations(1) | | Consolidated |
| | (in millions) |
Three Months Ended December 31, 2016 | | | | | | | | |
Wireless services | | $ | 5,763 |
| | $ | — |
| | $ | — |
| | $ | 5,763 |
|
Wireless equipment | | 2,226 |
| | — |
| | — |
| | 2,226 |
|
Voice | | — |
| | 153 |
| | (61 | ) | | 92 |
|
Data | | — |
| | 41 |
| | (23 | ) | | 18 |
|
Internet | | — |
| | 281 |
| | (38 | ) | | 243 |
|
Other | | 183 |
| | 22 |
| | 2 |
| | 207 |
|
Total net operating revenues | | $ | 8,172 |
| | $ | 497 |
| | $ | (120 | ) | | $ | 8,549 |
|
| | | | | | | | | | | | | | | | |
Operating Revenues by Service and Products | Wireless | | Wireline | | Corporate, Other and Eliminations(1) | | Consolidated | Wireless | | Wireline | | Corporate, Other and Eliminations(1) | | Consolidated |
| (in millions) | (in millions) |
Three Months Ended December 31, 2015 | | | | | | | | | | | | | | |
Wireless services | $ | 6,058 |
| | $ | — |
| | $ | — |
| | $ | 6,058 |
| $ | 6,058 |
| | $ | — |
| | $ | — |
| | $ | 6,058 |
|
Wireless equipment | 1,424 |
| | — |
| | — |
| | 1,424 |
| 1,424 |
| | — |
| | — |
| | 1,424 |
|
Voice | — |
| | 201 |
| | (82 | ) | | 119 |
| — |
| | 201 |
| | (82 | ) | | 119 |
|
Data | — |
| | 42 |
| | (17 | ) | | 25 |
| — |
| | 42 |
| | (17 | ) | | 25 |
|
Internet | — |
| | 317 |
| | (48 | ) | | 269 |
| — |
| | 317 |
| | (48 | ) | | 269 |
|
Other | 188 |
| | 21 |
| | 3 |
| | 212 |
| 188 |
| | 21 |
| | 3 |
| | 212 |
|
Total net operating revenues | $ | 7,670 |
| | $ | 581 |
| | $ | (144 | ) | | $ | 8,107 |
| $ | 7,670 |
| | $ | 581 |
| | $ | (144 | ) | | $ | 8,107 |
|
| | | | | | | | | | | | | | |
Operating Revenues by Service and Products | Wireless | | Wireline | | Corporate, Other and Eliminations(1) | | Consolidated | Wireless | | Wireline | | Corporate, Other and Eliminations(1) | | Consolidated |
| (in millions) | (in millions) |
Three Months Ended December 31, 2014 | | | | | | | | |
Nine Months Ended December 31, 2016 | | | | | | | | |
Wireless services | $ | 6,523 |
| | $ | — |
| | $ | — |
| | $ | 6,523 |
| $ | 17,555 |
| | $ | — |
| | $ | — |
| | $ | 17,555 |
|
Wireless equipment | 1,701 |
| | — |
| | — |
| | 1,701 |
| 5,556 |
| | — |
| | — |
| | 5,556 |
|
Voice | — |
| | 289 |
| | (94 | ) | | 195 |
| — |
| | 506 |
| | (196 | ) | | 310 |
|
Data | — |
| | 52 |
| | (22 | ) | | 30 |
| — |
| | 127 |
| | (67 | ) | | 60 |
|
Internet | — |
| | 333 |
| | (42 | ) | | 291 |
| — |
| | 871 |
| | (119 | ) | | 752 |
|
Other | 209 |
| | 18 |
| | 6 |
| | 233 |
| 509 |
| | 59 |
| | 7 |
| | 575 |
|
Total net operating revenues | $ | 8,433 |
| | $ | 692 |
| | $ | (152 | ) | | $ | 8,973 |
| $ | 23,620 |
| | $ | 1,563 |
| | $ | (375 | ) | | $ | 24,808 |
|
| | | | | | | | | | | | | | |
Operating Revenues by Service and Products | Wireless | | Wireline | | Corporate, Other and Eliminations(1) | | Consolidated | Wireless | | Wireline | | Corporate, Other and Eliminations(1) | | Consolidated |
| (in millions) | (in millions) |
Nine Months Ended December 31, 2015 | | | | | | | | | | | | | | |
Wireless services | $ | 18,631 |
| | $ | — |
| | $ | — |
| | $ | 18,631 |
| $ | 18,631 |
| | $ | — |
| | $ | — |
| | $ | 18,631 |
|
Wireless equipment | 3,509 |
| | — |
| | — |
| | 3,509 |
| 3,509 |
| | — |
| | — |
| | 3,509 |
|
Voice | — |
| | 646 |
| | (249 | ) | | 397 |
| — |
| | 646 |
| | (249 | ) | | 397 |
|
Data | — |
| | 134 |
| | (55 | ) | | 79 |
| — |
| | 134 |
| | (55 | ) | | 79 |
|
Internet | — |
| | 968 |
| | (140 | ) | | 828 |
| — |
| | 968 |
| | (140 | ) | | 828 |
|
Other | 586 |
| | 72 |
| | 7 |
| | 665 |
| 586 |
| | 72 |
| | 7 |
| | 665 |
|
Total net operating revenues | $ | 22,726 |
| | $ | 1,820 |
| | $ | (437 | ) | | $ | 24,109 |
| $ | 22,726 |
| | $ | 1,820 |
| | $ | (437 | ) | | $ | 24,109 |
|
| | | | | | | | | | | | | | |
Operating Revenues by Service and Products | Wireless | | Wireline | | Corporate, Other and Eliminations(1) | | Consolidated | |
| (in millions) | |
Nine Months Ended December 31, 2014 | | | | | | | | |
Wireless services | $ | 20,124 |
| | $ | — |
| | $ | — |
| | $ | 20,124 |
| |
Wireless equipment | 3,846 |
| | — |
| | — |
| | 3,846 |
| |
Voice | — |
| | 910 |
| | (271 | ) | | 639 |
| |
Data | — |
| | 161 |
| | (68 | ) | | 93 |
| |
Internet | — |
| | 1,018 |
| | (121 | ) | | 897 |
| |
Other | 585 |
| | 57 |
| | 9 |
| | 651 |
| |
Total net operating revenues | $ | 24,555 |
| | $ | 2,146 |
| | $ | (451 | ) | | $ | 26,250 |
| |
| | | | | | | | |
_______________
| |
(1) | Revenues eliminated in consolidation consist primarily of wireline services provided to the Wireless segment for resale to or use by wireless subscribers. |
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| |
Note 15.14. | Related-Party Transactions |
Sprint has entered into various arrangements with SoftBank or its controlled affiliates (SoftBank Parties) or with third parties to which SoftBank Parties are also parties, including for international wireless roaming, wireless and wireline call termination, real estate, logistical management, and other services.
Brightstar
We have arrangements with Brightstar US, Inc. (Brightstar), whereby Brightstar provides supply chain and inventory management services to us in our indirect channels and whereby Sprint may sell new and used devices and new accessories to Brightstar for its own purposes. We have provided a $1.0 billion credit line to Brightstar to facilitate certain of these arrangements. As a result, we shifted our concentration of credit risk away from our indirect channel partners to Brightstar. As Brightstar is a subsidiary of SoftBank, we expect SoftBank will provide the necessary support to ensure that Brightstar will fulfill its obligations to us under these agreements. However, we have no assurance that SoftBank will provide such support.
The supply chain and inventory management arrangement contemplatesprovides, among other things, that Brightstar willmay purchase inventory from the original equipment manufacturers (OEMs)OEMs or Sprint to sell directly to our indirect dealers. As compensation for these services, we remit per unit fees to Brightstar for each device sold to dealers or retailers in our indirect channels. During the three and nine-month periods ended December 31, 2016 and 2015, we incurred fees under these arrangements totaling $15 million and $43 million, and $29 million and $82 million, respectively. For those OEMs for which Brightstar has not successfully negotiated contracts or does not have sufficient credit under existing contracts, Brightstar will purchase device and accessory inventory from us in order to fulfill orders within our indirect channel. We have provided a $1.0 billion credit line to Brightstar to facilitate certain of these arrangements. As a result, we shifted our concentration of credit risk away from our indirect channel partners to Brightstar. As Brightstar is a wholly-owned subsidiary of SoftBank, we expect SoftBank will provide the necessary support to ensure that Brightstar will fulfill its obligations to us under these agreements. However, we have no assurance that SoftBank will provide such support. We may also purchase new and used devices and accessories from Brightstar to be sold in our direct channels or to be used to fulfill service and repair needs.
Amounts included in our consolidated financial statements associated with these arrangements with Brightstar were as follows:
| | Consolidated balance sheets: | December 31, 2015 | | March 31, 2015 | December 31, 2016 | | March 31, 2016 |
| (in millions) | (in millions) |
Accounts receivable | $ | 239 |
| | $ | 430 |
| $ | 219 |
| | $ | 197 |
|
Accounts payable | $ | 46 |
| | $ | 96 |
| $ | 126 |
| | $ | 96 |
|
| | Consolidated statements of comprehensive loss: | Three Months Ended December 31, | | Nine Months Ended December 31, | Three Months Ended December 31, | | Nine Months Ended December 31, |
| 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 | | 2016 | | 2015 |
| (in millions) | (in millions) |
Equipment revenues | $ | 598 |
| | $ | 1,030 |
| | $ | 1,375 |
| | $ | 1,149 |
| $ | 480 |
| | $ | 598 |
| | $ | 1,107 |
| | $ | 1,375 |
|
Cost of products | $ | 601 |
| | $ | 1,071 |
| | $ | 1,362 |
| | $ | 1,165 |
| $ | 403 |
| | $ | 601 |
| | $ | 1,021 |
| | $ | 1,362 |
|
Handset Sale-LeasebackSoftBank
In November 2015 and April 2016, Sprint entered into a Handset Sale-Leaseback transaction to sell and lease-back certain leased devicestransactions with MLS, a company formed by a group of equity investors, including SoftBank. Simultaneously with the sale of the devices and transfer of certain specified customer lease end rights and obligations to MLS, MLS leased back to us each device in exchange for monthly rental payments to be made to MLS. All devices must be returned to MLS. In the event that MLS is ableSoftBank, to sell the returnedand leaseback certain devices, at a price greater than the expected device residual value, Sprint has the potential to share somewhich are currently being leased by our customers, for total cash proceeds of the excess proceeds. Sprint will act as servicer forapproximately $2.2 billion. SoftBank's equity investment in MLS to the extent needed, after the end of the device leaseback period.totaled $79 million. Brightstar will provideprovides reverse logistics and remarketing services to MLS with respect to the devices.
In December 2016, Handset Sale-Leaseback Tranche 1 was terminated and the associated devices were repurchased by Sprint from MLS. With the cash proceeds, MLS repurchased the equity units from its investors including SoftBank. As a result, SoftBank's remaining equity investment in MLS totaled $39 million.
In April 2016, Sprint sold and leased back certain network equipment to Network LeaseCo. The network equipment acquired by Network LeaseCo, which is consolidated by us, was used by them as collateral to raise approximately $2.2 billion in borrowings from external investors, including $250 million from SoftBank. Principal and interest payments on the borrowings from the external investors will be repaid in staggered, unequal payments through January 2018 (See Note 3. Funding Sources). with the first principal payment of approximately $300 million due in March 2017 followed by the remaining $1.9 billion of principal payments due in fiscal year 2017.
All other transactions under agreements with SoftBank Parties, in the aggregate, were immaterial through the period ended December 31, 2015.2016.
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| |
Note 16.15. | Guarantor Financial Information |
On September 11, 2013, Sprint Corporation issued $2.25 billion aggregate principal amount of 7.250% notes due 2021 and $4.25 billion aggregate principal amount of 7.875% notes due 2023 in a private placement transaction with registration rights. On December 12, 2013, Sprint Corporation issued $2.5 billion aggregate principal amount of 7.125% notes due 2024 in a private placement transaction with registration rights. Each of these issuances is fully and unconditionally guaranteed by Sprint Communications, Inc. (Subsidiary Guarantor), which is a 100 percent100% owned subsidiary of Sprint Corporation (Parent/Issuer). In connection with the foregoing, the registration rights agreements with respect to the notes required the Company and Sprint Communications, Inc. to use their reasonable best efforts to cause an offer to exchange the notes for a new issue of substantially identical exchange notes registered under the Securities Act of 1933. Accordingly, in November 2014, we completed an exchange offer for these notes in compliance with our registration obligations. We did not receive any proceeds from this exchange offer. In addition, on February 24, 2015, Sprint Corporation issued $1.5 billion aggregate principal amount of 7.625% notes due 2025, in a registered transaction, which are fully and unconditionally guaranteed by Sprint Communications, Inc.
During the nine-month period ended December 31, 2016, there was a non-cash equity contribution from the Subsidiary Guarantor to the non-guarantor subsidiaries primarily as a result of organizational restructuring for tax purposes of approximately $600 million.
Under the Subsidiary Guarantor's revolving bank credit facility and certain other finance agreements, the Subsidiary Guarantor is currently restricted from paying cash dividends to the Parent/Issuer or any Non-Guarantor Subsidiary because the ratio of total indebtedness to adjusted EBITDA (each as defined in the applicable agreement) exceeds 2.5 to 1.0.
Sprint has a Receivables Facility providing for the sale of eligible wireless service, installment and certain future lease receivables. In November 2015, Sprint also entered a Handset Sale-Leasebackinto the Tranche 1 transaction to sell and lease-backleaseback certain leased devices.devices, which was subsequently terminated in December 2016. In April 2016, Sprint entered into the Tranche 2 transaction to sell and leaseback certain leased devices and a Network Equipment Sale-Leaseback to sell and leaseback certain network equipment. In connection with the Receivables Facility, Tranches 1 and 2 and the HandsetNetwork Equipment Sale-Leaseback, Sprint formed certain wholly-owned consolidated bankruptcy-remote SPEs and SPE Lessees that are included in the Non-Guarantor Subsidiariesnon-guarantor subsidiaries condensed consolidated financial information. Each SPE and SPE Lessee is a separate legal entity with its own separate creditors who will be entitled, prior to and upon the liquidation of the SPE or SPE Lessee, to be satisfied out of the SPE or SPE Lessee’s assets prior to any assets in the SPE and SPE Lessee becoming available to Sprint (see Note 3. Funding Sources).
We have accounted for investments in subsidiaries using the equity method. Presented below is the condensed consolidating financial information.
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET | | | As of December 31, 2015 | As of December 31, 2016 |
| Parent/Issuer | | Subsidiary Guarantor | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated | Parent/Issuer | | Subsidiary Guarantor | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| (in millions) | (in millions) |
ASSETS | Current assets: | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | — |
| | $ | 1,670 |
| | $ | 505 |
| | $ | — |
| | $ | 2,175 |
| $ | — |
| | $ | 3,117 |
| | $ | 590 |
| | $ | — |
| | $ | 3,707 |
|
Short-term investments | — |
| | 26 |
| | 15 |
| | — |
| | 41 |
| — |
| | 2,329 |
| | 20 |
| | — |
| | 2,349 |
|
Accounts and notes receivable, net | 196 |
| | 6 |
| | 1,033 |
| | (202 | ) | | 1,033 |
| 195 |
| | 1 |
| | 1,235 |
| | (195 | ) | | 1,236 |
|
Device and accessory inventory | — |
| | — |
| | 995 |
| | — |
| | 995 |
| — |
| | — |
| | 1,296 |
| | — |
| | 1,296 |
|
Prepaid expenses and other current assets | — |
| | 17 |
| | 2,300 |
| | — |
| | 2,317 |
| — |
| | 15 |
| | 1,969 |
| | — |
| | 1,984 |
|
Total current assets | 196 |
| | 1,719 |
| | 4,848 |
| | (202 | ) | | 6,561 |
| 195 |
| | 5,462 |
| | 5,110 |
| | (195 | ) | | 10,572 |
|
Investments in subsidiaries | 20,333 |
| | 22,524 |
| | — |
| | (42,857 | ) | | — |
| 18,988 |
| | 23,932 |
| | — |
| | (42,920 | ) | | — |
|
Property, plant and equipment, net | — |
| | — |
| | 20,645 |
| | — |
| | 20,645 |
| — |
| | — |
| | 19,333 |
| | — |
| | 19,333 |
|
Due from consolidated affiliate | 50 |
| | 20,920 |
| | — |
| | (20,970 | ) | | — |
| 25 |
| | 13,125 |
| | — |
| | (13,150 | ) | | — |
|
Note receivable from consolidated affiliate | 10,500 |
| | 563 |
| | — |
| | (11,063 | ) | | — |
| 10,390 |
| | 575 |
| | — |
| | (10,965 | ) | | — |
|
Intangible assets | | | | | | | | | | | | | | | | | | |
Goodwill | — |
| | — |
| | 6,575 |
| | — |
| | 6,575 |
| — |
| | — |
| | 6,579 |
| | — |
| | 6,579 |
|
FCC licenses and other | — |
| | — |
| | 40,052 |
| | — |
| | 40,052 |
| — |
| | — |
| | 40,556 |
| | — |
| | 40,556 |
|
Definite-lived intangible assets, net | — |
| | — |
| | 4,807 |
| | — |
| | 4,807 |
| — |
| | — |
| | 3,582 |
| | — |
| | 3,582 |
|
Other assets | 127 |
| | 1,254 |
| | 676 |
| | (1,146 | ) | | 911 |
| — |
| | 103 |
| | 570 |
| | — |
| | 673 |
|
Total assets | $ | 31,206 |
| | $ | 46,980 |
| | $ | 77,603 |
| | $ | (76,238 | ) | | $ | 79,551 |
| $ | 29,598 |
| | $ | 43,197 |
| | $ | 75,730 |
| | $ | (67,230 | ) | | $ | 81,295 |
|
| | | | | | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | Current liabilities: | | | | | | | | | | | | | | | | | | |
Accounts payable | $ | — |
| | $ | — |
| | $ | 3,078 |
| | $ | — |
| | $ | 3,078 |
| $ | — |
| | $ | — |
| | $ | 2,894 |
| | $ | — |
| | $ | 2,894 |
|
Accrued expenses and other current liabilities | 246 |
| | 571 |
| | 3,859 |
| | (202 | ) | | 4,474 |
| 212 |
| | 560 |
| | 3,612 |
| | (195 | ) | | 4,189 |
|
Deferred tax liabilities | — |
| | — |
| | 186 |
| | — |
| | 186 |
| |
Current portion of long-term debt, financing and capital lease obligations | — |
| | 2,034 |
| | 1,290 |
| | — |
| | 3,324 |
| — |
| | 2,583 |
| | 3,971 |
| | — |
| | 6,554 |
|
Total current liabilities | 246 |
| | 2,605 |
| | 8,413 |
| | (202 | ) | | 11,062 |
| 212 |
| | 3,143 |
| | 10,477 |
| | (195 | ) | | 13,637 |
|
Long-term debt, financing and capital lease obligations | 10,500 |
| | 12,594 |
| | 8,354 |
| | (1,019 | ) | | 30,429 |
| 10,390 |
| | 9,773 |
| | 10,596 |
| | — |
| | 30,759 |
|
Deferred tax liabilities | — |
| | — |
| | 13,773 |
| | — |
| | 13,773 |
| — |
| | — |
| | 14,238 |
| | — |
| | 14,238 |
|
Note payable due to consolidated affiliate | — |
| | 10,500 |
| | 563 |
| | (11,063 | ) | | — |
| — |
| | 10,390 |
| | 575 |
| | (10,965 | ) | | — |
|
Other liabilities | — |
| | 948 |
| | 3,006 |
| | — |
| | 3,954 |
| — |
| | 903 |
| | 2,762 |
| | — |
| | 3,665 |
|
Due to consolidated affiliate | 127 |
| | — |
| | 20,970 |
| | (21,097 | ) | | — |
| — |
| | — |
| | 13,150 |
| | (13,150 | ) | | — |
|
Total liabilities | 10,873 |
| | 26,647 |
| | 55,079 |
| | (33,381 | ) | | 59,218 |
| 10,602 |
| | 24,209 |
| | 51,798 |
| | (24,310 | ) | | 62,299 |
|
Commitments and contingencies | | | | | | | | | | | | | | | | | | |
Total stockholders' equity | 20,333 |
| | 20,333 |
| | 22,524 |
| | (42,857 | ) | | 20,333 |
| 18,996 |
| | 18,988 |
| | 23,932 |
| | (42,920 | ) | | 18,996 |
|
Total liabilities and stockholders' equity | $ | 31,206 |
| | $ | 46,980 |
| | $ | 77,603 |
| | $ | (76,238 | ) | | $ | 79,551 |
| $ | 29,598 |
| | $ | 43,197 |
| | $ | 75,730 |
| | $ | (67,230 | ) | | $ | 81,295 |
|
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET | | | As of March 31, 2015 | As of March 31, 2016 |
| Parent/Issuer | | Subsidiary Guarantor | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated | Parent/Issuer | | Subsidiary Guarantor | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| (in millions) | (in millions) |
ASSETS | Current assets: | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | — |
| | $ | 3,492 |
| | $ | 518 |
| | $ | — |
| | $ | 4,010 |
| $ | — |
| | $ | 2,154 |
| | $ | 487 |
| | $ | — |
| | $ | 2,641 |
|
Short-term investments | — |
| | 146 |
| | 20 |
| | — |
| | 166 |
| |
Accounts and notes receivable, net | 84 |
| | 157 |
| | 2,160 |
| | (111 | ) | | 2,290 |
| 87 |
| | 27 |
| | 1,099 |
| | (114 | ) | | 1,099 |
|
Device and accessory inventory | — |
| | — |
| | 1,359 |
| | — |
| | 1,359 |
| — |
| | — |
| | 1,173 |
| | — |
| | 1,173 |
|
Deferred tax assets | — |
| | — |
| | 62 |
| | — |
| | 62 |
| |
Prepaid expenses and other current assets | — |
| | 13 |
| | 1,877 |
| | — |
| | 1,890 |
| — |
| | 12 |
| | 1,908 |
| | — |
| | 1,920 |
|
Total current assets | 84 |
| | 3,808 |
| | 5,996 |
| | (111 | ) | | 9,777 |
| 87 |
| | 2,193 |
| | 4,667 |
| | (114 | ) | | 6,833 |
|
Investments in subsidiaries | 21,712 |
| | 22,413 |
| | — |
| | (44,125 | ) | | — |
| 19,783 |
| | 23,129 |
| | — |
| | (42,912 | ) | | — |
|
Property, plant and equipment, net | — |
| | — |
| | 19,721 |
| | — |
| | 19,721 |
| — |
| | — |
| | 20,297 |
| | — |
| | 20,297 |
|
Due from consolidated affiliate | 68 |
| | 20,934 |
| | — |
| | (21,002 | ) | | — |
| 50 |
| | 19,518 |
| | — |
| | (19,568 | ) | | — |
|
Note receivable from consolidated affiliate | 10,500 |
| | 458 |
| | — |
| | (10,958 | ) | | — |
| 10,377 |
| | 245 |
| | — |
| | (10,622 | ) | | — |
|
Intangible assets | | | | | | | | | | | | | | | | | | |
Goodwill | — |
| | — |
| | 6,575 |
| | — |
| | 6,575 |
| — |
| | — |
| | 6,575 |
| | — |
| | 6,575 |
|
FCC licenses and other | — |
| | — |
| | 39,987 |
| | — |
| | 39,987 |
| — |
| | — |
| | 40,073 |
| | — |
| | 40,073 |
|
Definite-lived intangible assets, net | — |
| | — |
| | 5,893 |
| | — |
| | 5,893 |
| — |
| | — |
| | 4,469 |
| | — |
| | 4,469 |
|
Other assets | 139 |
| | 1,260 |
| | 836 |
| | (1,158 | ) | | 1,077 |
| — |
| | 1,127 |
| | 620 |
| | (1,019 | ) | | 728 |
|
Total assets | $ | 32,503 |
| | $ | 48,873 |
| | $ | 79,008 |
| | $ | (77,354 | ) | | $ | 83,030 |
| $ | 30,297 |
| | $ | 46,212 |
| | $ | 76,701 |
| | $ | (74,235 | ) | | $ | 78,975 |
|
| | | | | | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | Current liabilities: | | | | | | | | | | | | | | | | | | |
Accounts payable | $ | — |
| | $ | — |
| | $ | 4,347 |
| | $ | — |
| | $ | 4,347 |
| $ | — |
| | $ | — |
| | $ | 2,899 |
| | $ | — |
| | $ | 2,899 |
|
Accrued expenses and other current liabilities | 154 |
| | 625 |
| | 4,625 |
| | (111 | ) | | 5,293 |
| 137 |
| | 531 |
| | 3,820 |
| | (114 | ) | | 4,374 |
|
Current portion of long-term debt, financing and capital lease obligations | — |
| | 500 |
| | 800 |
| | — |
| | 1,300 |
| — |
| | 3,065 |
| | 1,625 |
| | — |
| | 4,690 |
|
Total current liabilities | 154 |
| | 1,125 |
| | 9,772 |
| | (111 | ) | | 10,940 |
| 137 |
| | 3,596 |
| | 8,344 |
| | (114 | ) | | 11,963 |
|
Long-term debt, financing and capital lease obligations | 10,500 |
| | 14,576 |
| | 8,474 |
| | (1,019 | ) | | 32,531 |
| 10,377 |
| | 11,495 |
| | 8,415 |
| | (1,019 | ) | | 29,268 |
|
Deferred tax liabilities | — |
| | — |
| | 13,898 |
| | — |
| | 13,898 |
| — |
| | — |
| | 13,959 |
| | — |
| | 13,959 |
|
Note payable due to consolidated affiliate | — |
| | 10,500 |
| | 458 |
| | (10,958 | ) | | — |
| — |
| | 10,377 |
| | 245 |
| | (10,622 | ) | | — |
|
Other liabilities | — |
| | 960 |
| | 2,991 |
| | — |
| | 3,951 |
| — |
| | 961 |
| | 3,041 |
| | — |
| | 4,002 |
|
Due to consolidated affiliate | 139 |
| | — |
| | 21,002 |
| | (21,141 | ) | | — |
| — |
| | — |
| | 19,568 |
| | (19,568 | ) | | — |
|
Total liabilities | 10,793 |
| | 27,161 |
| | 56,595 |
| | (33,229 | ) | | 61,320 |
| 10,514 |
| | 26,429 |
| | 53,572 |
| | (31,323 | ) | | 59,192 |
|
Commitments and contingencies | | | | | | | | | | | | | | | | | | |
Total stockholders' equity | 21,710 |
| | 21,712 |
| | 22,413 |
| | (44,125 | ) | | 21,710 |
| 19,783 |
| | 19,783 |
| | 23,129 |
| | (42,912 | ) | | 19,783 |
|
Total liabilities and stockholders' equity | $ | 32,503 |
| | $ | 48,873 |
| | $ | 79,008 |
| | $ | (77,354 | ) | | $ | 83,030 |
| $ | 30,297 |
| | $ | 46,212 |
| | $ | 76,701 |
| | $ | (74,235 | ) | | $ | 78,975 |
|
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE (LOSS) INCOME
| | | For the Three Months Ended December 31, 2015 | For the Three Months Ended December 31, 2016 |
| Parent/Issuer | | Subsidiary Guarantor | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated | Parent/Issuer | | Subsidiary Guarantor | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| (in millions) | (in millions) |
Net operating revenues | $ | — |
| | $ | — |
| | $ | 8,107 |
| | $ | — |
| | $ | 8,107 |
| $ | — |
| | $ | — |
| | $ | 8,549 |
| | $ | — |
| | $ | 8,549 |
|
Net operating expenses: | | | | | | | | | | | | | | | | | | |
Cost of services (exclusive of depreciation and amortization included below) | — |
| | — |
| | 2,348 |
| | — |
| | 2,348 |
| — |
| | — |
| | 1,925 |
| | — |
| | 1,925 |
|
Cost of products (exclusive of depreciation and amortization included below) | — |
| | — |
| | 1,589 |
| | — |
| | 1,589 |
| — |
| | — |
| | 1,985 |
| | — |
| | 1,985 |
|
Selling, general and administrative | — |
| | — |
| | 2,129 |
| | — |
| | 2,129 |
| — |
| | — |
| | 2,080 |
| | — |
| | 2,080 |
|
Severance and exit costs | — |
| | — |
| | 209 |
| | — |
| | 209 |
| — |
| | — |
| | 19 |
| | — |
| | 19 |
|
Depreciation | — |
| | — |
| | 1,549 |
| | — |
| | 1,549 |
| — |
| | — |
| | 1,837 |
| | — |
| | 1,837 |
|
Amortization | — |
| | — |
| | 316 |
| | — |
| | 316 |
| — |
| | — |
| | 255 |
| | — |
| | 255 |
|
Other, net | — |
| | — |
| | 164 |
| | — |
| | 164 |
| — |
| | — |
| | 137 |
| | — |
| | 137 |
|
| — |
| | — |
| | 8,304 |
| | — |
| | 8,304 |
| — |
| | — |
| | 8,238 |
| | — |
| | 8,238 |
|
Operating loss | — |
| | — |
| | (197 | ) | | — |
| | (197 | ) | |
Operating income | | — |
| | — |
| | 311 |
| | — |
| | 311 |
|
Other income (expense): | | | | | | | | | | | | | | | | | | |
Interest income | 198 |
| | 39 |
| | 2 |
| | (236 | ) | | 3 |
| 198 |
| | 43 |
| | 4 |
| | (233 | ) | | 12 |
|
Interest expense | (198 | ) | | (406 | ) | | (178 | ) | | 236 |
| | (546 | ) | (198 | ) | | (409 | ) | | (245 | ) | | 233 |
| | (619 | ) |
(Losses) earnings of subsidiaries | (838 | ) | | (471 | ) | | — |
| | 1,309 |
| | — |
| (479 | ) | | (38 | ) | | — |
| | 517 |
| | — |
|
Other income, net | — |
| | — |
| | 1 |
| | — |
| | 1 |
| |
Other (expense) income, net | | — |
| | (75 | ) | | 3 |
| | — |
| | (72 | ) |
| (838 | ) | | (838 | ) | | (175 | ) | | 1,309 |
| | (542 | ) | (479 | ) | | (479 | ) | | (238 | ) | | 517 |
| | (679 | ) |
(Loss) income before income taxes | (838 | ) | | (838 | ) | | (372 | ) | | 1,309 |
| | (739 | ) | (479 | ) | | (479 | ) | | 73 |
| | 517 |
| | (368 | ) |
Income tax benefit (expense) | 2 |
| | — |
| | (99 | ) | | — |
| | (97 | ) | |
Income tax expense | | — |
| | — |
| | (111 | ) | | — |
| | (111 | ) |
Net (loss) income | (836 | ) | | (838 | ) | | (471 | ) | | 1,309 |
| | (836 | ) | (479 | ) | | (479 | ) | | (38 | ) | | 517 |
| | (479 | ) |
Other comprehensive (loss) income | (7 | ) | | (7 | ) | | (4 | ) | | 11 |
| | (7 | ) | (5 | ) | | (5 | ) | | (4 | ) | | 9 |
| | (5 | ) |
Comprehensive (loss) income | $ | (843 | ) | | $ | (845 | ) | | $ | (475 | ) | | $ | 1,320 |
| | $ | (843 | ) | $ | (484 | ) | | $ | (484 | ) | | $ | (42 | ) | | $ | 526 |
| | $ | (484 | ) |
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE (LOSS) INCOME
| | | For the Three Months Ended December 31, 2014 | For the Three Months Ended December 31, 2015 |
| Parent/Issuer | | Subsidiary Guarantor | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated | Parent/Issuer | | Subsidiary Guarantor | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| (in millions) | (in millions) |
Net operating revenues | $ | — |
| | $ | — |
| | $ | 8,973 |
| | $ | — |
| | $ | 8,973 |
| $ | — |
| | $ | — |
| | $ | 8,107 |
| | $ | — |
| | $ | 8,107 |
|
Net operating expenses: | | | | | | | | | | | | | | | | | | |
Cost of services (exclusive of depreciation and amortization included below) | — |
| | — |
| | 2,330 |
| | — |
| | 2,330 |
| — |
| | — |
| | 2,348 |
| | — |
| | 2,348 |
|
Cost of products (exclusive of depreciation and amortization included below) | — |
| | — |
| | 2,952 |
| | — |
| | 2,952 |
| — |
| | — |
| | 1,589 |
| | — |
| | 1,589 |
|
Selling, general and administrative | — |
| | — |
| | 2,647 |
| | — |
| | 2,647 |
| — |
| | — |
| | 2,129 |
| | — |
| | 2,129 |
|
Impairments | — |
| | — |
| | 2,133 |
| | — |
| | 2,133 |
| |
Severance and exit costs | — |
| | — |
| | 22 |
| | — |
| | 22 |
| — |
| | — |
| | 209 |
| | — |
| | 209 |
|
Depreciation | — |
| | — |
| | 940 |
| | — |
| | 940 |
| — |
| | — |
| | 1,549 |
| | — |
| | 1,549 |
|
Amortization | — |
| | — |
| | 380 |
| | — |
| | 380 |
| — |
| | — |
| | 316 |
| | — |
| | 316 |
|
Other, net | — |
| | 1 |
| | 108 |
| | — |
| | 109 |
| — |
| | — |
| | 164 |
| | — |
| | 164 |
|
| — |
| | 1 |
| | 11,512 |
| | — |
| | 11,513 |
| — |
| | — |
| | 8,304 |
| | — |
| | 8,304 |
|
Operating loss | — |
| | (1 | ) | | (2,539 | ) | | — |
| | (2,540 | ) | — |
| | — |
| | (197 | ) | | — |
| | (197 | ) |
Other income (expense): | | | | | | | | | | | | | | | | | | |
Interest income | 169 |
| | 22 |
| | 1 |
| | (189 | ) | | 3 |
| 198 |
| | 39 |
| | 2 |
| | (236 | ) | | 3 |
|
Interest expense | (169 | ) | | (360 | ) | | (166 | ) | | 189 |
| | (506 | ) | (198 | ) | | (406 | ) | | (178 | ) | | 236 |
| | (546 | ) |
(Losses) earnings of subsidiaries | (2,379 | ) | | (2,041 | ) | | — |
| | 4,420 |
| | — |
| (838 | ) | | (471 | ) | | — |
| | 1,309 |
| | — |
|
Other income, net | — |
| | 1 |
| | 6 |
| | — |
| | 7 |
| — |
| | — |
| | 1 |
| | — |
| | 1 |
|
| (2,379 | ) | | (2,378 | ) | | (159 | ) | | 4,420 |
| | (496 | ) | (838 | ) | | (838 | ) | | (175 | ) | | 1,309 |
| | (542 | ) |
(Loss) income before income taxes | (2,379 | ) | | (2,379 | ) | | (2,698 | ) | | 4,420 |
| | (3,036 | ) | (838 | ) | | (838 | ) | | (372 | ) | | 1,309 |
| | (739 | ) |
Income tax benefit | — |
| | — |
| | 657 |
| | — |
| | 657 |
| |
Income tax benefit (expense) | | 2 |
| | — |
| | (99 | ) | | — |
| | (97 | ) |
Net (loss) income | (2,379 | ) | | (2,379 | ) | | (2,041 | ) | | 4,420 |
| | (2,379 | ) | (836 | ) | | (838 | ) | | (471 | ) | | 1,309 |
| | (836 | ) |
Other comprehensive (loss) income | (220 | ) | | (220 | ) | | (208 | ) | | 428 |
| | (220 | ) | (7 | ) | | (7 | ) | | (4 | ) | | 11 |
| | (7 | ) |
Comprehensive (loss) income | $ | (2,599 | ) | | $ | (2,599 | ) | | $ | (2,249 | ) | | $ | 4,848 |
| | $ | (2,599 | ) | $ | (843 | ) | | $ | (845 | ) | | $ | (475 | ) | | $ | 1,320 |
| | $ | (843 | ) |
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE (LOSS) INCOME
| | | For the Nine Months Ended December 31, 2015 | For the Nine Months Ended December 31, 2016 |
| Parent/Issuer | | Subsidiary Guarantor | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated | Parent/Issuer | | Subsidiary Guarantor | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| (in millions) | (in millions) |
Net operating revenues | $ | — |
| | $ | — |
| | $ | 24,109 |
| | $ | — |
| | $ | 24,109 |
| $ | — |
| | $ | — |
| | $ | 24,808 |
| | $ | — |
| | $ | 24,808 |
|
Net operating expenses: | | | | | | | | | | | | | | | | | | |
Cost of services (exclusive of depreciation and amortization included below) | — |
| | — |
| | 7,194 |
| | — |
| | 7,194 |
| — |
| | — |
| | 6,125 |
| | — |
| | 6,125 |
|
Cost of products (exclusive of depreciation and amortization included below) | — |
| | — |
| | 4,244 |
| | — |
| | 4,244 |
| — |
| | — |
| | 5,097 |
| | — |
| | 5,097 |
|
Selling, general and administrative | — |
| | — |
| | 6,540 |
| | — |
| | 6,540 |
| — |
| | — |
| | 5,992 |
| | — |
| | 5,992 |
|
Severance and exit costs | — |
| | — |
| | 247 |
| | — |
| | 247 |
| — |
| | — |
| | 30 |
| | — |
| | 30 |
|
Depreciation | — |
| | — |
| | 4,202 |
| | — |
| | 4,202 |
| — |
| | — |
| | 5,227 |
| | — |
| | 5,227 |
|
Amortization | — |
| | — |
| | 994 |
| | — |
| | 994 |
| — |
| | — |
| | 813 |
| | — |
| | 813 |
|
Other, net | — |
| | — |
| | 386 |
| | — |
| | 386 |
| — |
| | — |
| | 230 |
| | — |
| | 230 |
|
| — |
| | — |
| | 23,807 |
| | — |
| | 23,807 |
| — |
| | — |
| | 23,514 |
| | — |
| | 23,514 |
|
Operating income | — |
| | — |
| | 302 |
| | — |
| | 302 |
| — |
| | — |
| | 1,294 |
| | — |
| | 1,294 |
|
Other income (expense): | | | | | | | | | | | | | | | | | | |
Interest income | 593 |
| | 118 |
| | 3 |
| | (707 | ) | | 7 |
| 593 |
| | 105 |
| | 13 |
| | (674 | ) | | 37 |
|
Interest expense | (593 | ) | | (1,220 | ) | | (524 | ) | | 707 |
| | (1,630 | ) | (593 | ) | | (1,271 | ) | | (674 | ) | | 674 |
| | (1,864 | ) |
(Losses) earnings of subsidiaries | (1,443 | ) | | (341 | ) | | — |
| | 1,784 |
| | — |
| (923 | ) | | 320 |
| | — |
| | 603 |
| | — |
|
Other income, net | — |
| | — |
| | 6 |
| | — |
| | 6 |
| |
Other expense, net | | — |
| | (77 | ) | | (27 | ) | | — |
| | (104 | ) |
| (1,443 | ) | | (1,443 | ) | | (515 | ) | | 1,784 |
| | (1,617 | ) | (923 | ) | | (923 | ) | | (688 | ) | | 603 |
| | (1,931 | ) |
(Loss) income before income taxes | (1,443 | ) | | (1,443 | ) | | (213 | ) | | 1,784 |
| | (1,315 | ) | (923 | ) | | (923 | ) | | 606 |
| | 603 |
| | (637 | ) |
Income tax benefit (expense) | 2 |
| | — |
| | (128 | ) | | — |
| | (126 | ) | |
Income tax expense | | — |
| | — |
| | (286 | ) | | — |
| | (286 | ) |
Net (loss) income | (1,441 | ) | | (1,443 | ) | | (341 | ) | | 1,784 |
| | (1,441 | ) | (923 | ) | | (923 | ) | | 320 |
| | 603 |
| | (923 | ) |
Other comprehensive (loss) income | (11 | ) | | (11 | ) | | (6 | ) | | 17 |
| | (11 | ) | |
Other comprehensive income (loss) | | 2 |
| | 2 |
| | 3 |
| | (5 | ) | | 2 |
|
Comprehensive (loss) income | $ | (1,452 | ) | | $ | (1,454 | ) | | $ | (347 | ) | | $ | 1,801 |
| | $ | (1,452 | ) | $ | (921 | ) | | $ | (921 | ) | | $ | 323 |
| | $ | 598 |
| | $ | (921 | ) |
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE (LOSS) INCOME
| | | For the Nine Months Ended December 31, 2014 | For the Nine Months Ended December 31, 2015 |
| Parent/Issuer | | Subsidiary Guarantor | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated | Parent/Issuer | | Subsidiary Guarantor | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| (in millions) | (in millions) |
Net operating revenues | $ | — |
| | $ | — |
| | $ | 26,250 |
| | $ | — |
| | $ | 26,250 |
| $ | — |
| | $ | — |
| | $ | 24,109 |
| | $ | — |
| | $ | 24,109 |
|
Net operating expenses: | | | | | | | | | | | | | | | | | | |
Cost of services (exclusive of depreciation and amortization included below) | — |
| | — |
| | 7,279 |
| | — |
| | 7,279 |
| — |
| | — |
| | 7,194 |
| | — |
| | 7,194 |
|
Cost of products (exclusive of depreciation and amortization included below) | — |
| | — |
| | 7,482 |
| | — |
| | 7,482 |
| — |
| | — |
| | 4,244 |
| | — |
| | 4,244 |
|
Selling, general and administrative | — |
| | — |
| | 7,232 |
| | — |
| | 7,232 |
| — |
| | — |
| | 6,540 |
| | — |
| | 6,540 |
|
Severance and exit costs | — |
| | — |
| | 333 |
| | — |
| | 333 |
| — |
| | — |
| | 247 |
| | — |
| | 247 |
|
Impairments | — |
| | — |
| | 2,133 |
| | — |
| | 2,133 |
| |
Depreciation | — |
| | — |
| | 2,706 |
| | — |
| | 2,706 |
| — |
| | — |
| | 4,202 |
| | — |
| | 4,202 |
|
Amortization | — |
| | — |
| | 1,189 |
| | — |
| | 1,189 |
| — |
| | — |
| | 994 |
| | — |
| | 994 |
|
Other, net | — |
| | 1 |
| | 108 |
| | — |
| | 109 |
| — |
| | — |
| | 386 |
| | — |
| | 386 |
|
| — |
| | 1 |
| | 28,462 |
| | — |
| | 28,463 |
| — |
| | — |
| | 23,807 |
| | — |
| | 23,807 |
|
Operating loss | — |
| | (1 | ) | | (2,212 | ) | | — |
| | (2,213 | ) | |
Operating income | | — |
| | — |
| | 302 |
| | — |
| | 302 |
|
Other income (expense): | | | | | | | | | | | | | | | | | | |
Interest income | 507 |
| | 68 |
| | 2 |
| | (567 | ) | | 10 |
| 593 |
| | 118 |
| | 3 |
| | (707 | ) | | 7 |
|
Interest expense | (507 | ) | | (1,092 | ) | | (496 | ) | | 567 |
| | (1,528 | ) | (593 | ) | | (1,220 | ) | | (524 | ) | | 707 |
| | (1,630 | ) |
(Losses) earnings of subsidiaries | (3,121 | ) | | (2,097 | ) | | — |
| | 5,218 |
| | — |
| (1,443 | ) | | (341 | ) | | — |
| | 1,784 |
| | — |
|
Other income, net | — |
| | 1 |
| | 8 |
| | — |
| | 9 |
| — |
| | — |
| | 6 |
| | — |
| | 6 |
|
| (3,121 | ) | | (3,120 | ) | | (486 | ) | | 5,218 |
| | (1,509 | ) | (1,443 | ) | | (1,443 | ) | | (515 | ) | | 1,784 |
| | (1,617 | ) |
(Loss) income before income taxes | (3,121 | ) | | (3,121 | ) | | (2,698 | ) | | 5,218 |
| | (3,722 | ) | (1,443 | ) | | (1,443 | ) | | (213 | ) | | 1,784 |
| | (1,315 | ) |
Income tax benefit | — |
| | — |
| | 601 |
| | — |
| | 601 |
| |
Income tax benefit (expense) | | 2 |
| | — |
| | (128 | ) | | — |
| | (126 | ) |
Net (loss) income | (3,121 | ) | | (3,121 | ) | | (2,097 | ) | | 5,218 |
| | (3,121 | ) | (1,441 | ) | | (1,443 | ) | | (341 | ) | | 1,784 |
| | (1,441 | ) |
Other comprehensive (loss) income | (227 | ) | | (227 | ) | | (209 | ) | | 436 |
| | (227 | ) | (11 | ) | | (11 | ) | | (6 | ) | | 17 |
| | (11 | ) |
Comprehensive (loss) income | $ | (3,348 | ) | | $ | (3,348 | ) | | $ | (2,306 | ) | | $ | 5,654 |
| | $ | (3,348 | ) | $ | (1,452 | ) | | $ | (1,454 | ) | | $ | (347 | ) | | $ | 1,801 |
| | $ | (1,452 | ) |
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
| | | For the Nine Months Ended December 31, 2015 | For the Nine Months Ended December 31, 2016 |
| Parent/Issuer | | Subsidiary Guarantor | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated | Parent/Issuer | | Subsidiary Guarantor | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| (in millions) | (in millions) |
Cash flows from operating activities: | | | | | | | | | | | | | | | | | | |
Net cash (used in) provided by operating activities | $ | — |
| | $ | (1,029 | ) | | $ | 3,800 |
| | $ | (168 | ) | | $ | 2,603 |
| $ | — |
| | $ | (1,168 | ) | | $ | 4,186 |
| | $ | (118 | ) | | $ | 2,900 |
|
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | |
Capital expenditures - network and other | — |
| | — |
| | (3,958 | ) | | — |
| | (3,958 | ) | — |
| | — |
| | (1,421 | ) | | — |
| | (1,421 | ) |
Capital expenditures - leased devices | — |
| | — |
| | (1,724 | ) | | — |
| | (1,724 | ) | — |
| | — |
| | (1,530 | ) | | — |
| | (1,530 | ) |
Expenditures relating to FCC licenses | — |
| | — |
| | (75 | ) | | — |
| | (75 | ) | — |
| | — |
| | (46 | ) | | — |
| | (46 | ) |
Proceeds from sales and maturities of short-term investments | — |
| | 317 |
| | 60 |
| | — |
| | 377 |
| — |
| | 2,614 |
| | 35 |
| | — |
| | 2,649 |
|
Purchases of short-term investments | — |
| | (197 | ) | | (55 | ) | | — |
| | (252 | ) | — |
| | (4,943 | ) | | (55 | ) | | — |
| | (4,998 | ) |
Change in amounts due from/due to consolidated affiliates | 1 |
| | (568 | ) | | — |
| | 567 |
| | — |
| — |
| | 6,865 |
| | — |
| | (6,865 | ) | | — |
|
Proceeds from sales of assets and FCC licenses | — |
| | — |
| | 36 |
| | — |
| | 36 |
| — |
| | — |
| | 126 |
| | — |
| | 126 |
|
Proceeds from sale-leaseback transaction | — |
| | — |
| | 1,136 |
| | — |
| | 1,136 |
| |
Intercompany note advance to consolidated affiliate | — |
| | (159 | ) | | — |
| | 159 |
| | — |
| — |
| | (392 | ) | | — |
| | 392 |
| | — |
|
Proceeds from intercompany note advance to consolidated affiliate | — |
| | 54 |
| | — |
| | (54 | ) | | — |
| — |
| | 62 |
| | — |
| | (62 | ) | | — |
|
Other, net | — |
| | — |
| | (25 | ) | | — |
| | (25 | ) | — |
| | — |
| | 26 |
| | — |
| | 26 |
|
Net cash provided by (used in) investing activities | 1 |
| | (553 | ) | | (4,605 | ) | | 672 |
| | (4,485 | ) | — |
| | 4,206 |
| | (2,865 | ) | | (6,535 | ) | | (5,194 | ) |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | |
Proceeds from debt and financings | — |
| | 250 |
| | 505 |
| | — |
| | 755 |
| — |
| | — |
| | 6,830 |
| | — |
| | 6,830 |
|
Repayments of debt, financing and capital lease obligations | — |
| | (500 | ) | | (227 | ) | | — |
| | (727 | ) | — |
| | (2,000 | ) | | (1,266 | ) | | — |
| | (3,266 | ) |
Debt financing costs | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) | — |
| | (110 | ) | | (162 | ) | | — |
| | (272 | ) |
Proceeds from issuance of common stock, net | — |
| | 10 |
| | — |
| | — |
| | 10 |
| |
Intercompany dividends paid to parent | — |
| | — |
| | (168 | ) | | 168 |
| | — |
| — |
| | — |
| | (118 | ) | | 118 |
| | — |
|
Change in amounts due from/due to consolidated affiliates | — |
| | — |
| | 567 |
| | (567 | ) | | — |
| — |
| | — |
| | (6,865 | ) | | 6,865 |
| | — |
|
Intercompany note advance from parent | — |
| | — |
| | 159 |
| | (159 | ) | | — |
| — |
| | — |
| | 392 |
| | (392 | ) | | — |
|
Repayments of intercompany note advance from parent | — |
| | — |
| | (54 | ) | | 54 |
| | — |
| — |
| | — |
| | (62 | ) | | 62 |
| | — |
|
Other, net | — |
| | — |
| | 10 |
| | — |
| | 10 |
| — |
| | 35 |
| | 33 |
| | — |
| | 68 |
|
Net cash (used in) provided by financing activities | (1 | ) | | (240 | ) | | 792 |
| | (504 | ) | | 47 |
| — |
| | (2,075 | ) | | (1,218 | ) | | 6,653 |
| | 3,360 |
|
Net decrease in cash and cash equivalents | — |
| | (1,822 | ) | | (13 | ) | | — |
| | (1,835 | ) | |
Net increase in cash and cash equivalents | | — |
| | 963 |
| | 103 |
| | — |
| | 1,066 |
|
Cash and cash equivalents, beginning of period | — |
| | 3,492 |
| | 518 |
| | — |
| | 4,010 |
| — |
| | 2,154 |
| | 487 |
| | — |
| | 2,641 |
|
Cash and cash equivalents, end of period | $ | — |
| | $ | 1,670 |
| | $ | 505 |
| | $ | — |
| | $ | 2,175 |
| $ | — |
| | $ | 3,117 |
| | $ | 590 |
| | $ | — |
| | $ | 3,707 |
|
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
| | | For the Nine Months Ended December 31, 2014 | For the Nine Months Ended December 31, 2015 |
| Parent/Issuer | | Subsidiary Guarantor | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated | Parent/Issuer | | Subsidiary Guarantor | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| (in millions) | (in millions) |
Cash flows from operating activities: | | | | | | | | | | | | | | | | | | |
Net cash (used in) provided by operating activities | $ | — |
| | $ | (735 | ) | | $ | 2,409 |
| | $ | (200 | ) | | $ | 1,474 |
| $ | — |
| | $ | (1,029 | ) | | $ | 3,800 |
| | $ | (168 | ) | | $ | 2,603 |
|
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | |
Capital expenditures - network and other | — |
| | — |
| | (3,814 | ) | | — |
| | (3,814 | ) | — |
| | — |
| | (3,958 | ) | | — |
| | (3,958 | ) |
Capital expenditures - leased devices | — |
| | — |
| | (143 | ) | | — |
| | (143 | ) | — |
| | — |
| | (1,724 | ) | | — |
| | (1,724 | ) |
Expenditures relating to FCC licenses | — |
| | — |
| | (121 | ) | | — |
| | (121 | ) | — |
| | — |
| | (75 | ) | | — |
| | (75 | ) |
Reimbursements relating to FCC licenses | — |
| | — |
| | 95 |
| | — |
| | 95 |
| |
Proceeds from sales and maturities of short-term investments | — |
| | 2,878 |
| | 35 |
| | — |
| | 2,913 |
| — |
| | 317 |
| | 60 |
| | — |
| | 377 |
|
Purchases of short-term investments | — |
| | (1,857 | ) | | (90 | ) | | — |
| | (1,947 | ) | — |
| | (197 | ) | | (55 | ) | | — |
| | (252 | ) |
Change in amounts due from/due to consolidated affiliates | — |
| | (1,933 | ) | | — |
| | 1,933 |
| | — |
| 1 |
| | (568 | ) | | — |
| | 567 |
| | — |
|
Proceeds from sales of assets and FCC licenses | — |
| | — |
| | 114 |
| | — |
| | 114 |
| — |
| | — |
| | 36 |
| | — |
| | 36 |
|
Proceeds from sale-leaseback transaction | | — |
| | — |
| | 1,136 |
| | — |
| | 1,136 |
|
Intercompany note advance to consolidated affiliate | | — |
| | (159 | ) | | — |
| | 159 |
| | — |
|
Proceeds from intercompany note advance to consolidated affiliate | | — |
| | 54 |
| | — |
| | (54 | ) | | — |
|
Other, net | — |
| | — |
| | (9 | ) | | — |
| | (9 | ) | — |
| | — |
| | (25 | ) | | — |
| | (25 | ) |
Net cash (used in) provided by investing activities | — |
| | (912 | ) | | (3,933 | ) | | 1,933 |
| | (2,912 | ) | |
Net cash provided by (used in) investing activities | | 1 |
| | (553 | ) | | (4,605 | ) | | 672 |
| | (4,485 | ) |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | |
Proceeds from debt and financings | — |
| | 300 |
| | — |
| | — |
| | 300 |
| — |
| | 250 |
| | 505 |
| | — |
| | 755 |
|
Repayments of debt, financing and capital lease obligations | — |
| | — |
| | (390 | ) | | — |
| | (390 | ) | — |
| | (500 | ) | | (227 | ) | | — |
| | (727 | ) |
Debt financing costs | (1 | ) | | (5 | ) | | (31 | ) | | — |
| | (37 | ) | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) |
Proceeds from issuance of common stock, net | — |
| | 50 |
| | — |
| | — |
| | 50 |
| |
Intercompany dividends paid to parent | — |
| | — |
| | (200 | ) | | 200 |
| | — |
| — |
| | — |
| | (168 | ) | | 168 |
| | — |
|
Change in amounts due from/due to consolidated affiliates | 1 |
| | — |
| | 1,932 |
| | (1,933 | ) | | — |
| — |
| | — |
| | 567 |
| | (567 | ) | | — |
|
Net cash provided by (used in) financing activities | — |
| | 345 |
| | 1,311 |
| | (1,733 | ) | | (77 | ) | |
Intercompany note advance from parent | | — |
| | — |
| | 159 |
| | (159 | ) | | — |
|
Repayments of intercompany not advance from parent | | — |
| | — |
| | (54 | ) | | 54 |
| | — |
|
Other, net | | — |
| | 10 |
| | 10 |
| | — |
| | 20 |
|
Net cash (used in) provided by financing activities | | (1 | ) | | (240 | ) | | 792 |
| | (504 | ) | | 47 |
|
Net decrease in cash and cash equivalents | — |
| | (1,302 | ) | | (213 | ) | | — |
| | (1,515 | ) | — |
| | (1,822 | ) | | (13 | ) | | — |
| | (1,835 | ) |
Cash and cash equivalents, beginning of period | — |
| | 4,125 |
| | 845 |
| | — |
| | 4,970 |
| — |
| | 3,492 |
| | 518 |
| | — |
| | 4,010 |
|
Cash and cash equivalents, end of period | $ | — |
| | $ | 2,823 |
| | $ | 632 |
| | $ | — |
| | $ | 3,455 |
| $ | — |
| | $ | 1,670 |
| | $ | 505 |
| | $ | — |
| | $ | 2,175 |
|
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| |
Note 16. | Subsequent Events |
New Secured Term Loan and Revolving Credit Facility
On February 3, 2017, we entered into a new credit agreement for $6.0 billion, consisting of a $4.0 billion, seven-year secured term loan that matures in February 2024 and a $2.0 billion secured revolving bank credit facility that expires in February 2021. The term loan has an interest rate equal to LIBOR plus 250 basis points and the bank facility has an interest rate equal to LIBOR plus a spread that varies depending on the Company's leverage ratio. The new credit facility replaced the $3.3 billion unsecured revolving bank credit facility that was due to expire in February 2018.
Insurance Program Master Services Agreement
Effective January 1, 2017, we entered into a new Master Services Agreement with a vendor to provide post-sale device support services (including device insurance) to subscribers. Under the new agreement, the vendor will be the primary obligor and bear the risk of loss with regards to claims and related costs. As a result, revenue will be accounted for and presented on a net basis, whereas historically the amounts were presented on a gross basis. Sprint will remit premiums to the vendor who will pay Sprint a monthly recurring commission per subscriber for the duration of the agreement.
Accounts Receivable Facility
On February 3, 2017, the Company executed certain amendments to the Receivables Facility. The maturity date was extended to November 2018 and Sprint obtained the right to repurchase, under certain conditions, the financial assets transferred to the conduits. As a result of adding the repurchase feature, Sprint gained effective control over the financial assets. Accordingly, all sales of wireless service and installment receivables to the conduits will be reflected as financings. All cash inflows and outflows under the Receivables Facility will be reported as financing activities in the consolidated statements of cash flows prospectively.
| |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
OVERVIEW
Sprint Corporation, including its consolidated subsidiaries, is a communications company offering a comprehensive range of wireless and wireline communications products and services that are designed to meet the needs of individual consumers, businesses, government subscribers, and resellers. Unless the context otherwise requires, references to "Sprint," "we," "us," "our" and the "Company" mean Sprint Corporation and its consolidated subsidiaries for all periods presented, and references to "Sprint Communications" are to Sprint Communications, Inc. and its consolidated subsidiaries.
Description of the Company
We are one of the largest wireless communications companies in the U.S., as well as a provider of wireline services. Our services are provided through our ownership of extensive wireless networks, an all-digital global wireline network and a Tier 1 Internet backbone.
We offer wireless and wireline voice and data transmission services to subscribers in all 50 states, Puerto Rico, and the U.S. Virgin Islands under the Sprint corporate brand, which includes our retail brands of Sprint®, Boost Mobile®, Virgin Mobile®, and Assurance Wireless® on our wireless networks utilizing various technologies including third generation (3G) code division multiple access (CDMA), and fourth generation (4G) services utilizing Long Term Evolution (LTE) and Worldwide Interoperability for Microwave Access (WiMAX) technologies (which we expect to be shutdown by the end of fiscal year 2015). We utilize these networks to offer our wireless and wireline subscribers differentiated products and services whether through the use of a single network or a combination of these networks.
Wireless
We offer wireless services on a postpaid and prepaid payment basis to retail subscribers and also on a wholesale basis, which includes the sale of wireless services that utilize the Sprint network but are sold under the wholesaler's brand.
Wireless
Postpaid
In our postpaid portfolio, we offer several price plans for both consumer and business subscribers. Many of our price plans include unlimited talk, text and data or allow subscribers to purchase monthly data allowances. We also offer family plans that include multiple lines of service under one account. We offer these plans with subsidy, installment billing or leasing programs. The subsidy program primarily requires a two-year service contract and allows for a subscriber to either bring theirpurchase a handset or purchase one at a discount for a new line of service. Our installment billing program does not require a two-year service contract and offers service plans at lower monthly rates compared to subsidy plans, but requires the subscriber to pay full or near full price for the handset over monthly installments. Our leasing program also does not require a two-year service contract, provides for service plans at lower monthly rates compared to subsidy plans and allows qualified subscribers to lease a device and make payments for use of the device over the term of the lease. At the end of the lease term, the subscriber can either turn in the device, continue leasing the device or purchase the device.
Prepaid
Our prepaid portfolio currently includes multiple brands, each designed to appeal to specific subscriber uses and demographics. Sprint Prepaid primarily serves as a complementary offer to our Sprint Postpaid offer for those subscribers who want plans that are affordable, simple and flexible without a long-term commitment. Boost Mobile primarily serves subscribers with plans that offer unlimited text and talk with step pricing based on a subscriber's preferredare looking for value without data usage.limits. Virgin Mobile primarily serves subscribers through plansthat are looking to optimize spend but need solutions that offer control, flexibility and connectivity through various planplans with high speed data options. Virgin Mobile is also designated as a Lifeline-only Eligible Telecommunications Carrier in certain states and provides service for the Lifeline program under our Assurance Wireless brand. Assurance Wireless provides eligible subscribers in certain states, who meet income requirements or are receiving government assistance, with a free wireless phone, 250350 free local and long-distancelong distance voice minutes each month and unlimited free texts under the Lifeline Program.program. The Lifeline Programprogram requires applicants to meet certain eligibility requirements and existing subscribers must recertify as to those requirements annually.
Wholesale
We have focused our wholesale business on enabling our diverse network of customers to successfully grow their business by providing them with an array of network, product, and device solutions. This allows our customers to customize this full suite of value-added solutions to meet the growing demands of their businesses. As part of these growing demands, some of our wholesale mobile virtual network operators (MVNO) are also selling prepaid services under the Lifeline program.
We continue to support the open development of applications, content, and devices on the Sprint platform. In addition, we enable a variety of business and consumer third-party relationships through our portfolio of machine-to-machine
solutions, which we offer on a retail postpaid and wholesale basis. Our machine-to-machine solutions portfolio provides a secure, real-time and reliable wireless two-way data connection across a broad range of connected devices.
Wireline
We provide a broad suite of wireline voice and data communication services to other communications companies and targeted business subscribers. In addition, our Wireline segment provides voice, data and IP communication services to our Wireless segment. We provide long distance services and operate all-digital global long distance and Tier 1 IP networks.
Business Strategies and Key Priorities
Our business strategy is to be responsive to changing customer mobility demands of existing and potential customers, and to expand our business into new areas of customer value and economic opportunity through innovation and differentiation. To help lay the foundation for these future growth opportunities, our strategy revolves around targeted investment, in the following key priority areas:
Provide a network that delivers the consistent reliability, capacity and speed that customers demand;
Achieve a more competitive cost position in the industry through simplification;
Increase subscriber acquisition and retention and reduce churn;
Create an alternative financial structure to fuel growth and maximize shareholder value;
Attract and retain the best talent in the industry; and
Deliver a simplified and improved customer experience.
To achieve these key priorities, we are focusing on the following initiatives. To provide a network that delivers the consistent reliability, capacity and speed that customers demand, we expect to continue to optimize our 3G data network and invest in LTE deployment across all of our spectrum bands. We also expect to deploy new technologies that will help strengthen our competitive position, including the expected use of Voice over LTE, more extensive use of Wi-Fi and the use of small cells to further densify our network.
To achieve a more competitive cost position, we have established an Office of Cost Management with responsibility for identifying, operationalizing, and monitoring sustained improvements in operating costs and efficiencies. Also, we have deployed new cost management and planning tools across the entire organization to more effectively monitor expenditures.
We are focused on attracting and retaining subscribers by improving our sales and marketing initiatives. We have expanded our direct retail store presence through our relationship with RadioShack, as well as our new Direct 2to You service that brings the Sprint store experience to our customers. We have demonstrated our value proposition through our new price plans, promotions, and payment programs and have deployed new local marketing and civic engagement initiatives in key markets.
Our alternative financial structure consists ofcurrent strategy also includes transactions that continue to leverage our assets such as the handset sale-leasebackAccounts Receivable Facility, the Handset Sale-Leaseback transactions, as well as the Network Equipment Sale-Leaseback. In October 2016, we also entered into in December 2015,a Spectrum Financing transaction involving a portion of our spectrum holdings. Each of these transactions are described in more detail in "Liquidity and Capital Resources." In addition, weAdditionally, cost reduction initiatives are identifying other funding sources such as the potential monetization of certain spectrumunderway to reduce operating expenses and network equipment. improve our operating cash flows.
We seek to buildhave built a stronger management team through striking a balance of bringing in newby attracting outside talent with world class experience and credentials and more fully leveragingwhile retaining selected members of the experience within our existing leadershipincumbent management team. We recently began operating in a regional model that will put key leadership closer to customers and allow us to better serve them in four geographic areas which are comprised of seventeen regions. To deliver a simplified and improved customer experience, we are focusing on key subscriber touch points, pursuing process improvements and deploying platforms to simplify and enhance the interactions between us and our customers. In addition, we have established a Customer Experience Officecustomer experience team to support our focus on net promoter score as ouran important key measure inof customer satisfaction. With
Network
We continue to increase coverage and capacity by densifying and optimizing our existing network. Densification, which includes increasing the Officenumber of Cost Management, wesmall cells and antennas, is intended to enhance coverage and capacity across the network. We expect the densification efforts to cost significantly less than our historical macro cell site builds (i.e. adding traditional cell towers). We are also deploying new technologies, such as carrier aggregation, which allows us to move more data at faster speeds over the same spectrum. Additionally, our introduction of tri-band devices, which support each of our spectrum bands, allows us to manage and operate our network more efficiently and at a lower cost. We have commenced major cost cutting initiatives, whichcontinued to see positive results from these infrastructure upgrades in key U.S. markets.
Today, the 2.5 GHz spectrum band carries the highest percentage of Sprint's LTE data traffic. We have significant additional capacity to grow the use of our 2.5 GHz spectrum holdings into the future. Sprint believes it is well-positioned with spectrum holdings of more than 160 MHz of 2.5 GHz spectrum in the top 100 markets in the U.S.
Overall, our densification and optimization efforts are expected to include headcount reductions, among other actions,continue to reduce operating expensesenhance the customer experience by adding data capacity, increasing the wireless data speeds available to our customers, and improveimproving network coverage for both voice and data services. While circumstances may change in the future, we believe that our operating cash flows. In addition,substantial spectrum holdings are sufficient to allow us to continue to provide consistent network reliability, capacity, and speed, as well as to provide current and future customers a highly competitive wireless experience. As we continuallycontinue to refine our network strategy and evaluate other potential network initiatives, to improve the overall performance of our network. As a result of these ongoing activities, we may incur future material charges associated with lease and access exit costs, severance,loss from asset impairments, anddispositions or accelerated depreciation, among others.
Network
Our current network improvement efforts include optimizing the use of our 1.9 gigahertz (GHz), 800 megahertz (MHz) and 2.5 GHz spectrum and the deployment and optimization of 4G LTE on our 800 MHz and 2.5 GHz spectrum, as well as significantly densifying our network and deploying carrier aggregation.
We plan to densify our network by increasing the number of sites across all spectrum bands. We also continue to deploy carrier aggregation to create wider channels and produce more capacity and faster speeds across the country. Carrier aggregation allows us to utilize our 2.5 GHz spectrum position to carry increased data at faster speeds for those enabled
devices that we currently have available to our subscribers. We expect these efforts to produce more data capacity, faster speeds and improved coverage as our network improvement activities are implemented over the course of the next two years.
WiMAX technology was utilized by Clearwire at the time of its acquisition by us in July 2013. We plan to cease using WiMAX technology by the end of fiscal year 2015. To date, we have specifically identified exit costs, which are expected to range between approximately $100 million to $175 million, primarily related to ceasing use of WiMAX technology and access exit costs, of which the majority is expected to be incurred by March 31, 2016.
Shentel Transaction
On August 10, 2015, Shenandoah Telecommunications Company (Shentel) entered into a definitive agreement to acquire one of our wholesale partners, NTELOS Holdings Corp (nTelos). In connection with this definitive agreement, we have entered into a series of agreements with Shentel subject to regulatory approval, to, among other things, acquire certain assets such as spectrum, terminate our existing wholesale arrangement with nTelos, and amend our existing affiliate agreement with Shentel to primarily include among other things, the subscribers formerly under the wholesale arrangement with nTelos. The agreements will also expandexpanded the area in which Shentel provides wireless service to Sprint customers and will provideprovided for more favorable economic terms. In April 2016, we received regulatory approval, and the transaction closed in May 2016. The total consideration for this transaction is expected to include approximately $220included $181 million, on a net present value basis, of notes payable to Shentel. Sprint will satisfy its obligations under the notes payable over an expected term of five to six years. At this time, we expect approximately $110FCC licenses acquired from Shentel had a total value of $85 million. $96 million of the total purchase price to bewas recorded in “Other, net” in the consolidated statements of comprehensive loss as a loss,contract termination in the quarter ended June 30, 2016, which relatesrelated to the termination of our pre-existing wholesale arrangement with nTelos, upon the closing of the transaction, which is expected to occur in the first half of calendar year 2016.nTelos.
RESULTS OF OPERATIONS
Consolidated Results of Operations
The following table provides an overview of the consolidated results of operations.
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | Nine Months Ended |
| December 31, | | December 31, | December 31, |
| 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 | 2016 | | 2015 |
| (in millions) | (in millions) |
Wireless segment earnings | $ | 1,866 |
| | $ | 1,034 |
| | $ | 5,919 |
| | $ | 4,197 |
| $ | 2,397 |
| | $ | 1,866 |
| $ | 7,160 |
| | $ | 5,919 |
|
Wireline segment earnings | 33 |
| | 11 |
| | 71 |
| | 73 |
| 48 |
| | 33 |
| 90 |
| | 71 |
|
Corporate, other and eliminations | (1 | ) | | (1 | ) | | (2 | ) | | (13 | ) | 5 |
| | (1 | ) | 4 |
| | (2 | ) |
Consolidated segment earnings | 1,898 |
| | 1,044 |
| | 5,988 |
| | 4,257 |
| 2,450 |
| | 1,898 |
| 7,254 |
| | 5,988 |
|
Depreciation | (1,549 | ) | | (940 | ) | | (4,202 | ) | | (2,706 | ) | (1,837 | ) | | (1,549 | ) | (5,227 | ) | | (4,202 | ) |
Amortization | (316 | ) | | (380 | ) | | (994 | ) | | (1,189 | ) | (255 | ) | | (316 | ) | (813 | ) | | (994 | ) |
Impairments | — |
| | (2,133 | ) | | — |
| | (2,133 | ) | |
Other, net | (230 | ) | | (131 | ) | | (490 | ) | | (442 | ) | (47 | ) | | (230 | ) | 80 |
| | (490 | ) |
Operating (loss) income | (197 | ) | | (2,540 | ) | | 302 |
| | (2,213 | ) | |
Operating income (loss) | | 311 |
| | (197 | ) | 1,294 |
| | 302 |
|
Interest expense | (546 | ) | | (506 | ) | | (1,630 | ) | | (1,528 | ) | (619 | ) | | (546 | ) | (1,864 | ) | | (1,630 | ) |
Other income, net | 4 |
| | 10 |
| | 13 |
| | 19 |
| |
Income tax (expense) benefit | (97 | ) | | 657 |
| | (126 | ) | | 601 |
| |
Other (expense) income, net | | (60 | ) | | 4 |
| (67 | ) | | 13 |
|
Income tax expense | | (111 | ) | | (97 | ) | (286 | ) | | (126 | ) |
Net loss | $ | (836 | ) | | $ | (2,379 | ) | | $ | (1,441 | ) | | $ | (3,121 | ) | $ | (479 | ) | | $ | (836 | ) | $ | (923 | ) | | $ | (1,441 | ) |
Depreciation Expense
Depreciation expense increased $609$288 million, or 65%19%, and $1.5$1.0 billion, or 55%24%, in the three and nine-month periods ended December 31, 2015,2016, respectively, compared to the same periods in 2014,2015, primarily due to increased depreciation on leased devices as a result of $535the continued growth of the device leasing program. Depreciation expense incurred on all leased devices was $837 million and $1.2$2.2 billion infor the three and nine-month periods ended December 31, 2015,2016, respectively, as a result of the device leasing program that was introduced in September 2014. Depreciation expense incurred on all leased devices for three and nine-month periods ended December 31, 2014 was $54$535 million and $56 million,$1.2 billion for the same periods in 2015, respectively. Depreciation also increased due to network asset additions partially offset by a decrease due to assets being retired or fully depreciated.
Amortization Expense
Amortization expense decreased $64$61 million, or 17%19%, and $195$181 million, or 16%18%, in the three and nine-month periods ended December 31, 2015,2016, respectively, compared to the same periods in 2014,2015, primarily due to customer relationship intangible assets that are amortized using the sum-of-the-months'-digits method, which results in higher amortization rates in early periods that will decline over time.
Impairments
During the three-month period ended December 31, 2014, we determined that recoverability of the carrying amount of the Sprint trade name should be evaluated for impairment due to changes in circumstances surrounding our Wireless reporting unit. As a result, we recorded an impairment loss of $1.9 billion, which is included in “Impairments” in our consolidated statements of comprehensive loss. During the three-month period ended December 31, 2014, we also tested the recoverability of the Wireline asset group, which consists primarily of property, plant and equipment, due to continued declines in our Wireline segment earnings and our current forecast that projects continued losses in future periods. As a result, we recorded an impairment loss of $233 million to reduce the carrying value of Wireline’s property, plant and equipment to its estimated fair value, which is included in “Impairments” in our consolidated statements of comprehensive loss.
Other, net
The following table provides additional information regarding items included in "Other, net" for the three and nine-month periods ended December 31, 20152016 and 2014.2015.
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| December 31, | | December 31, | December 31, | | December 31, |
| 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 | | 2016 | | 2015 |
| (in millions) | (in millions) |
Severance and exit costs | $ | (209 | ) | | $ | (22 | ) | | $ | (247 | ) | | $ | (333 | ) | $ | (19 | ) | | $ | (209 | ) | | $ | (30 | ) | | $ | (247 | ) |
Litigation | (21 | ) | | (91 | ) | | (178 | ) | | (91 | ) | |
Litigation and other contingencies | | — |
| | (21 | ) | | (103 | ) | | (178 | ) |
Loss on disposal of property, plant and equipment | — |
| | — |
| | (85 | ) | | — |
| (28 | ) | | — |
| | (28 | ) | | (85 | ) |
Partial pension settlement | — |
| | (59 | ) | | — |
| | (59 | ) | |
Release of assumed liability - United States Cellular Corporation (U.S. Cellular) asset acquisition | — |
| | 41 |
| | 20 |
| | 41 |
| |
Contract terminations | | — |
| | — |
| | (113 | ) | | — |
|
Gains from asset dispositions and exchanges | | — |
| | — |
| | 354 |
| | — |
|
Revision to estimate of a previously recorded reserve | | — |
| | — |
| | — |
| | 20 |
|
Total | $ | (230 | ) | | $ | (131 | ) | | $ | (490 | ) | | $ | (442 | ) | $ | (47 | ) | | $ | (230 | ) | | $ | 80 |
| | $ | (490 | ) |
Other, net represented an expense of $47 million and a benefit of $80 million in the three and nine-month periods ended December 31, 2016, respectively. During the three and nine-month periods ended December 31, 2016, we recognized severance and exit costs expense of $19 million and $30 million, respectively. During the nine-month period ended December 31, 2016, we recorded a $103 million charge associated with a state tax matter, a $354 million non-cash gain as a result of spectrum license exchanges with other carriers and $113 million of contract terminations that were primarily related to the termination of our pre-existing wholesale arrangement with nTelos as a result of the Shentel transaction. During the three and nine-month periods ended December 31, 2016, we recorded a $28 million loss on disposal of property, plant and equipment related to cell site construction costs that are no longer recoverable as a result of changes in our network plans.
Other, net represented an expense of $230 million and $490 million in the three and nine-month periods ended December 31, 2015, respectively. During the three and nine-month periods ended December 31, 2015, we recognized accruals of $21 million and $178 million, respectively, for ongoing legal matters. In addition, we recognized severance and exit costs forin the three and nine-month periods ended December 31, 2015, which included $176 million and $194 million, respectively, of severance primarily associated with reductions in our work force and $33 million and $53 million, respectively, of lease and access exit costs primarily associated with tower and cell site leasessites and backhaul access contracts for which we will no longer be receiving any economic benefit. During the nine-month period ended December 31, 2015, we recorded an $85 million loss on disposal of property, plant and equipment primarily related to cell site construction costs that are no longer recoverable as a result of changes in the Company'sour network plans. As a result of the May 2013 U.S. Cellular asset acquisition, we recorded a liability related to network shutdown costs, which primarily consisted of lease exit costs, for which we agreed to reimburse U.S. Cellular. During the three monththree-month period ended June 30, 2015, we revised our estimate and, asof a result, we reduced thepreviously recorded reserve, resulting in approximately $20 million of income.
Other, net represented an expense of $131 million and $442 million in the three and nine-month periods ended December 31, 2014, respectively. Severance and exit costs for the three and nine-month periods ended December 31, 2014 included $3 million and $272 million, respectively, of severance primarily associated with reductions in force and $7 million and $20 million, respectively, of lease exit costs primarily associated with facility closures as well as the network modernization plan. In addition, we recognized $12 million and $41 million during the three and nine-month periods ended December 31, 2014, respectively, of costs related to payments that will continue to be made under our backhaul access contracts for which we will no longer be receiving any economic benefit. Litigation expense of $91 million in both the three and nine-month periods ended December 31, 2014, represents legal reserves for various pending legal suits and proceedings. Partial pension settlement is the result of the Company’s Board of Directors approving a plan amendment to the Sprint Retirement Pension Plan (Plan) to offer certain terminated participants, who had not begun to receive Plan benefits, the opportunity to voluntarily elect to receive their benefits as an immediate a lump sum distribution. The lump sum distribution created a settlement event that resulted in a $59 million charge in both the three and nine-month periods ended December 31,
2014, respectively. As a result of the May 2013 U.S. Cellular asset acquisition, we recorded a liability related to network shutdown costs for which we agreed to reimburse U.S. Cellular. During the quarter ended December 31, 2014, we identified favorable trends in actual costs and, as a result, we released some of the reserve, resulting in a gain of approximately $41 million in both the three and nine-month periods ended December 31, 2014, respectively.
Interest Expense
Interest expense increased $40$73 million, or 8%13%, and $102$234 million, or 7%14%, in the three and nine-month periods ended December 31, 2015,2016, respectively, compared to the same periods in 2014,2015, primarily due to interest associated with $1.5 billion aggregate principal amount of notes issued in February 2015.the Network Equipment Sale-Leaseback, the Handset Sale-Leaseback Tranche 2, the unsecured financing facility and the Spectrum Financing transaction. The effective interest rate, which includes capitalized interest, on the weighted average long-term debt balance of $33.9$38.4 billion and $34.0$37.1 billion was 6.5% in each of6.6% and 6.8% for the three and nine-month periods ended December 31, 2015,2016, respectively. The effective interest rate, which includes capitalized interest, on the weighted average
long-term debt balance of $32.3$33.7 billion and $32.5$33.8 billion was 6.4% in each of6.6% for both the three and nine-month periods ended December 31, 2014,2015, respectively. See “Liquidity and Capital Resources” for more information on the Company's financing activities.
Other (expense) income, net
Other (expense) income, net represented an expense of $60 million and $67 million in the three and nine-month periods ended December 31, 2016, respectively. The expense was primarily due to recognizing the remaining debt finance costs of $74 million associated with the terminated unsecured financing facility in the three-month period ended December 31, 2016.
Income Taxes
The income tax expense of $111 million and $286 million for the three and nine-month periods ended December 31, 2016, respectively, represented consolidated effective tax rates of approximately (30)% and (45)%, respectively. Income tax expense for both periods was primarily attributable to tax expense resulting from taxable temporary differences from amortization of FCC licenses and tax expense to increase our deferred tax liability on FCC licenses temporary differences. Income tax expense for the nine-month period ended December 31, 2016 included tax expense on pre-tax gains from spectrum license exchanges during the period, partially offset by tax benefits from the reversal of certain state income tax valuation allowance on deferred tax assets. The income tax expense of $97 million and $126 million for the three and nine-month periods ended December 31, 2015, respectively, represented consolidated effective tax rates of approximately (13)% and (10)%, respectively. Income tax expense for both periods was primarily attributable to tax expense resulting from taxable temporary differences from amortization of FCC licenses. The income tax expense for the nine-month period ended December 31, 2015 was partially offset by tax benefits from changes in state income tax laws enacted during the periods. The income tax benefit of $657 million and $601 million for the three and nine-month periods ended December 31, 2014, respectively, represented consolidated effective tax rates of approximately 22% and 16%, respectively. The income tax benefit for both periods was primarily attributable to recognition of a tax benefit on the $1.9 billion Sprint trade name impairment loss partially offset by tax expense on taxable temporary differences from the amortization of FCC licenses for income tax purposes.
Segment Earnings - Wireless
Wireless segment earnings are a function of wireless service revenue, the sale of wireless devices (handsets and tablets), broadband devices, connected devices and accessories, leasing wireless devices, in addition to costs to acquire subscribers and network and interconnection costs to serve those subscribers, as well as other Wireless segment operating expenses. The costs to acquire our subscribers include the net cost at which we sell our devices, referred to as equipment net subsidies, as well as the marketing and sales costs incurred to attract those subscribers. Network costs primarily represent switch and cell site costs, backhaul costs, and interconnection costs, which generally consist of per-minute usage fees and roaming fees paid to other carriers. The remaining costs associated with operating the Wireless segment include the costs to operate our customer care organization and administrative support. Wireless service revenue, costs to acquire subscribers, and variable network and interconnection costs fluctuate with the changes in our subscriber base and their related usage, but some cost elements do not fluctuate in the short termshort-term with these changes.
As shown by the table above under "Consolidated Results of Operations," Wireless segment earnings represented almost all of our total Consolidatedconsolidated segment earnings for the three and nine-month periods ended December 31, 2016 and 2015. Within the Wireless segment, postpaid wireless services represent the most significant contributors to earnings, and is driven by the number of postpaid subscribers toutilizing our services, as well as ARPU.average revenue per user (ARPU). The wireless industry is subject to competition to retain and acquire subscribers of wireless services. Most markets in which we operate have high rates of penetration for wireless services.
Device Financing Programs
In lateSeptember 2013, we introduced an installment billing program that allows subscribers to purchase a device by paying monthly installments generally over 24 months. In lateSeptember 2014, Sprintwe introduced a leasing program, whereby qualified subscribers can lease a device for a contractual period of time.
Under the installment billing program, we recognize a majority of the revenue associated with future expected installment payments at the time of sale of the device. As compared to our traditional subsidized programs,subsidy program, this results in better alignment of the equipment revenue with the cost of the device, which significantly reduces the amount of equipment net subsidy recognized in our operating results.device. The impact to Wireless earnings from the sale of devices under our installment billing program is neutral except for the impact from the time value of money element related to the imputed interest on the installment receivable.
Under the leasing program, qualified subscribers can lease a device for a contractual period of time. At the end of the lease term, the subscriber has the option to turn in their device, continue leasing their device, or purchase the device. As of December 31, 2015,2016, substantially all of our device leases were classified as operating leases. As a result, at lease inception, the devices are reclassified from inventory to property, plant and equipment when leased through Sprint's direct channels. For
leases in the indirect channel, we purchase the devices at lease inception from the dealer, which is then capitalized to property, plant and equipment. While a majority of the revenue associated with installment sales is recognized at the time of sale along with the related cost of products, lease revenue is recorded monthly over the term of the lease and the cost of the device is depreciated down to its estimated residual value generally over the lease term. During the three and nine-month periods ended December 31, 2016 and 2015, we leased devices through our Sprint direct channels totaling approximately $1.1 billion, $2.3 billion, $1.0 billion and $2.6 billion, respectively. These devices were reclassified from inventory to property, plant and equipment and, as such, the cost of the device was not recorded as cost of products compared to when purchased under the installment billing or the traditional subsidy program, which resulted in a significant positive impact to Wireless segment earnings. Depreciation expense incurred on all leased devices for the three and nine-month periods ended December 31, 2016 and 2015, was $837 million, $2.2 billion, $535 million and $1.2 billion, respectively. Depreciation expense incurred on all leased devices for three and nine-month periods ended December 31, 2014 was $54 million and $56 million, respectively. Because a substantial portion of the cost of a device leased through our direct channel is not recorded as cost of products but rather as depreciation expense, there is a positive impact to Wireless segment earnings compared to when purchased under the installment billing or traditional subsidized programs. If the mix of leased devices continues to increase, we expect this positive impact on the financial results of Wireless segment earnings to continue and depreciation expense to increase. However, this benefit to Wireless segment earnings will bewas partially offset by the Handset Sale-Leaseback Tranche 1 (Tranche 1) transaction that was consummated in November 2015 wherewhereby we sold and subsequently leased back certain devices leased to our customers (see Handset Sale-Leaseback Tranche 1 in Liquidity"Liquidity and Capital ResourcesResources" for further details). As a result, ourthe cost to us of the devices sold to Mobile Leasing Solutions, LLC (MLS) willunder Tranche 1 was no longer be recorded as depreciation expense, but rather was recognized as rent expense within “Cost of products” in the consolidated statements of comprehensive loss during the leaseback periods. Asperiods until Tranche 1 was terminated in conjunction with the repurchase of devices in December 31, 2015, the estimated rental payments due to MLS were $176 million for the remaining fiscal year 2015, $673 million for fiscal year 2016, and $113 million for fiscal year 2017.2016.
Our device leasing and installment billing programs require a greater use of operating cash flows in the earlier part of the device contracts as our subscribers will generally pay less upfront than a traditional subsidized programs.subsidy program. The Accounts Receivable Facility and the Handset Sale-Leaseback transactions (See Accounts Receivable Facility and Handset Sale-Leaseback discussed in Liquidity"Liquidity and Capital Resources for further details)Resources" were designed to mitigate the significant use of cash from purchasing devices from OEMsoriginal equipment manufacturers (OEMs) to fulfill our installment billing and leasing programs.
Wireless Segment Earnings Trends
Sprint is offeringoffers lower monthly service fees without a traditional contract as an incentive to attract subscribers to certain of our service plans. These lower rates for service are available whether the subscriber brings their own handset, pays the full or near full retail price of the handset, purchases the handset under our installment billing program, or leases their handset through our leasing program. As the adoption rates of these plans increase throughout our base of subscribers, we expect our postpaid average revenue per user (ARPU)ARPU to continue to decline as a result of lower pricing associated with our new serviceprice plans offered in conjunction with device financing options as compared to our traditional subsidized programs,subsidy program, which reflect higher service revenue and lower equipment revenue; however, we also expect reducedhigher equipment net subsidy expenserevenue due to the installment billing and leasing programs to substantially offset these declines. Since inception, the combination of lower priced plans, and our installment billing and leasing programs have been accretive to Wireless segment earnings. We expect that trend to continue with the magnitude of the impact being dependent upon the rate of subscriber adoption. We also expect that the installment billing and leasing programs will require a greater use of operating cash flows in the earlier part of the contracts as the subscriber will generally pay less upfront than traditional subsidized programs.
We began to experience net losses of postpaid handset subscribers in mid-2013. Since the release of our new price plans offered in conjunction with device financing options, results have shown improvement in trends of handset subscribers; however, there can be no assurance that this trend will continue. We have taken initiatives to provide the best value in wireless service while continuing to enhance our network performance, coverage and capacity in order to attract and retain valuable handset subscribers. In addition, we are evaluating our cost model to operationalize a more effective cost structure, which we believe may help to relieve somestructure.
As a result of canceling our leaseback in connection with the pressuretermination of Tranche 1, we expect on earnings.an increase to wireless segment earnings of approximately $0.2 billion and a neutral impact to net loss during calendar year 2017.
The following table provides an overview of the results of operations of our Wireless segment.
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| December 31, | | December 31, | December 31, | | December 31, |
Wireless Segment Earnings | 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 | | 2016 | | 2015 |
| (in millions) | (in millions) |
Postpaid | $ | 4,813 |
| | $ | 5,202 |
| | $ | 14,670 |
| | $ | 16,132 |
| $ | 4,686 |
| | $ | 4,813 |
| | $ | 14,184 |
| | $ | 14,670 |
|
Prepaid | 1,224 |
| | 1,215 |
| | 3,783 |
| | 3,633 |
| 1,077 |
| | 1,224 |
| | 3,371 |
| | 3,783 |
|
Other(1) | 21 |
| | 106 |
| | 178 |
| | 359 |
| — |
| | 21 |
| | — |
| | 178 |
|
Retail service revenue | 6,058 |
| | 6,523 |
| | 18,631 |
| | 20,124 |
| 5,763 |
| | 6,058 |
| | 17,555 |
| | 18,631 |
|
Wholesale, affiliate and other | 188 |
| | 209 |
| | 586 |
| | 585 |
| 183 |
| | 188 |
| | 509 |
| | 586 |
|
Total service revenue | 6,246 |
| | 6,732 |
| | 19,217 |
| | 20,709 |
| 5,946 |
| | 6,246 |
| | 18,064 |
| | 19,217 |
|
Cost of services (exclusive of depreciation and amortization) | (2,031 | ) | | (1,902 | ) | | (6,147 | ) | | (5,939 | ) | (1,649 | ) | | (2,031 | ) | | (5,226 | ) | | (6,147 | ) |
Service gross margin | 4,215 |
| | 4,830 |
| | 13,070 |
| | 14,770 |
| 4,297 |
| | 4,215 |
| | 12,838 |
| | 13,070 |
|
Service gross margin percentage | 67 | % | | 72 | % | | 68 | % | | 71 | % | 72 | % | | 67 | % | | 71 | % | | 68 | % |
Equipment revenue | 1,424 |
| | 1,701 |
| | 3,509 |
| | 3,846 |
| 2,226 |
| | 1,424 |
| | 5,556 |
| | 3,509 |
|
Cost of products | (1,589 | ) | | (2,952 | ) | | (4,244 | ) | | (7,482 | ) | |
Equipment net subsidy | (165 | ) | | (1,251 | ) | | (735 | ) | | (3,636 | ) | |
Equipment net subsidy percentage | (12 | )% | | (74 | )% | | (21 | )% | | (95 | )% | |
Cost of products (exclusive of depreciation and amortization) | | (1,985 | ) | | (1,589 | ) | | (5,097 | ) | | (4,244 | ) |
Selling, general and administrative expense | (2,041 | ) | | (2,545 | ) | | (6,273 | ) | | (6,937 | ) | (2,032 | ) | | (2,041 | ) | | (5,797 | ) | | (6,273 | ) |
Loss on disposal of property, plant and equipment | (143 | ) | | — |
| | (143 | ) | | — |
| (109 | ) | | (143 | ) | | (340 | ) | | (143 | ) |
Wireless segment earnings | $ | 1,866 |
| | $ | 1,034 |
| | $ | 5,919 |
| | $ | 4,197 |
| $ | 2,397 |
| | $ | 1,866 |
| | $ | 7,160 |
| | $ | 5,919 |
|
___________________
| |
(1) | Represents service revenue primarily related to the acquisition of Clearwire Acquisition on July 9, 2013. |
Service Revenue
Our Wireless segment generates service revenue from the sale of wireless services and the sale of wholesale and other services. Service revenue consists of fixed monthly recurring charges, variable usage charges and miscellaneous fees such as activation fees, directory assistance, roaming, equipment protection, late payment and early termination charges, and certain regulatory related fees, net of service credits.
The ability of our Wireless segment to generate service revenue is primarily a function of:
revenue generated from each subscriber, which in turn is a function of the types and amount of services utilized by each subscriber and the rates charged for those services; and
the number of subscribers that we serve, which in turn is a function of our ability to retain existing subscribers and acquire new subscribers.
Retail comprises those subscribers to whom Sprint directly provides wireless services, whether those services are provided on a postpaid or a prepaid basis. We also categorize our retail subscribers as prime and subprime based upon subscriber credit profiles. We use proprietary scoring systems that measure the credit quality of our subscribers using several factors, such as credit bureau information, subscriber credit risk scores and service plan characteristics. Payment history is subsequently monitored to further evaluate subscriber credit profiles. Wholesale and affiliates are those subscribers who are served through MVNO and affiliate relationships and other arrangements. Under the MVNO relationships, wireless services are sold by Sprint to other companies that resell those services to subscribers.
Retail service revenue decreased $465$295 million, or 7%5%, and $1.5$1.1 billion, or 7%6%, for the three and nine-month periods ended December 31, 2015,2016, respectively, compared to the same periods in 2014.2015. The decrease was primarily due to a lower average revenue per postpaid subscriber driven by growthan increase in both postpaid subscribers on our newlower price plans, combined with a decrease in average prepaid subscribers driven by higher churn and tablet sales.the impact of the shutdown of the Clearwire WiMAX network on March 31, 2016. The decrease was partially offset by an increase in average postpaid subscribers mostly duesubscribers.
Effective January 1, 2017, we entered into a new Master Services Agreement with a vendor to improved churn.provide post-sale device support services (including device insurance) to subscribers. Under the new agreement, the vendor bears the risk of loss with regards to claims and related costs, which Sprint will no longer incur. Sprint will remit premiums to the vendor who will pay Sprint a monthly recurring commission per subscriber for the duration of the agreement. Additionally, under the terms of the new agreement, the vendor will be the primary obligor in the agreement with the subscriber and, as such, revenue will be accounted for and presented on a net basis, whereas historically the amounts were presented on a gross basis. The change is expected to result in reductions in service revenue by approximately $700 million to $800 million in calendar
year 2017. Because the vendor, not Sprint, will be fulfilling the services, we expect the reductions in service revenue to be more than offset by greater reductions in cost of services expense.
Wholesale, affiliate and other revenues decreased $21$5 million, or 10%3%, and remained relatively flat$77 million, or 13%, for the three and nine-month periods ended December 31, 2015,2016, respectively, compared to the same periods in 2014. The decrease in the three-month period ended December 31, 2015, was primarily due to a decreasedecline in Lifeline and prepaid resellers combined with the impact of the shutdown of the Clearwire WiMAX network, partially offset by growth in connected devices in both periods and an increase in imputed interest associated with installment billing on handsets combined within the decline in prepaid resellers and the impact of the expected shutdown of the Clearwire WiMAX network.three-month period. Approximately 62%66% of our total wholesale and affiliate subscribers represent connected devices. These devices generate revenue from usage, which varies depending on the solution being utilized.
Average Monthly Service Revenue per Subscriber and Subscriber Trends
The table below summarizes average number of retail subscribers. Additional information about the number of subscribers, net additions (losses) to subscribers, and average rates of monthly postpaid and prepaid subscriber churn for each quarter since the quarter ended June 30, 20142015 may be found in the tables on the following pages.
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| December 31, | | December 31, | December 31, | | December 31, |
| 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 | | 2016 | | 2015 |
| (subscribers in thousands) | (subscribers in thousands) |
Average postpaid subscribers | 30,683 |
| | 29,871 |
| | 30,443 |
| | 30,108 |
| 31,431 |
| | 30,683 |
| | 31,153 |
| | 30,443 |
|
Average prepaid subscribers | 14,966 |
| | 15,324 |
| | 15,442 |
| | 15,272 |
| 12,997 |
| | 14,966 |
| | 13,662 |
| | 15,442 |
|
Average retail subscribers | 45,649 |
| | 45,195 |
| | 45,885 |
| | 45,380 |
| 44,428 |
| | 45,649 |
| | 44,815 |
| | 45,885 |
|
The table below summarizes ARPU. Additional information about ARPU for each quarter since the quarter ended June 30, 20142015 may be found in the tables on the following pages.
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| December 31, | | December 31, | December 31, | | December 31, |
| 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 | | 2016 | | 2015 |
ARPU(1): | | | | | | | | | | | | | | |
Postpaid | $ | 52.41 |
| | $ | 58.63 |
| | $ | 53.86 |
| | $ | 60.18 |
| $ | 49.70 |
| | $ | 52.41 |
| | $ | 50.59 |
| | $ | 53.86 |
|
Prepaid | $ | 27.49 |
| | $ | 27.61 |
| | $ | 27.89 |
| | $ | 27.77 |
| $ | 27.61 |
| | $ | 27.49 |
| | $ | 27.41 |
| | $ | 27.89 |
|
Average retail | $ | 44.24 |
| | $ | 48.11 |
| | $ | 45.12 |
| | $ | 49.27 |
| $ | 43.24 |
| | $ | 44.24 |
| | $ | 43.53 |
| | $ | 45.12 |
|
_______________________
| |
(1) | ARPU is calculated by dividing service revenue by the sum of the monthly average number of subscribers in the applicable service category. Changes in average monthly service revenue reflect subscribers for either the postpaid or prepaid service category who change rate plans, the level of voice and data usage, the amount of service credits which are offered to subscribers, plus the net effect of average monthly revenue generated by new subscribers and deactivating subscribers. |
Postpaid ARPU for the three and nine-month periods ended December 31, 20152016 decreased compared to the same periods in 20142015 primarily due to the impact of subscriber migration to many of our new service plans associated with device financing options, resulting in lower service fees, combined with ongoing growth in sales of tablets, which carry a lower revenue per subscriber.fees. We expect Sprint platform postpaid ARPU to continue to decline during fiscal year 20152016 as a result of lower service fees associated with many of our new price plans and a continued increaseoffered in tablet mix that carries a lower ARPU;conjunction with device financing options; however, as a result of our installment billing and leasing programs, we expect reducedincreasing equipment net subsidy expenserevenues to more than offset these declines. Prepaid ARPU decreased for the three-month period ended December 31, 2015 and increased for the nine-month period ended December 31, 20152016 compared to the same periodsperiod in 2014. The decrease for the three-month period was2015 primarily due to a decreaseincreased competition resulting in average subscribers in the Transactions prepaid subscribers due to the expected shutdown of the WiMAX network, in addition to a decline in average subscribers primarily in the Virgin Mobile brand combined with the revenue impact of subscribers choosing lower priced plans in both the Virgin Mobile and Boost brands due tobrand. Prepaid ARPU for the three-month period ended December 31, 2016 increased competition, partially offset by an increase in average subscribersprimarily in the prepaid Boost brand that carries a higher ARPU. The increase for the nine-month period was primarily driven by an increase in average prepaid Boost subscribers that carry a higher ARPU compared to other prepaid brands, partially offset by the revenue impact of subscribers choosing lower priced plans in both the Boost and Virgin Mobile brands.brand.
The following table shows (a) net additions (losses) of wireless subscribers, (b) our total subscribers, and (c) end of period connected device subscribers as of the end of each quarterly period beginning with the quarter ended June 30, 2014.2015.
| | | June 30, 2014 | | Sept 30, 2014 | | Dec 31, 2014 | | March 31, 2015 | | June 30, 2015 | | Sept 30, 2015 | | Dec 31, 2015 | June 30, 2015 | | Sept 30, 2015 | | Dec 31, 2015 | | March 31, 2016 | | June 30, 2016 | | Sept 30, 2016 | | Dec 31, 2016 |
Net additions (losses) (in thousands)(1) | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sprint platform(2): | | | | | | | | | | | | | | | | | | | | | | | | | | |
Postpaid(3) | (181 | ) | | (272 | ) | | 30 |
| | 211 |
| | 310 |
| | 378 |
| | 501 |
| |
Prepaid(3) | (542 | ) | | 35 |
| | 410 |
| | 546 |
| | (366 | ) | | (188 | ) | | (491 | ) | |
Postpaid | | 310 |
| | 378 |
| | 501 |
| | 56 |
| | 180 |
| | 344 |
| | 405 |
|
Prepaid | | (366 | ) | �� | (188 | ) | | (491 | ) | | (264 | ) | | (331 | ) | | (427 | ) | | (501 | ) |
Wholesale and affiliates | 503 |
| | 827 |
| | 527 |
| | 492 |
| | 731 |
| | 866 |
| | 481 |
| 731 |
| | 866 |
| | 481 |
| | 655 |
| | 528 |
| | 823 |
| | 673 |
|
Total Sprint platform | (220 | ) | | 590 |
| | 967 |
| | 1,249 |
| | 675 |
| | 1,056 |
| | 491 |
| 675 |
| | 1,056 |
| | 491 |
| | 447 |
| | 377 |
| | 740 |
| | 577 |
|
Transactions: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Postpaid | (64 | ) | | (64 | ) | | (49 | ) | | (41 | ) | | (60 | ) | | (70 | ) | | (238 | ) | (60 | ) | | (70 | ) | | (238 | ) | | — |
| | — |
| | — |
| | — |
|
Prepaid | (77 | ) | | (55 | ) | | (39 | ) | | (18 | ) | | (66 | ) | | (64 | ) | | (231 | ) | (66 | ) | | (64 | ) | | (231 | ) | | — |
| | — |
| | — |
| | — |
|
Wholesale | 27 |
| | 13 |
| | 13 |
| | 22 |
| | (22 | ) | | (12 | ) | | (241 | ) | (22 | ) | | (12 | ) | | (241 | ) | | — |
| | — |
| | — |
| | — |
|
Total Transactions | (114 | ) | | (106 | ) | | (75 | ) | | (37 | ) | | (148 | ) | | (146 | ) | | (710 | ) | (148 | ) | | (146 | ) | | (710 | ) | | — |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total retail postpaid | (245 | ) | | (336 | ) | | (19 | ) | | 170 |
| | 250 |
| | 308 |
| | 263 |
| 250 |
| | 308 |
| | 263 |
| | 56 |
| | 180 |
| | 344 |
| | 405 |
|
Total retail prepaid | (619 | ) | | (20 | ) | | 371 |
| | 528 |
| | (432 | ) | | (252 | ) | | (722 | ) | (432 | ) | | (252 | ) | | (722 | ) | | (264 | ) | | (331 | ) | | (427 | ) | | (501 | ) |
Total wholesale and affiliate | 530 |
| | 840 |
| | 540 |
| | 514 |
| | 709 |
| | 854 |
| | 240 |
| 709 |
| | 854 |
| | 240 |
| | 655 |
| | 528 |
| | 823 |
| | 673 |
|
Total Wireless | (334 | ) | | 484 |
| | 892 |
| | 1,212 |
| | 527 |
| | 910 |
| | (219 | ) | 527 |
| | 910 |
| | (219 | ) | | 447 |
| | 377 |
| | 740 |
| | 577 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
End of period subscribers (in thousands)(1) | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sprint platform(2): | | | | | | | | | | | | | | | | | | | | | | | | | | |
Postpaid(3)(4) | 29,737 |
| | 29,465 |
| | 29,495 |
| | 29,706 |
| | 30,016 |
| | 30,394 |
| | 30,895 |
| 30,016 |
| | 30,394 |
| | 30,895 |
| | 30,951 |
| | 30,945 |
| | 31,289 |
| | 31,694 |
|
Prepaid(3)(5) | 14,715 |
| | 14,750 |
| | 15,160 |
| | 15,706 |
| | 15,340 |
| | 15,152 |
| | 14,661 |
| 15,340 |
| | 15,152 |
| | 14,661 |
| | 14,397 |
| | 13,974 |
| | 13,547 |
| | 11,812 |
|
Wholesale and affiliates(5)(6) | 8,879 |
| | 9,706 |
| | 10,233 |
| | 10,725 |
| | 11,456 |
| | 12,322 |
| | 12,803 |
| 11,456 |
| | 12,322 |
| | 12,803 |
| | 13,458 |
| | 14,534 |
| | 15,357 |
| | 16,009 |
|
Total Sprint platform | 53,331 |
| | 53,921 |
| | 54,888 |
| | 56,137 |
| | 56,812 |
| | 57,868 |
| | 58,359 |
| 56,812 |
| | 57,868 |
| | 58,359 |
| | 58,806 |
| | 59,453 |
| | 60,193 |
| | 59,515 |
|
Transactions(6): | | | | | | | | | | | | | | |
Transactions(7): | | | | | | | | | | | | | | |
Postpaid | 522 |
| | 458 |
| | 409 |
| | 368 |
| | 308 |
| | 238 |
| | — |
| 308 |
| | 238 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Prepaid | 473 |
| | 418 |
| | 379 |
| | 361 |
| | 295 |
| | 231 |
| | — |
| 295 |
| | 231 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Wholesale | 227 |
| | 240 |
| | 253 |
| | 275 |
| | 253 |
| | 241 |
| | — |
| 253 |
| | 241 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total Transactions | 1,222 |
| | 1,116 |
| | 1,041 |
| | 1,004 |
| | 856 |
| | 710 |
| | — |
| 856 |
| | 710 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total retail postpaid(3)(4) | 30,259 |
| | 29,923 |
| | 29,904 |
| | 30,074 |
| | 30,324 |
| | 30,632 |
| | 30,895 |
| 30,324 |
| | 30,632 |
| | 30,895 |
| | 30,951 |
| | 30,945 |
| | 31,289 |
| | 31,694 |
|
Total retail prepaid(3)(5) | 15,188 |
| | 15,168 |
| | 15,539 |
| | 16,067 |
| | 15,635 |
| | 15,383 |
| | 14,661 |
| 15,635 |
| | 15,383 |
| | 14,661 |
| | 14,397 |
| | 13,974 |
| | 13,547 |
| | 11,812 |
|
Total wholesale and affiliates(5)(6) | 9,106 |
| | 9,946 |
| | 10,486 |
| | 11,000 |
| | 11,709 |
| | 12,563 |
| | 12,803 |
| 11,709 |
| | 12,563 |
| | 12,803 |
| | 13,458 |
| | 14,534 |
| | 15,357 |
| | 16,009 |
|
Total Wireless | 54,553 |
| | 55,037 |
| | 55,929 |
| | 57,141 |
| | 57,668 |
| | 58,578 |
| | 58,359 |
| 57,668 |
| | 58,578 |
| | 58,359 |
| | 58,806 |
| | 59,453 |
| | 60,193 |
| | 59,515 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Supplemental data - connected devices | | | | | | | | | | | | | | | | | | | | | | | | | | |
End of period subscribers (in thousands)(4) | | | | | | | | | | | | | | | | | | | | | | | | | | |
Retail postpaid | 988 |
| | 1,039 |
| | 1,180 |
| | 1,320 |
| | 1,439 |
| | 1,576 |
| | 1,676 |
| 1,439 |
| | 1,576 |
| | 1,676 |
| | 1,771 |
| | 1,822 |
| | 1,874 |
| | 1,960 |
|
Wholesale and affiliates | 4,192 |
| | 4,635 |
| | 5,175 |
| | 5,832 |
| | 6,620 |
| | 7,338 |
| | 7,930 |
| 6,620 |
| | 7,338 |
| | 7,930 |
| | 8,575 |
| | 9,244 |
| | 9,951 |
| | 10,594 |
|
Total | 5,180 |
| | 5,674 |
| | 6,355 |
| | 7,152 |
| | 8,059 |
| | 8,914 |
| | 9,606 |
| 8,059 |
| | 8,914 |
| | 9,606 |
| | 10,346 |
| | 11,066 |
| | 11,825 |
| | 12,554 |
|
_______________________
| |
(1) | A subscriber is defined as an individual line of service associated with each device activated by a customer. Subscribers that transfer from their original service category classification to another platform, or another service line within the same platform, are reflected as a net loss to the original service category and a net addition to their new service category. There is no net effect for such subscriber changes to the total wireless net additions (losses) or end of period subscribers. |
| |
(2) | Sprint platform refers to the Sprint network that supports the wireless service we provide through our multiple brands. |
| |
(3) | InAs part of the Shentel transaction, 186,000 and 92,000 subscribers were transferred from postpaid and prepaid, respectively, to affiliates. An additional 270,000 of nTelos' subscribers are now part of our affiliate relationship with Shentel and are being reported in wholesale and affiliate subscribers during the quarter ended SeptemberJune 30, 2015, approximately 175,000 subscribers were reported as transferred out of the prepaid subscriber base and into the postpaid subscriber base as a result of their decision to choose to participate in a program offered to certain tenured prepaid subscribers. Moreover, in the quarter ended December 31, 2015, the program has been implemented more broadly for the prepaid base. As a result, the 175,000 subscribers previously reported as postpaid last quarter were re-classed to the prepaid subscriber base and the prior period was restated for better comparability across periods. See the discussion under "Subscriber Results" for additional details.2016. |
| |
(4) | End of period connected devices are included in total retail postpaid or wholesale and affiliates end of period subscriber totals for all periods presented. |
| |
(5) | During the three-month period ended December 31, 2016, the Company aligned all prepaid brands, including prepaid affiliate subscribers, under one churn and retention program. As a result of this change, end of period prepaid and affiliate subscribers as of December 31, 2016 were reduced by 1,234,000 and 21,000, respectively. See "Subscriber Results" below for more information. |
| |
(6) | Subscribers through some of our MVNO relationships have inactivity either in voice usage or primarily as a result of the nature of the device, where activity only occurs when data retrieval is initiated by the end-user and may occur infrequently. Although we continue to provide these subscribers access to our network through our MVNO relationships, approximately 1,809,0001,750,000 subscribers at December 31, 20152016 through these MVNO relationships have been inactive for at least six months, with no associated revenue during the six-month period ended December 31, 2015.2016. |
| |
(6)(7) | End of period transactions subscribers reflected postpaid, prepaid and wholesale subscribers acquired as a result of the Clearwire Acquisition. Asacquisition of December 31, 2015, we haveClearwire. We had no remaining transaction subscribers primarily due to the expected shut downshutdown of the WiMAX network.network on March 31, 2016. |
The following table shows our average rates of monthly postpaid and prepaid subscriber churn as of the end of each quarterly period beginning with the quarter ended June 30, 2014.2015.
| | | June 30, 2014 | | Sept 30, 2014 | | Dec 31, 2014 | | March 31, 2015 | | June 30, 2015 | | Sept 30, 2015 | | Dec 31, 2015 | June 30, 2015 | | Sept 30, 2015 | | Dec 31, 2015 | | March 31, 2016 | | June 30, 2016 | | Sept 30, 2016 | | Dec 31, 2016 |
Monthly subscriber churn rate(1) | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sprint platform: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Postpaid | 2.05 | % | | 2.18 | % | | 2.30 | % | | 1.84 | % | | 1.56 | % | | 1.54 | % | | 1.62 | % | 1.56 | % | | 1.54 | % | | 1.62 | % | | 1.72 | % | | 1.56 | % | | 1.52 | % | | 1.67 | % |
Prepaid(2) | 4.44 | % | | 3.76 | % | | 3.94 | % | | 3.84 | % | | 5.08 | % | | 5.06 | % | | 5.82 | % | 5.08 | % | | 5.06 | % | | 5.82 | % | | 5.65 | % | | 5.55 | % | | 5.63 | % | | 5.80 | % |
Transactions(3): | | | | | | | | | | | | | | |
Transactions(2): | | | | | | | | | | | | | | |
Postpaid | 4.15 | % | | 4.66 | % | | 4.09 | % | | 3.87 | % | | 6.07 | % | | 8.55 | % | | NM |
| 6.07 | % | | 8.55 | % | | NM |
| | NM |
| | NM |
| | NM |
| | NM |
|
Prepaid | 6.28 | % | | 5.70 | % | | 4.95 | % | | 3.77 | % | | 7.23 | % | | 8.51 | % | | NM |
| 7.23 | % | | 8.51 | % | | NM |
| | NM |
| | NM |
| | NM |
| | NM |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total retail postpaid | 2.09 | % | | 2.22 | % | | 2.33 | % | | 1.87 | % | | 1.61 | % | | 1.61 | % | | 1.87 | % | 1.61 | % | | 1.61 | % | | 1.87 | % | | 1.72 | % | | 1.56 | % | | 1.52 | % | | 1.67 | % |
Total retail prepaid | 4.50 | % | | 3.81 | % | | 3.97 | % | | 3.84 | % | | 5.13 | % | | 5.12 | % | | 6.29 | % | 5.13 | % | | 5.12 | % | | 6.29 | % | | 5.65 | % | | 5.55 | % | | 5.63 | % | | 5.80 | % |
_______________________
| |
(1) | Churn is calculated by dividing net subscriber deactivations for the quarter by the sum of the average number of subscribers for each month in the quarter. For postpaid accounts comprising multiple subscribers, such as family plans and enterprise accounts, net deactivations are defined as deactivations in excess of subscriber activations in a particular account within 30 days. Postpaid and Prepaidprepaid churn consist of both voluntary churn, where the subscriber makes his or her own determination to cease being a subscriber, and involuntary churn, where the subscriber's service is terminated due to a lack of payment or other reasons. |
| |
(2) | In the quarter ended June 30, 2015, the Company revised its prepaid subscriber reporting to remove one of its rules that matches customers who disconnect and then re-engage within a specified period of time. This enhancement, which we believe represents a more precise churn calculation, had no impact on net additions, but did result in reporting higher deactivations and higher gross additions in the quarter. Without this revision, Sprint platform prepaid churn in the quarter would have been 4.33% and relatively flat compared to the same period in 2014. End of period prepaid subscribers and net prepaid subscriber additions for all periods presented were not impacted by the change. |
| |
(3) | Subscriber churn related to the Clearwire Acquisition.acquisition of Clearwire. |
The following table shows our postpaid and prepaid ARPU as of the end of each quarterly period beginning with the quarter ended June 30, 2014.2015.
| | | June 30, 2014 | | Sept 30, 2014 | | Dec 31, 2014 | | March 31, 2015 | | June 30, 2015 | | Sept 30, 2015 | | Dec 31, 2015 | June 30, 2015 | | Sept 30, 2015 | | Dec 31, 2015 | | March 31, 2016 | | June 30, 2016 | | Sept 30, 2016 | | Dec 31, 2016 |
ARPU | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sprint platform: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Postpaid | $ | 62.07 |
| | $ | 60.58 |
| | $ | 58.90 |
| | $ | 56.94 |
| | $ | 55.48 |
| | $ | 53.99 |
| | $ | 52.48 |
| $ | 55.48 |
| | $ | 53.99 |
| | $ | 52.48 |
| | $ | 51.68 |
| | $ | 51.54 |
| | $ | 50.54 |
| | $ | 49.70 |
|
Prepaid | $ | 27.38 |
| | $ | 27.19 |
| | $ | 27.12 |
| | $ | 27.50 |
| | $ | 27.81 |
| | $ | 27.66 |
| | $ | 27.44 |
| $ | 27.81 |
| | $ | 27.66 |
| | $ | 27.44 |
| | $ | 27.72 |
| | $ | 27.34 |
| | $ | 27.31 |
| | $ | 27.61 |
|
Transactions(1): | | | | | | | | | | | | | | | | | | | | | | | | | | |
Postpaid | $ | 39.16 |
| | $ | 39.69 |
| | $ | 39.85 |
| | $ | 40.28 |
| | $ | 40.47 |
| | $ | 40.62 |
| | $ | 31.62 |
| $ | 40.47 |
| | $ | 40.62 |
| | $ | 31.62 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Prepaid | $ | 45.15 |
| | $ | 45.52 |
| | $ | 45.80 |
| | $ | 46.68 |
| | $ | 46.10 |
| | $ | 45.82 |
| | $ | 34.61 |
| $ | 46.10 |
| | $ | 45.82 |
| | $ | 34.61 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total retail postpaid | $ | 61.65 |
| | $ | 60.24 |
| | $ | 58.63 |
| | $ | 56.72 |
| | $ | 55.31 |
| | $ | 53.87 |
| | $ | 52.41 |
| $ | 55.31 |
| | $ | 53.87 |
| | $ | 52.41 |
| | $ | 51.68 |
| | $ | 51.54 |
| | $ | 50.54 |
| | $ | 49.70 |
|
Total retail prepaid | $ | 27.97 |
| | $ | 27.73 |
| | $ | 27.61 |
| | $ | 27.95 |
| | $ | 28.18 |
| | $ | 27.97 |
| | $ | 27.49 |
| $ | 28.18 |
| | $ | 27.97 |
| | $ | 27.49 |
| | $ | 27.72 |
| | $ | 27.34 |
| | $ | 27.31 |
| | $ | 27.61 |
|
_______________________
| |
(1) | Subscriber ARPU related to the Clearwire Acquisition.acquisition of Clearwire. |
Subscriber Results
Sprint Platform Subscribers
Retail Postpaid — During the three-month period ended December 31, 2015,2016, net postpaid subscriber additions were 501,000405,000 compared to 30,000501,000 in the same period in 2014, inclusive of 82,000 and 189,000 net additions of tablets, respectively, which generally have a significantly2015. The lower ARPU as compared to other wireless subscribers. The primary driver for the net additions in the current quarter was our pricing plan promotions launched in the quarter combined with improving churn as subscribers benefit from the improved network quality.
During the three-month period ended September 30, 2015, we introduced a program to provide certain tenured Boost and Virgin Mobile prepaid subscribers with the opportunity to receive an extension of credit for their use of wireless service. Subscribers who opt-in to this program may also qualify for certain device offers and/or service credits. During the three-month period ended September 30, 2015, approximately 175,000 participating subscribers were migrated from the prepaiddriven by tablet subscriber base into the postpaid subscriber base under their respective Boost and Virgin Mobile brands. Moreover, in the three-month period ended December 31, 2015, the program has been implemented more broadly for the prepaid base. As a result, the 175,000 subscribers previously reported as postpaid last quarter were re-classed to the prepaid subscriber base and the prior period was restated for better comparability across periods.losses.
Retail Prepaid — During the three-month period ended December 31, 2015,2016, we lost 491,000501,000 net prepaid subscribers compared to additions of 410,000491,000 in the same period in 2014.2015. The net losses in the quarter were primarily due to subscriber losses in the Boost and Virgin Mobile prepaid brand primarily due to continued competition. Prepaidcompetition in the market. Historically, prepaid and prepaid affiliate subscribers arewere generally deactivated between 60 and 150 days from the later of the date of initial activation or replenishment; however, prior to account deactivation, targeted retention programs can be offered to qualifying subscribers to maintain ongoing service by providing up to an additional 150 days to make a replenishment. AtSeptember 30, 2016, each of our prepaid brands had different churn rules and retention programs. As a part of our ongoing efforts to simplify and drive consistency across our prepaid business, as well as tighten the customer engagement criteria, we have aligned all prepaid brands under one churn and retention program as of December 31, 2016. Therefore, all prepaid and prepaid affiliate subscribers are now deactivated 60 days from the later of the date of initial activation or the most recent replenishment date. As a result of these changes, we have approximately 1.2 million fewer prepaid subscribers and 21,000 fewer prepaid affiliate subscribers in the base as of December 31, 2016. However, because we have deactivated customers with no engagement, we do not expect a material impact to future prepaid revenue. If these changes had been implemented for our prepaid subscriber
base at the beginning of the quarter rather than the end, and thus been in effect for the entire three month period, we estimate churn would have been 5.84% versus 5.80% and ARPU would have been $30.11 versus $27.61.
Wholesale and Affiliate Subscribers — Wholesale and affiliate subscribers represent customers that are served on our networks through companies that resell our wireless services to their subscribers, customers residing in affiliate territories and connected devices that utilize our network. Of the 12.816.0 million Sprint platform subscribers included in wholesale and affiliates, approximately 62%66% represent connected devices. Wholesale and affiliate subscriber net additions were 481,000673,000 during the three-month period ended December 31, 20152016 compared to 527,000481,000 during the same period in 2014,2015, inclusive of net additions of connected devices totaling 592,000643,000 and 540,000,592,000, respectively. The decreaseincrease in net additions in the three-month period ended December 31, 20152016 was primarily attributable to growth in connected devices and subscribers under the Lifeline program, partially offset by a decline in subscribers under the Lifeline programs, partially offset by growth in resellersthrough our prepaid and connected device subscribers.postpaid resellers.
Transactions Subscribers
As part of the acquisition of Clearwire Acquisition in July 2013, we acquired 788,000 postpaid subscribers (exclusive of Sprint platform wholesale subscribers acquired through our MVNO relationship with Clearwire that were transferred to postpaid subscribers within transactions)Transactions), 721,000 prepaid subscribers, and 93,000 wholesale subscribers. We had net postpaid subscriber losses of 238,000, net prepaid subscriber losses of 231,000 and net wholesale subscriber losses of 241,000 for the three-month period ended December 31, 2015 due to the expected shutdown of the WiMAX network. As of December 31, 2015, we have no remaining transaction subscribers.subscribers due to the shutdown of the Clearwire WiMAX network on March 31, 2016.
Cost of Services
Cost of services consists primarily of:
costs to operate and maintain our networks, including direct switch and cell site costs, such as rent, utilities, maintenance, labor costs associated with network employees, and spectrum frequency leasing costs;
fixed and variable interconnection costs, the fixed component of which consists of monthly flat-rate fees for facilities leased from local exchange carriers and other providers based on the number of cell sites and switches in service in a particular period and the related equipment installed at each site, and the variable component of which generally consists of per-minute useusage fees charged by wireline providers for calls terminating on their networks, which fluctuate in relation to the level and duration of those terminating calls;
long distance costs paid to the Wireline segment;
costs to service and repair devices;
regulatory fees;
roaming fees paid to other carriers; and
fixed and variable costs relating to payments to third parties for the subscriber use of their proprietary data applications, such as messaging, music and cloud services and connected vehicle fees.
Cost of services increased $129decreased $382 million, or 7%19%, and $208$921 million, or 4%15%, for the three and nine-month periods ended December 31, 2015,2016, respectively, compared to the same periods in 2014,2015, primarily due to increased servicedecreases in network costs such as rent, utilities, backhaul and repair costs as a resultlabor associated with our network improvements and the shutdown of higher costs per unit of new and used devices. These increases were partially offset bythe WiMAX network on March 31, 2016, combined with decreases in roaming and interconnection costs primarily due to lower rates.
Equipment Revenue and Cost of Products
We recognize equipment revenue and corresponding costs of equipmentdevices when title and risk of loss passes to the indirect dealer or end-use subscriber, assuming all other revenue recognition criteria are met. Our devices are sold under the subsidy program, the installment billing program, or leased under the leasing program. Under the subsidy program, we offer certain incentives to retain and acquire subscribers such as new devices at discounted prices. The cost of these incentives is recorded as a reduction to equipment revenue upon activation of the device with a service contract. Under the installment billing program, the device is sold at or near full retail price and we recognize most of the future expected installment payments at the time of sale of the device, which results in the recognition of significantly less equipment net subsidy. The impact to net equipment subsidy from the sale of devices under our installment billing program is relatively neutral except for the impact from the time value of money element related to the imputed interest on the installment receivables. Under the leasing program, lease revenue is recorded over the term of the lease. The cost of the leased device is depreciated down to its estimated residual value over the lease term. Because a substantial portion of the cost of a device leased through our direct channel is not recorded as cost of products but rather as depreciation expense, there is a significant positive impact to net equipment subsidy compared to when purchased under the installment billing or subsidized programs. During the three and nine-month periods ended December 31, 2015, we leased devices through our Sprint direct channels totaling approximately $1.0 billion and $2.6 billion, respectively. As subscribers migrate from acquiring devices through our subsidy program to installment billing or choose to lease under our leasing program, equipment net subsidy continues to decline.device.
Cost of products includes equipment costs (primarily devices and accessories), order fulfillment related expenses, and write-downs of device and accessory inventory related to shrinkage and obsolescence. Additionally, cost of products is reduced by any rebates that are earned from the equipment manufacturers. Cost of products in excess of the net revenue generated from equipment sales is referred to in the industry as equipment net subsidy. As subscribers migrate from acquiring devices through our subsidy program to installment billing or choose to lease under our leasing program, equipment net subsidy continues to decline. We also make incentive payments to certain indirect dealers who purchase handsetsdevices directly from original equipment manufacturers (OEMs)OEMs or other device distributors. Those payments are recognized as selling, general and administrative expenses when the handsetdevice is activated with a Sprint service plan because Sprint does not recognize any equipment revenue or cost of products for those transactions. (See Selling, General and Administrative Expense below.)
The net impact to equipment revenue and cost of products from the sale of devices under our installment billing program is relatively neutral except for the impact from the time value of money element related to the imputed interest on the installment receivables. Under the leasing program, lease revenue is recorded over the term of the lease. The cost of the leased device is depreciated to its estimated residual value generally over the lease term. During the three and nine-month periods ended December 31, 2016 and 2015, we leased devices through our Sprint direct channels totaling approximately $1.1 billion, $2.3 billion, $1.0 billion and $2.6 billion, respectively, which were reclassified from inventory to property, plant and equipment and, as such, the cost of the device was not recorded as cost of products compared to when purchased under the installment billing or the traditional subsidy programs.
Equipment revenue decreased $277increased $802 million, or 16%56%, and $337 million,$2.0 billion, or 9%58%, for the three and nine-month periods ended December 31, 2015,2016, respectively, compared to the same periods in 2014.2015. The decreaseincrease in equipment revenue for the three and nine-month periods ended December 31, 20152016 was primarily due to a decrease in postpaid handsets soldhigher revenue from the leasing program as more subscribers are choosing to lease their device, combined with lower average sales price per prepaid handset sold, partially offset by higher revenue from the installment billing and leasing programs and a higher average sales price per postpaid handsetdevices sold and an increase in postpaid devices sold. Cost of products decreased $1.4 billion,increased $396 million, or 46%25%, and $3.2 billion,$853 million, or 43%20%, for the three and nine-month periods ended December 31, 2015,2016, respectively, compared to the same periods in 20142015 primarily due to an increase in postpaid devices sold combined with lease payments to MLS associated with Handset Sale-Leaseback Tranche 1, partially offset by a decrease in postpaid handsets sold as a result of subscribers choosing to leaseprepaid devices instead of purchasing them.sold.
Selling, General and Administrative Expense
Sales and marketing costs primarily consist of subscriber acquisition costs, including commissions paid to our indirect dealers, third-party distributors and retail sales force for new device activations and upgrades, residual payments to our indirect dealers, commission payments made to OEMs or other device distributors for direct source handsets, payroll and facilities costs associated with our retail sales force, marketing employees, advertising, media programs and sponsorships, including costs related to branding. General and administrative expenses primarily consist of costs for billing, customer care and information technology operations, bad debt expense and administrative support activities, including collections, legal, finance, human resources, corporate communications, and strategic planning, and technology and product development.planning.
Sales and marketing expense decreased $140$30 million, or 10%2%, and $129$159 million, or 3%4%, for the three and nine-month periods ended December 31, 2015,2016, respectively, compared to the same periods in 20142015. The decrease in the nine-month period was primarily due to lower mediaoverall marketing spend as a result of cost reduction initiatives. The decrease in the three-month period was primarily due to lower sales commission expense and a decrease in payments to OEMs for direct source handsets as a result of lower volume of device sales, partially offset by higher retail labor costs.sales.
General and administrative costs decreased $364increased $21 million, or 34%3%, and $535decreased $317 million, or 18%13%, for the three and nine-month periods ended December 31, 2015,2016, respectively, compared to the same periods in 20142015. The decrease in the nine-month period was primarily due to a decrease in bad debt expense combined with declines inlower customer care costs and other general and administrative expensescosts as a result of cost reduction initiatives, partially offset by higher bad debt expense. The increase in the three-month period was primarily due to reduced headcount and other cost-savingshigher bad debt expense, partially offset by lower customer care costs as a result of cost reduction initiatives.
Bad debt expense decreased $136increased $69 million, or 56%65%, and $354$29 million, or 48%8%, for the three and nine-month periods ended December 31, 2015, respectively, compared to the same periods in 20142016, respectively. The increase was primarily related to an improved aging as a result of customer credit profile improvement and fewerincreased installment billing accounts written off due to improvements in churn,with higher reserve rates, partially offset by a higher average balance of accounts written off.aging and rate improvements related to service bad debt. We reassess our allowance for doubtful accounts quarterly.
Loss on Disposal of Property, Plant and Equipment
LossFor the three and nine-month periods ended December 31, 2016, loss on the disposal of property, plant and equipment, is a resultnet of approximately $65recoveries, of $109 million in net losses recognized upon the sale of devices to MLS under the Handset Sale-Leaseback transaction, which represented the difference between the fair value and net book value of the devices sold. In addition, approximately $78$340 million, in lossesrespectively, resulted from the write-off of leased devices associated with lease cancellations prior to the scheduled customer lease terms where customers did not return the devices to us. If customers continue to not return devices, we may continue to have similar losses in future periods. Similar losses are and have been incurred for devices sold under our subsidy program as equipment net subsidy.
Segment Earnings - Wireline
We provide a broad suite of wireline voice and data communications services to other communications companies and targeted business subscribers. In addition, we provide voice, data and IP communication services to our Wireless segment. We provide long distance services and operate all-digital global long distance and Tier 1 IP networks. Our services and products include domestic and international data communications using various protocols such as multiprotocol label switching technologies (MPLS), IP, managed network services, Voice over Internet Protocol (VoIP), Session Initiated Protocol (SIP), and traditional voice services. Our IP services can also be combined with wireless services. Such services
include our Sprint Mobile Integration service, which enables a wireless handset to operate as part of a subscriber's wireline voice network, and our DataLinkSM service, which uses our wireless networks to connect a subscriber location into their primarily wireline wide-area IP/MPLS data network, making it easier for businesses to adapt their network to changing business requirements. In addition to providing services to our business customers, the wireline network is carrying increasing amounts of voice and data traffic for our Wireless segment as a result of growing usage by our wireless subscribers.
We continue to assess the portfolio of services provided by our Wireline business and are focusing our efforts on IP-based data services and de-emphasizing stand-alone voice services and non-IP-based data services. We also continue to provide voice services primarily to business subscribers.consumers. Our Wireline segment markets and sells its services primarily through direct sales representatives.
Wireline segment earnings are primarily a function of wireline service revenue, network and interconnection costs, and other Wireline segment operating expenses. Network costs primarily represent special access costs and interconnection costs, which generally consist of domestic and international per-minute usage fees paid to other carriers. The remaining costs associated with operating the Wireline segment include the costs to operate our customer care and billing organizations in addition to administrative support. Wireline service revenue and variable network and interconnection costs fluctuate with the changes in our customer base and their related usage, but some cost elements do not fluctuate in the short termshort-term with the changes in our customer usage. Our wireline services provided to our Wireless segment are generally accounted for based on market rates, which we believe approximate fair value. The Company generally re-establishes these rates at the beginning of each fiscal year. Over the past several years, there has been an industry wide trend of lower rates due to increased competition from other wireline and wireless communications companies, as well as cable and Internet service providers. Declines in Wireline segment earnings related to intercompany pricing rates do not affect our consolidated results of operations as our Wireless segment benefits from an equivalent reduction in cost of service.services.
The following table provides an overview of the results of operations of our Wireline segment.
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| December 31, | | December 31, | December 31, | | December 31, |
Wireline Segment Earnings | 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 | | 2016 | | 2015 |
| (in millions) | (in millions) |
Voice | $ | 201 |
| | $ | 289 |
| | $ | 646 |
| | $ | 910 |
| $ | 153 |
| | $ | 201 |
| | $ | 506 |
| | $ | 646 |
|
Data | 42 |
| | 52 |
| | 134 |
| | 161 |
| 41 |
| | 42 |
| | 127 |
| | 134 |
|
Internet | 317 |
| | 333 |
| | 968 |
| | 1,018 |
| 281 |
| | 317 |
| | 871 |
| | 968 |
|
Other | 21 |
| | 18 |
| | 72 |
| | 57 |
| 22 |
| | 21 |
| | 59 |
| | 72 |
|
Total net service revenue | 581 |
| | 692 |
| | 1,820 |
| | 2,146 |
| 497 |
| | 581 |
| | 1,563 |
| | 1,820 |
|
Cost of services (exclusive of depreciation) | (466 | ) | | (581 | ) | | (1,495 | ) | | (1,800 | ) | (400 | ) | | (466 | ) | | (1,284 | ) | | (1,495 | ) |
Service gross margin | 115 |
| | 111 |
| | 325 |
| | 346 |
| 97 |
| | 115 |
| | 279 |
| | 325 |
|
Service gross margin percentage | 20 | % | | 16 | % | | 18 | % | | 16 | % | 20 | % | | 20 | % | | 18 | % | | 18 | % |
Selling, general and administrative expense | (82 | ) | | (100 | ) | | (254 | ) | | (273 | ) | (49 | ) | | (82 | ) | | (189 | ) | | (254 | ) |
Wireline segment earnings | $ | 33 |
| | $ | 11 |
| | $ | 71 |
| | $ | 73 |
| $ | 48 |
| | $ | 33 |
| | $ | 90 |
| | $ | 71 |
|
Wireline Revenue
Voice Revenues
Voice revenues for the three and nine-month periods ended December 31, 20152016 decreased $88$48 million, or 30%24%, and $264$140 million, or 29%22%, respectively, compared to the same periods in 2014.2015. The decrease was driven by lower volume and overall rate declines primarily due to decreases in international hubbing volumes as the company continues to de-emphasize certain voice services, combined with the decline in prices for the sale of services to our Wireless segment infor the three and nine-month periods ended December 31, 2015.2016. Voice revenues generated from the sale of services to our Wireless segment represented 41%40% and 39% of total voice revenues for the three and nine-month periods ended December 31, 2015,2016, respectively, compared to 33%41% and 30%39%, for the same periods in 2014.2015, respectively.
Data Revenues
Data revenues reflect sales of data services, primarily private linePrivate Line and managed network services bundled with non-IP-based data access. Data revenues decreased $10$1 million, or 19%2%, and $27$7 million, or 17%5%, for the three and nine-month periods ended December 31, 2015,2016, respectively, compared to the same periods in 20142015 as a result of customer churn
primarily related to Private Line. Data revenues generated from the provision of services to the Wireless segment represented 40%56% and 41%53% of total data revenue for the three and nine-month periods ended December 31, 2015,2016, respectively, compared to 42%and 40% and 41% for each of the same periods in 2014.2015, respectively.
Internet Revenue
IP-based data services revenue reflects sales of Internet services, including MPLS, VoIP, SIP, and managed services bundled with IP-based data access. IP-based data services revenue decreased $16$36 million, or 5%11%, and $50$97 million, or 5%10%, for the three and nine-month periods ended December 31, 2015,2016, respectively, compared to the same periods in 20142015 primarily due to fewer IP customers. In addition, revenue was also impacted by a decline in prices for the sale of services to our Wireless segment. Sale of services to our Wireless segment represented 15% and 14% of total Internet revenues for both the three and nine-month periods ended December 31, 2015, respectively,2016, compared to 13%15% and 12%14%, respectively, for the same periods in 2014.2015.
Other Revenues
Other revenues, which primarily consist of sales of customer premises equipment, increased $3$1 million, or 17%5%, and $15decreased $13 million, or 26%18%, in the three and nine-month periods ended December 31, 2015,2016, respectively, compared to the same periods in 2014.2015.
Costs of Services
Costs of services include access costs paid to local phone companies, other domestic service providers and foreign phone companies to complete calls made by our domestic subscribers, costs to operate and maintain our networks, and costs of equipment. Costs of services decreased $115$66 million, or 20%14%, and $305$211 million, or 17%14%, in the three and nine-month periods ended December 31, 2015,2016, respectively, compared to the same periods in 2014.2015. The decrease was primarily due to lower international voice volume and rates combined with lower access expense as the result of savings initiatives and declining voice and IP rate and volumes. Service gross margin percentage increased from 16% in each of the three and nine-
month periods ended December 31, 2014 tostayed relatively flat at 20% and 18% in each of the three and nine-month periods ended December 31, 2016 and 2015, respectively, primarily as a result of a decrease in cost of services partially offset by a decrease in net service revenue.respectively.
Selling, General and Administrative Expense
Selling, general and administrative expense decreased $18$33 million, or 18%40%, and $19$65 million, or 7%26%, in the three and nine-month periods ended December 31, 2015,2016, respectively, compared to the same periods in 2014.2015. The decrease was primarily due to a decrease inlower shared administrative and employee-related costs required to support the Wireline segment as a result of the decline in revenue. Total selling, general and administrative expense as a percentage of net services revenue was 14%10% and 12% for each of the three and nine-month periods ended December 31, 20152016, respectively, as compared to 14% and 13% for each of the same periods in 2014.2015.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
| | | Nine Months Ended | Nine Months Ended |
| December 31, | December 31, |
| 2015 | | 2014 | 2016 | | 2015 |
| (in millions) | (in millions) |
Net cash provided by operating activities | $ | 2,603 |
| | $ | 1,474 |
| $ | 2,900 |
| | $ | 2,603 |
|
Net cash used in investing activities | $ | (4,485 | ) | | $ | (2,912 | ) | $ | (5,194 | ) | | $ | (4,485 | ) |
Net cash provided by (used in) financing activities | $ | 47 |
| | $ | (77 | ) | |
Net cash provided by financing activities | | $ | 3,360 |
| | $ | 47 |
|
Operating Activities
Net cash provided by operating activities of $2.6$2.9 billion in the nine-month period ended December 31, 20152016 increased $1.1 billion$297 million from the same period in 2014.2015. The increase was primarily due to $1.1 billion of reduced cash paid to vendorslower vendor and increased cash received from customers of $136 million, which includes $700 million of net activity under the Receivables Facility (defined below) comprisedlabor-related payments of $1.2 billion, which were primarily due to reduced operating costs resulting from the Company's ongoing cost reduction initiatives, partially offset by $831 million of receiptsdecreased cash received primarily due to an increase in the deferred purchase price receivable (DPP) as a result of increased accounts receivables sold and a decline in net cash received related to our Accounts Receivable Facility (Receivables Facility). Cash activity related to our Receivables Facility included cash remitted to unaffiliated third parties (Purchasers) for receivables collected in the amount of $185 million and $500 million during the nine-month periods ended December 31, 2016 and 2015, respectively. In addition, during the nine-month periods ended December 31, 2016 and 2015, we elected to receive $625 million and $1.2 billion, respectively, related to our Receivables Facility. Also, during the nine-month period ended December 31, 2015, as described below, and $500 million of repayments in the quarter ended June 30, 2015. In addition,2016 we had increased interest payments of $69$79 million primarily associated with $1.5 billion aggregate principal amount of notes issued in February 2015.due to the Network Equipment Sale-Leaseback, the unsecured financing facility and the Spectrum Financing transaction.
Investing Activities
Net cash used in investing activities in the nine-month period ended December 31, 20152016 increased by approximately $1.6 billion$709 million compared to the same period in 2014,2015, primarily due to increased capital expenditures of $144 million, increasednet purchases of $1.6 billion of leased devices from indirect dealers and decreased net proceeds from sales and maturities of short-term investments of $2.5 billion. These increases were partiallyThis increase was offset by $1.1decreased network and other capital expenditures of approximately $2.5 billion and decreased purchases of proceeds$194 million of leased devices from MLS underindirect dealers. Included in the purchases of leased devices was $477 million of repurchased devices due to the termination of the Handset Sale-Leaseback transaction and $1.7 billionTranche 1. Net cash used in decreased purchases of short-term investments. In addition, ininvesting activities for the nine-month period ended December 31, 2014, we received $95 million in reimbursements2015 included proceeds of our costs of clearing the H Block spectrum as part of the Report and Order obligations and $114 million of proceeds$1.1 billion from the sale of assets and FCC licenses of which $90 million was related to the sale of certain FCC licenses.Tranche 1.
Financing Activities
Net cash provided by financing activities was $3.4 billion during the nine-month period ended December 31, 2016, which was primarily due to cash receipts of $2.2 billion, $1.1 billion and $3.5 billion from the Network Equipment Sale-Leaseback, Handset Sale-Leaseback Tranche 2 and Spectrum Financing, respectively. These receipts were partially offset by repayments of $502 million, $220 million and $153 million for the Handset Sale-Leaseback Tranche 2, secured equipment credit facilities and financing of future lease receivables, respectively. We also retired $2.0 billion in principal amount of Sprint Communications, Inc. 6% senior notes due 2016 and $300 million principal amount of Clearwire Communications LLC 14.75% secured notes due 2016. In addition, we paid a total of $272 million in debt finance costs for the unsecured financing facility, Network Equipment Sale-Leaseback and Spectrum Financing transaction.
Net cash provided by financing activities was $47 million during the nine-month period ended December 31, 2015,, which was primarily due to draws of $208 million, $266 million and $32 million on our Finnvera plc (Finnvera), K-sure and Delcredere | Ducroire (D/D) secured equipment credit facilities, respectively. These draws were partially offset by repayments related to our secured equipment credit facilities of $155 million, capital lease repayments of $67 million and a $500 million repayment of the Export Development Canada (EDC) credit facility. In addition, we amended our unsecured EDC agreement to add an additional tranche totaling $250 million due December 2017. Net cash used in financing activities was $77 million during the nine-month period ended December 31, 2014, which was primarily due to principal payments on the iPCS, Inc. notes due 2014 of approximately $181 million and a scheduled principal payment on our secured equipment credit facility of approximately $127 million. In December 2014, we amended our unsecured EDC agreement to, among other things, add an additional tranche totaling $300 million due 2019.
Working Capital
We had negative working capital of $4.5$3.1 billion and $1.2$5.1 billion as of December 31, 20152016 and March 31, 2015,2016, respectively. The declinechange in working capital is due to decreased cashwas primarily the result of $1.8$3.4 billion primarily due to cash paid for capital expenditures which was partially offset byof net cash provided by operatingfinancing activities and proceeds from MLS under the Handset Sale-Leaseback transaction. In addition, accounts and notes receivable, net decreased $1.3 billion primarily dueas described above plus approximately $500 million of changes to the sale of installment receivables as part of our Receivables Facility described below and device and accessory inventory decreased $364 million. Also contributing to the decline wasother working capital items, partially offset by an increase of $2.0 billion in the current portion of long-term debt, financing and capital lease obligations primarily due to Sprint Communications, Inc. 6% Senior notes, which will be due in the quarter ending December 31, 2016. These decreases were offset by decreases in accounts payable of $1.3 billion primarily as a result of invoices with extended payment terms with certain network equipment suppliers coming due and timing of purchases and payments associated with device launches. Additionally, accrued expenses and other current liabilities decreased $819 million primarily due to decreased employee accruals and decreased accrued capital expenditures for unbilled services. Also, prepaid and other current assets increased $427 million primarily due to the activity associated with the deferred purchase price receivable (DPP) recognized as part of our Receivables Facility described below. The remaining balance was due to changes to other working capital items.$1.9 billion.
Long-Term Debt and Other Funding Sources
Our device leasing and installment billing programs require a greater use of operating cash flows in the earlier part of the device contracts as our subscribers will generally pay less upfront than a traditional subsidized programs.subsidy program. The Accounts Receivable Facility and the Handset Sale-Leaseback transactions described below were designed in large part to mitigate the significant use of cash from purchasing devices from OEMs to fulfill our installment billing and leasing programs.
Accounts Receivable Facility
Transaction Overview
Our accounts receivable facility (Receivables Facility), whichReceivables Facility provides us the opportunity to sell eligiblecertain wireless service, and installment receivables to unaffiliated third parties (Purchasers), was amended in November 2015 to includeand future amounts due from customers who lease certain devices from us.us to the Purchasers. The amendment increased the maximum funding limit under the Receivables Facility is $4.3 billion. The Receivables Facility was amended in November 2016 to, $4.3 billion among other things, reallocate the Purchasers' commitments between service, installment and extendedfuture lease receivables. The amendment was in response to changing trends in the expiration to Novemberfinancing methods selected by customers. On February 3, 2017,. The amount available under the Receivables Facility fluctuates over timewas further amended by the Company to extend the maturity date to November 2018 and obtain the right to repurchase, under certain conditions, the financial assets transferred to the conduits. While we have the right to decide how much cash to receive from each sale, the maximum amount of cash available to us varies based on a number of factors and currently represents approximately 50% of the total amount of the eligible receivables generated duringsold to the normal course of our business.Purchasers. As of December 31, 2015, the total borrowing capacity available under the facility was approximately $2.0 billion. However, as a result of sales we have completed to date,2016, the total amount available to be drawn as of December 31, 2015 was $778$6 million. The proceeds from the sale of these receivables are comprised of a combination of cash and a deferred purchase price receivable (DPP). While it’s at Sprint's election to decide how much cash it chooses to receive from each sale, the maximum amount of proceeds varies based on a number of factors and currently represents approximately 50% of the total amount of the receivables sold to the Purchasers.DPP. The DPP is realized by us upon the ultimate collection of the underlying receivables sold to the Purchasers or until Sprint electsupon Sprint's election to receive additional amountsadvances in cash from the Purchasers subject to the total availability under the Receivables Facility. As of December 31, 2015, we have elected not to sell future receivables associated with certain devices leased by our customers.
Wireless service and installment receivables sold are treated as a sale of financial assets and Sprint derecognizes these receivables, as well as the related allowances, and recognizes the net proceeds received in cash provided by operating activities on the consolidated statements of cash flows. The net amount drawn for wireless service and installment receivables was $1.8 billion as of December 31, 2016. The fees associated with these sales are recognized in "Selling, general and administrative" onin the consolidated statements of comprehensive loss.
The sale of future lease receivables will be recordedis treated as a financing transaction. Accordingly, the proceeds received will beare reflected as cash provided by financing activities on the consolidated statements of cash flows and the fees will beare recognized as "Interest expense" onin the consolidated statements of comprehensive loss. During the nine-month period ended December 31, 2016, we repaid $153 million to the Purchasers, which reduced the principal amount outstanding to $447 million as of December 31, 2016.
Transaction Structure
Sprint contributes eligiblecertain wireless service, installment and future lease receivables, as well as the associated leased devices to Sprint's wholly-owned consolidated bankruptcy-remote special purpose entities (SPEs). At Sprint's direction, the SPEs have sold, and will continue to sell, wireless service, installment and installmentfuture lease receivables to Purchasers or to a bank agent on behalf of the Purchasers. Leased devices will remain with the SPEs once sales are initiated, and continue to be depreciated over their estimated useful life.
Each SPE is a separate legal entity with its own separate creditors who will be entitled, prior to and upon the liquidation of the SPE, to be satisfied out of the SPE’sSPE's assets prior to any assets in the SPE becoming available to Sprint. Accordingly, the assets of the SPE are not available to pay creditors of Sprint or any of its affiliates (other than any other SPE), although collections from these receivables in excess of amounts required to payrepay the investment,advances, yield and fees of the Purchasers and other creditors of the SPEs may be remitted to Sprint during and after the term of the Receivables Facility.
Sprint has no retained interest in the receivables sold, other than collection and administrative responsibilities and its right to the DPP. Sales of eligible receivables by the SPEs generally occur daily and are settled on a monthly basis. Sprint pays a fee for the drawn and undrawn portions of the Receivables Facility. A subsidiary of Sprint services the receivables in exchange for a monthly servicing fee, and Sprint guarantees the performance of the servicing obligations under the Receivables Facility.
DPP
The DPP related to our wireless service and installment receivables, which amounted to approximately $1.4 billion and $1.2 billion as of December 31, 2016 and March 31, 2016, respectively, is classified as a trading security within "Prepaid expenses and other current assets" onin the consolidated balance sheets and is recorded at its estimated fair value. The fair value of the DPP is estimated using a discounted cash flow model, which relies principally on unobservable inputs such
as the nature and credit class of the sold receivables and subscriber payment history, and for installment receivables sold, the estimated timing of upgrades and upgrade payment amounts for those with upgrade options. Accretable yield on the DPP is recognized as interest revenue within net operating service revenue on the consolidated statements of comprehensive loss and other changes in the fair value of the DPP are recognized in "Selling, general and administrative" onin the consolidated statements of comprehensive loss. Changes in the fair value of the DPP did not have a material impact on our statements of comprehensive loss for the three and nine-month periods ended December 31, 2015.2016. Changes to the unobservable inputs used to determine the fair value did not and are not expected to result in a material change in the fair value of the DPP.
Wireless Service Receivable Sales
On MarchDuring the nine-month period ended December 31, 2015,2016, we sold approximately $1.8 billionremitted $185 million of wireless service receivables in exchange for $500 million in cash (reflected within the change in accounts and notes receivable on the consolidated statement of cash flows) and a DPP of $1.3 billion, with an estimated fair value of $1.2 billion. In accordance with our rights under the Receivables Facility, in April 2015 Sprint elected to temporarily suspend sales of receivables by the SPEs and remitted payments receivedfunds to the Purchasers to reduce the funded amount to zero.
In September 2015, we sold wireless service receivables of approximately $1.9 billion in exchange for $400 million in cash and $1.5 billion of DPP, with an estimated fair value of $1.4 billion. In October 2015, we elected to receive $300 million of cash and reducedbecause the amount of cash proceeds received by us under the associatedfacility exceeded the maximum funding limit, which increased the total amount of the DPP due to Sprint. AsWe also elected to receive $625 million of December 31, 2015,cash, which decreased the total amount available under the Receivables Facility associated with wireless service receivables was $193 million and the total fair value of the associated DPP was $1.1 billion.
Installment Receivable Sales
In October 2015, we sold installment receivables of approximately $1.2 billion under the Receivables Facility in exchange for $100 million in cash and $1.1 billion of DPP, with an estimated fair value of $1.0 billion. In November 2015, we elected to receive $400 million of cash and reduce the amount of the associated DPP due to Sprint. DuringIn addition, during the nine-month period from our initial sale in October toended December 31, 2015,2016, sales of new receivables exceeded cash collections on previously sold installment receivables exceeded sales of new receivables such that the DPP decreasedincreased by approximately $150 million. As of December 31, 2015, the total amount available under the Receivables Facility associated with installment receivables was $29 million and the total fair value of the associated DPP was $491$660 million.
Future Lease Receivable SalesHandset Sale-Leasebacks
As ofIn December 31, 2015 and May 2016, we had not sold any future lease receivables. As of December 31, 2015, the amount available under the Receivables Facility associated with future lease receivables was $556 million.
Handset Sale-Leaseback
In November 2015, Sprint entered into agreements (Handset Sale-Leaseback)certain iPhone® devices being leased by our customers to sell and lease-back certain leased devices excluded from our Receivables Facility, which allowed us to monetize the devices, including the device residual values. Under the agreements with MLS, a company formed by a group of equity investors, including SoftBank Group Corp. (SoftBank), and then subsequently leased the devices back. Under the agreements, Sprint generally maintains the customer lease, will continueleases, continues to collect and record lease revenue from the customer and will remitremits monthly rental payments to MLS which are recognized as "Cost of products" on the consolidated statements of comprehensive loss during the lease-back period.leaseback periods.
In December 2015,Under the agreements, Sprint contributed $1.3 billion of certain leasedthe devices and the associated customer leases to wholly-owned consolidated bankruptcy-remote special purpose entities of Sprint (SPE Lessees). The SPE Lessees then sold the devices and transferred certain specified customer lease end rights and obligations, such as the right to receive the proceeds from customers who elect to purchase the device at the end of the customer lease term, to MLS in exchange for proceeds totaling $1.1 billion(Cash Purchase Price)a combination of cash and DPP. Settlement for the DPP occurs near the end of the agreement and can be reduced to the extent that MLS experiences a DPP of $126 million.
The difference betweenloss on the fair value anddevice (either not returned or sold at an amount less than the net bookexpected residual value of the devices sold was recognized as a loss on disposal of property, plant and equipment indevice), but only to the amount of $65 million and is included in "Other, net" on the consolidated statements of comprehensive loss. Simultaneously with the saleextent of the device's DPP balance. In the event that MLS sells the devices MLS leased back eachreturned from our customers at a price greater than the expected device residual value, Sprint has the potential to share some of the SPE Lessees pursuant to the Master Lease Agreement (Device Lease) in exchange for monthly rental payments to be made by the SPE Lessees to MLS. Monthly rental payments made to MLS totaled $60 million during the three and nine-month periods ended December 31, 2015. As of December 31, 2015, the minimum estimated amounts due to MLS were $176 million for the remaining fiscal year 2015, $673 million for fiscal year 2016, and $113 million for fiscal year 2017.excess proceeds.
The SPE Lessees retain all rights to the underlying customer leases, such as the right to receive the rental payments during the device lease-backleaseback period, other than the aforementioned certain specified customer lease end rights. Each SPE Lessee is a separate legal entity with its own separate creditors who will be entitled, prior to and upon the liquidation of the SPE Lessee, to be satisfied out of the SPE Lessee’s assets prior to any assets in the SPE Lessee becoming available to Sprint. Accordingly, the assets of the SPE Lessee are not available to pay creditors of Sprint or any of its affiliates. Settlement for the DPP occurs at the end of the agreement and can be reduced to the extent that MLS experiences a loss on the device (either not returned or sold at a loss), but only to the extent of the device's DPP balance. The DPP associated with the Handset Sale-Leaseback is recorded in “Other assets” in the consolidated balance sheets at its estimated net realizable value. Changes to the DPP prior to settlement with MLS are recorded as an adjustment to rent expense in “Cost of products” in the consolidated statements of comprehensive loss. Brightstar US, Inc. (Brightstar), a wholly-owned subsidiary of SoftBank, provides reverse logistics and remarketing services to MLS with respect to the devices.
Unless a Device Lease is terminated early, the SPE Lessees are obligated to pay the full monthly rental payments under each Device Lease,device lease to MLS regardless of whether our customers make lease payments on the devices leased to them or whether the customer lease is still in effect.canceled. Sprint has guaranteed to MLS the performance of the covenants, agreements and undertakings of the SPE Lessees under the transaction documents.
AllHandset Sale-Leaseback Tranche 1 (Tranche 1)
In December 2015, Sprint transferred devices must be returnedwith a net book value of approximately $1.3 billion to MLS in exchange for cash proceeds totaling $1.1 billionand a DPP of $126 million. We recorded the sale, removed the devices from our balance sheet, and classified the leasebacks as operating leases. The difference between the fair value and the net book value of the devices sold was recognized as a loss on disposal of property, plant and equipment in the amount of $65 million and was included in "Other, net" in the consolidated statements of comprehensive loss for the three and nine-month periods ended December 31, 2015. The cash proceeds received in the transaction were reflected as cash provided by investing activities on the consolidated statements of cash flows and payments made to MLS under the leaseback are reflected as "Cost of products" in the consolidated statements of comprehensive loss. Rent expense related to MLS totaled $117 million and $494 million during the three and nine-month periods ended December 31, 2016, respectively, and is reflected within cash flows from operations. The monthly rental payments for the devices leased backed by us were expected to approximate the amount of cash received from the associated customer leases during the weighted average leaseback period. In December 2016, Sprint terminated Tranche 1 by repurchasing the devices and related customer lease end rights and obligations from MLS for consideration of $371 million of net cash payments and the DPP of $126 million. As a result of the transaction, Sprint recorded $477 million of property, plant and equipment, $16 million of other assets, and was released from certain liabilities. Additionally, the leaseback was canceled and there will be no future rental payments owed to MLS related to Tranche 1. The impact to the consolidated statements of comprehensive loss as a result of the termination was immaterial.
Handset Sale-Leaseback Tranche 2 (Tranche 2)
In May 2016, Sprint transferred devices with a net book value of approximately $1.3 billion to MLS in exchange for cash proceeds totaling $1.1 billion and a DPP of $186 million. Unlike Tranche 1, Tranche 2 was accounted for as a financing. Accordingly, the devices remain in "Property, plant and equipment, net" in the consolidated balance sheets and we continue to depreciate the assets to their estimated residual values over the respective customer lease terms. At December 31, 2016, the net book value of devices transferred to MLS was approximately $725 million.
The proceeds received are reflected as cash provided by financing activities in the consolidated statements of cash flows and payments made to MLS will be reflected as principal repayments and interest expense over the respective terms. We have elected to account for the financing obligation at fair value. Accordingly, changes in the fair value of the financing obligation are recognized in "Other (expense) income, net" in the consolidated statements of comprehensive loss over the course of the arrangement.
Tranche 2 primarily includes devices from our iPhone Forever Program, whereas these devices were specifically excluded from Tranche 1. The iPhone Forever Program provides our leasing customers the ability to upgrade their devices and to enter into a new lease agreement, subject to purchase rightscertain conditions, upon Apple's release of a next generation device. Upon a customer exercising their iPhone Forever upgrade right, Sprint has the option to terminate the existing leaseback by immediately remitting all unpaid device leaseback payments and returning the device to MLS. Alternatively, Sprint is required to transfer the title in the new device to MLS in exchange for the title in the original device (Exchange Option). If Sprint elects the Exchange Option, we are required to continue to pay existing device leaseback rental related to the original device, among other requirements.
To address the introduction of the customersupgrade feature into the sale-leaseback structure, among other factors, numerous contractual terms from Tranche 1 were modified, which shifted certain risks of ownership in the devices away from MLS to Sprint and provided that SPE Lessees have noresulted in Tranche 2 being accounted for as a financing. For instance, the device leaseback periods are generally longer in Tranche 2 as compared to Tranche 1, and the resulting amounts committed to be paid by the Company represent the initial proceeds received from MLS plus interest. This mitigates MLS's exposure to certain risks for non-returned and damaged devices, as well as to declines in device residual values.
During the nine-month period ended December 31, 2016, we repaid $502 million to MLS, which reduced the principal amount of the financing obligation to return devices not returned$554 million as of December 31, 2016.
Network Equipment Sale-Leaseback
In April 2016, Sprint sold and leased back certain network equipment to unrelated bankruptcy-remote special purpose entities (collectively, "Network LeaseCo"). The network equipment acquired by Network LeaseCo was used by them as collateral to raise approximately $2.2 billion in borrowings from external investors, including SoftBank. Sprint's payments to Network LeaseCo during the customersleaseback period are used by Network LeaseCo to Sprint.service their debt.
Network LeaseCo is a variable interest entity for which Sprint will actis the primary beneficiary. As a result, Sprint is required to consolidate Network LeaseCo and our consolidated financial statements include Network LeaseCo's debt and the related financing cash inflows. The network assets included in the transaction, which had a net book value of approximately $3.0 billion and consisted primarily of equipment located at cell towers, remain on Sprint's consolidated financial statements and continue to be depreciated over their respective estimated useful lives. At December 31, 2016, these network assets had a net book value of approximately $2.5 billion.
The proceeds received were reflected as servicer for MLS,cash provided by financing activities in the consolidated statements of cash flows and payments made to Network LeaseCo are reflected as principal repayments and interest expense over the extent needed, afterrespective terms. Sprint has the option to purchase the equipment at the end of the device leaseback period. To secureterm for a nominal amount. All intercompany transactions between Network LeaseCo and Sprint are eliminated in our consolidated financial statements. Principal and interest payments on the obligationsborrowings from the external investors will be repaid in staggered, unequal payments through January 2018 with the first principal payment of approximately $300 million due in March 2017 followed by the remaining $1.9 billion of principal payments due in fiscal year 2017.
Spectrum Financing
In October 2016, Sprint transferred certain directly held and third-party leased spectrum licenses (collectively, "the Spectrum Portfolio") to wholly-owned bankruptcy-remote special purpose entities (collectively, "the Spectrum Financing SPEs"). The Spectrum Portfolio, which represents approximately 14% of Sprint's total spectrum holdings on a MHz-pops basis, was used as collateral to raise an initial $3.5 billion in senior secured notes at 3.36% from external investors under a $7.0 billion program. Sprint can utilize this financing structure to potentially raise up to an additional $3.5 billion subject to certain conditions. The notes will be repaid over a five-year term, with interest only payments over the first four quarters and amortizing quarterly principal and interest payments thereafter through September 2021.
Sprint Communications, Inc. simultaneously entered into a long-term lease with the Spectrum Financing SPEs for the ongoing use of the SPE Lessees underSpectrum Portfolio. Sprint Communications, Inc. is required to make monthly lease payments to the Device Lease, the SPE Lessees provide a security interest to MLS in, among other things, the customer leases. In the event that MLS is able to sell the returned devicesSpectrum Financing SPEs, at a price greater thanmarket rate in an amount sufficient to service the expected device residual value,notes. As the Spectrum Financing SPEs are wholly-owned Sprint subsidiaries, these entities are consolidated and all intercompany activity has the potential to share somebeen eliminated.
As of December 31, 2016, approximately $219 million of the excess proceeds.total principal outstanding was classified as "Current portion of long-term debt" in the consolidated balance sheets.
As a result of this transaction, our $2.5 billion unsecured financing facility was terminated.
Long-Term Debt
During the three-month period ended December 31, 2016, the Company repaid $2.0 billion aggregate principal upon maturity of its outstanding Sprint Communications, Inc. 6% senior notes and $300 million aggregate principal of its Clearwire Communications LLC 14.75% secured notes.
Credit Facilities
Bank Credit Facility
Our unsecured revolving bank credit facility that expires in February 2018 requires a ratio (Leverage Ratio) of total indebtedness to trailing four quarters earnings before interest, taxes, depreciation and amortization and other non-recurringitems, as defined by the credit facility (adjusted EBITDA), not to exceed 6.5 to 1.0 through the quarter ended December 31, 2015, 6.25 to 1.0 through the quarter ending December 31, 2016 and 6.0 to 1.0 each fiscal quarter ending thereafter through expiration of the facility. The facility allows us to reduce our total indebtedness for purposes of calculating the Leverage Ratio by subtracting from total indebtedness the amount of any cash contributed into a segregated reserve account, provided that, after such cash contribution, our cash remaining on hand for operations exceeds $2.0 billion. Upon transfer, the cash contribution will remain restricted until and to the extent it is no longer required for the Leverage Ratio to remain in compliance.
New Secured Loan and Revolving Credit Facility
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TableOn February 3, 2017, we entered into a new credit agreement for $6.0 billion, consisting of Contentsa $4.0 billion, seven-year secured term loan that matures in February 2024 and a $2.0 billion secured revolving bank credit facility that expires in February 2021. The term loan has an interest rate equal to LIBOR plus 250 basis points and the bank facility has an interest rate equal to LIBOR plus a spread that varies depending on the Company's leverage ratio. The new credit facility replaced the $3.3 billion unsecured revolving bank credit facility described above that was due to expire in February 2018.
Export Development Canada (EDC) agreement
TheAs of December 31, 2016, the unsecured EDC agreement providesprovided for covenant terms similar to those of the unsecured revolving bank credit facility. However, under the terms of the EDC agreement, repayments of outstanding amounts cannot be re-drawn. In the quarter ended December 2015, we made a scheduled principal repayment of $500 million, leaving a principal balance of $300 million, which matures in December 2019. At the time of the repayment, the EDC agreement was also amended to increase the facility by $250 million through the addition of a new tranche due December 2017, which was fully drawn. Accordingly, asAs of December 31, 2015,2016, the total principal amount of our borrowings under the EDC facility was $550 million. On February 3, 2017, we amended the EDC agreement to provide for security and covenant terms similar to our new secured term loan and revolving bank credit facility.
Unsecured Financing Facility
During the three-month period ended June 30, 2016, Sprint Communications entered into an unsecured financing facility for $2.5 billion. In October 2016, this facility was terminated upon entering into the Spectrum Financing transaction in accordance with its terms.
Secured equipment credit facilities
Eksportkreditnamnden (EKN)
The EKN secured equipment credit facility provides for covenant terms similar to those of the revolving bank credit facility. In 2013, we had fully drawn and began to repay the EKN secured equipment credit facility totaling $1.0 billion, which was used to finance certain network-related purchases from Ericsson. We made regularly scheduled principal repayments totaling $127 million duringDuring the nine-month period ended December 31, 2015. The balance2016, we made principal repayments totaling $127 million on the facility, resulting in a total principal amount of $127 million outstanding at December 31, 2015 was $381 million.2016.
Finnvera plc (Finnvera)
The Finnvera secured equipment credit facility provides for the ability to borrow up to $800 million to finance network-related purchases from Nokia.Nokia Solutions and Networks US LLC, USA. The facility, which initially could be drawn upon as many as three consecutive tranches, now has one tranche remaining and available for borrowing through October 2017. Such borrowings are contingent upon the amount and timing of Sprint's network-related purchases. During the nine-monthnine-
month period ended December 31, 2015, we had drawn $208 million on the facility, and2016, we made principal repayments totaling $28 million on the facility, resulting in a total principal amount of $224$168 million outstanding at December 31, 2015.2016.
K-sure
The K-sure secured equipment credit facility provides for the ability to borrow up to $750 million to finance network-related purchases from Samsung.Samsung Telecommunications America, LLC. The facility can be divided in up to three consecutive tranches of varying size with borrowings available until May 2018, contingent upon the amount of network-related purchases made by Sprint. During the nine-month period ended December 31, 2015,2016, we had drawn $266made principal repayments totaling $65 million on the facility, resulting in a total principal amount of $323$258 million outstanding at December 31, 2015.2016.
Delcredere | Ducroire (D/D)
The D/D secured equipment credit facility provides for the ability to borrow up to $250 million to finance network equipment-related purchases from Alcatel-Lucent. During the nine-month period ended December 31, 2015, we drew $32 million on the facility, resulting in a totalAlcatel-Lucent USA Inc. The principal amount of $32 millionbalance outstanding at December 31, 2015.2016 was $32 million.
Borrowings under the EKN, Finnvera, K-sure and D/D secured equipment credit facilities are each secured by liens on the respective equipment purchased pursuant to each facility's credit agreement. In addition, repayments of outstanding amounts borrowed under the secured equipment credit facilities cannot be redrawn. Each of these facilities is fully and unconditionally guaranteed by both Sprint Communications, Inc. and Sprint Corporation. The covenants under eachAs of February 3, 2017, the four secured equipment credit facilities arehave certain key covenants similar to one anotherthose in our new secured term loan and to the covenants of our revolving bank credit facility and EDC agreement.facility.
As of December 31, 2015,2016, our Leverage Ratio, as defined by the revolving bank credit facility, the unsecured EDC Agreement and all other equipment credit facilities, all in accordance with the respective covenants in effect as of thatdate, was 4.33.6 to 1.0. Because our Leverage Ratio exceeded 2.5 to 1.0 at period end, we were restricted from paying cash dividends.
Liquidity and Capital Resources
As of December 31, 2015,2016, our liquidity, including cash and cash equivalents, short-term investments, available borrowing capacity under our revolving bank credit facility and availability under our Receivables Facility was $6.0$9.1 billion. Our cash and cash equivalents and short-term investments totaled $2.2$6.1 billion as of December 31, 20152016 compared to $4.2$2.6 billion as of March 31, 2015.2016. As of December 31, 2015, approximately $323 million in letters of credit were outstanding under our $3.3 billion revolving bank credit facility. The amount of the letter of credit required pursuant to the Report and Order was reduced to $256 million as of December 31, 2015. As a result of the outstanding letters of credit, which directly reduce the2016, we had availability of the revolving bank credit facility, we had approximately $3.0 billion of borrowing capacity available under the revolving bank credit facility as of December 31, 2015.facility. Amounts available under our Receivables facilityFacility as of December 31, 20152016 totaled $778 million. $6 million.
In addition, to the amounts discussed above, as of December 31, 2015, we had a combined available
borrowing capacity of $645 million$1.2 billion under our Finnvera, K-sure and D/D secured equipment credit facilities. Also,facilities as of April 1, 2016, up to $520 million of the third tranche under our Finnvera secured equipment credit facility will be available.December 31, 2016. However, utilization of these facilities is dependent upon the amount and timing of network-related purchases from the applicable suppliers, as well as the period of time remaining to complete any further borrowings available under each facility.
We offer device financing plans, including the installment billing program and our leasing program, that allow subscribers to forgo traditional service contracts and pay less upfront for devices in exchange for lower monthly service fees, early upgrade options, or both. While a majority of the revenue associated with installment sales is recognized at the time of sale along with the related cost of products, lease revenue is recorded monthly over the term of the lease and the cost of the device is depreciated down to its estimated residual value generally over the lease term. Because a substantial portion of the cost of a device leased through our direct channel is not recorded as cost of products but rather as depreciation expense, there isterm, which creates a positive impact to Wireless segment earnings compared to when purchased under the installment billing or traditional subsidized programs.earnings. If the mix of leased devices continues to increase, we expect this positive impact on the financial results of Wireless segment earnings to continue and depreciation expense to increase. However, this benefit to Wireless segment earnings will be partially offset by the Handset Sale-Leaseback transaction that was consummated in November 2015 where we sold and subsequently leased back certain devices leased to our customers. As a result, our cost of the devices sold to MLS will no longer be recorded as depreciation expense, but rather recognized as rent expense within "Cost of products" during the leaseback periods. The installment billing and leasing programs will continue to require a greater use of operating cash flows in the earlier part of the contracts as the subscriber will generally pay less upfront than a traditional subsidized programssubsidy program because they are financing the device. The Receivables Facility and our relationship with MLS were established as mechanisms to mitigate the use of cash from purchasing devices from OEMs to fulfill our installment billing and leasing programs.
To meet our liquidity requirements, we look to a variety of sources. In addition to our existing cash and cash equivalents, short-term investments, and cash generated from operating activities, we raise funds as necessary from external sources. We rely on the ability to issue debt and equity securities, the ability to access other forms of financing, including debt financing, some of which may be secured by our assets, proceeds from the sale of certain accounts receivable and future lease receivables under our Receivables Facility, proceeds from future device sale-leaseback transactions, such as spectrum, devices, and equipment, and the borrowing capacity available under our credit facilities to support our short- and long-term liquidity requirements. We believe our existing available liquidity and cash flows from operations will be sufficient to meet our
In
funding requirements over the third quarter of our fiscal year ending March 31, 2017, we are contractually obligated to make approximately $2.3 billion in principal payments on long-term debt. next twelve months, including debt service requirements and other significant future contractual obligations.
To maintain an adequate amount of available liquidity and execute our current business plan, which includes, among other things, network deployment and maintenance, subscriber growth, data usage capacity needs and the expected achievement of a cost structure intended to improve profitability and to meet our short-termlong-term debt repaymentservice requirements and other significant future contractual obligations, we will need to continue to raise additional funds from external sources. Our ability to meet our funding requirements, including the $2.3 billion of principal payments on long-term debt due in the quarter ending December 31, 2016, through the next twelve months is dependent upon our ability to obtain external funding and to successfully execute on our cost reduction initiatives. In November 2015, we amended our Receivables Facility to include the sale of future lease receivables, which increased the maximum funding limit under the Receivables Facility to $4.3 billion and extended the maturity to November 2017. As of December 31, 2015, the total amount available to be drawn under the Receivables Facility was $778 million. In December 2015, we entered into agreements (Handset Sale-Leaseback) to sell and lease-back certain devices currently leased to our customers for total proceeds of approximately $1.1 billion. The monthly rental payments for the devices leased back by us will approximate the amount of cash received from the associated customer leases during the weighted average 17 month lease-back period.
Possible future financing sources include additional handset and receivables financing transactions, under the Handset Sale-Leaseback to includeand raising additional devices, a transaction to monetize certain network equipment, spectrum holdings or both, refinancing our debt, or sale-leasebacks of certain real estate.funds through spectrum-backed notes. In addition, we are pursuing extended payment terms and increased facilities with certain vendors. If we are unable to obtain external funding, and execute on our cost reduction initiatives, or are not successful in attracting valuable subscribers such as postpaid handset subscribers, our operations would be adversely affected, which may lead to defaults under certain of our borrowings.
Depending on the amount of any difference in actual results versus what we currently expect, it may make it difficult for us to generate sufficient earnings before interest, taxes, depreciation and amortization and other non-recurring items (adjusted EBITDA) to remain in compliance with our financial covenants or be able to meet our debt service obligations, which could result in acceleration of our indebtedness, or adversely impact our ability to raise additional funding through the sources described above, or both. If such events occur, we may engage with our lenders to obtain appropriate waivers or amendments of our credit facilities or refinance borrowings, or seek funding from other external sources, although there is no assurance we would needbe successful in any of these actions.
A default under certain of our borrowings could trigger defaults under certain of our other debt obligations, which in turn could result in the maturities being accelerated. Certain indentures and other agreements governing our debt obligations require compliance with various covenants, including covenants that limit the Company's ability to modify our existing business plan, which could adversely affect our expectationsell certain of long-term benefits from our operations.
In determining our expectation of future funding needs in the next twelve months and beyond, we have made several assumptions regarding:
projected revenues and expenses relating to our operations, including those related to our installment billing and leasing programs, along with the success of initiatives such as our expectations of achieving a more competitive cost structure through cost reduction initiatives and increasing our postpaid handset subscriber base;
cash needs related to our installment billing and device leasing programs;
current availability of $778 million in funding under the Receivables Facility, which terminates in November 2017;2018;
continued availability of our new secured term loan that matures in February 2024 and secured revolving bank credit facility, which expires in February 2018, in the amount of $3.32021 for $6.0 billion less outstanding letters of credit;
remaining availability of approximately $1.2 billion of our secured equipment credit facilities (inclusive of availability that we are eligible to draw upon beginning April 1, 2016) for eligible capital expenditures, and any corresponding principal, interest, and fee payments;
raising additional funds from external sources;
the expected use of cash and cash equivalents in the near-term;
anticipated levels and timing of capital expenditures, including assumptions regarding lower unit costs, the capacity additions and upgrading of our networks and the deployment of new technologies in our networks, FCC license acquisitions, and purchases of leased devices from our indirect dealers;
any additional contributions we may make to our pension plan;
any scheduled principal payments on debt, secured equipment credit facilities and EDC, including approximately $14.2$21.8 billion coming due over the next five years plus interest due on all outstanding debt;years;
estimated residual values of devices related to our device lease program; and
other future contractual obligations and general corporate expenditures.
Our ability to fund our needs from external sources is ultimately affected by the overall capacity of, and financing terms available in the banking and securities markets, and the availability of other financing alternatives, as well as our performance and our credit ratings. Given our recent financial performance, as well as the volatility in these markets, we continue to monitor them closely and to take steps to maintain financial flexibility at a reasonable cost of capital.
The outlooks and credit ratings from Moody's Investor Service, Standard & Poor's Ratings Services, and Fitch Ratings for certain of Sprint Corporation's outstanding obligations were:
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| | | | | | | | | | |
| | Rating |
Rating Agency | | Issuer Rating | | Unsecured Notes | | Guaranteed Notes | | Bank Credit Facility | | Outlook |
Moody's | | B3B2 | | Caa1B3 | | B1 | | Ba3 | | NegativeStable |
Standard and Poor's | | B | | B | | BB-B+ | | BB-B+ | | Stable |
Fitch | | B+ | | B+ | | BB | | BB | | Stable |
We expect to execute on a number of initiatives to increase our subscriber base, including continuing to improve the quality of our network. However, if those initiatives are not successful in attracting valuable subscribers, such as postpaid handset (versus tablet) subscribers in particular, depending on the amount of any difference in actual results versus what we currently anticipate, it may make it difficult for us to generate sufficient EBITDA to remain in compliance with our financial covenants or be able to meet our debt service obligations, which could result in acceleration of our indebtedness, or adversely impact our ability to raise additional funding through the sources described above, or both. If such events occur, we may engage with our lenders to obtain appropriate waivers or amendments of our credit facilities or refinance borrowings, or seek funding from other external sources, although there is no assurance we would be successful in any of these actions.
A default under certain of our borrowings could trigger defaults under certain of our other debt obligations, which in turn could result in their maturities being accelerated. Certain indentures and other agreements require compliance with various covenants, including covenants that limit the Company's ability to sell all or substantially all of its assets, limit the Company and its subsidiaries' ability to incur indebtedness and liens, and require that we maintain certain financial ratios, each as defined by the terms of the indentures, related supplemental indentures and other agreements.
FUTURE CONTRACTUAL OBLIGATIONS
As a result of our Handset Sale-Leaseback agreements, weThere have additional future contractual obligations of $176 million for the remaining fiscal year 2015, $673 million for fiscal year 2016, and $113 million for fiscal year 2017, in additionbeen no significant changes to our future contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended March 31, 2015.2016. Below is a graph depicting our future principal maturities of debt as of December 31, 2015.
2016.
* This table excludes (i) our unsecured revolving bank credit facility, which will expire in 2018 and has no outstanding balance, (ii) $323$274 million in letters of credit that were outstanding under the unsecured revolving bank credit facility, and (iii) all$480 million of capital leaseslease and other obligations, and (iv) net premiums and debt financing obligations.costs.
OFF-BALANCE SHEET ARRANGEMENTSFINANCING
Sprint has an accounts Receivablea Receivables Facility providing for the sale of eligible wireless service, installment and certain future lease receivables, with a maximum funding limit of $4.3 billion and an expiration date of November 2017.2018. In connection with the Receivables Facility, Sprint formed certain wholly-owned consolidated bankruptcy-remote SPEs. At Sprint's direction, the SPEs sell wireless service installment and future leaseinstallment receivables to unaffiliated third parties or to a bank agent. Sales of eligible receivables generally occur daily and are settled on a monthly basis. Sprint pays a fee for the drawn and undrawn portions of the Receivables Facility. The net amount drawn for wireless service and installment receivables was $1.8 billion as of December 31, 2016.
In November, 2015, Sprint also entered into a Handset Sale-Leaseback agreementOn February 3, 2017, the Company executed certain amendments to sell and lease-back certain leased devices with MLS. In connection with the Handset Sale-Leaseback, Sprint formed certain wholly-owned consolidated bankruptcy-remote SPE Lessees. The SPE Lessees then sold the devices and transferred certain specified customer lease end rights and obligations to MLS in exchange for proceeds totaling $1.1 billion and a DPP of $126 million in December 2015. See the detailed Receivables Facility and Handset Sale-Leaseback discussions within Liquidityobtained the right to repurchase, under certain conditions, the financial assets transferred to the conduits. As a result of adding the repurchase feature, Sprint gained effective control over the financial assets. Accordingly, all sales of wireless service and Capital Resources above.installment receivables to the conduits will be reflected as financings. All cash inflows and outflows under the Receivables Facility will be reported as financing activities on the consolidated statements of cash flows prospectively.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The CompanySprint applies those accounting policies that management believes best reflect the underlying business and economic events, consistent with accounting principles generally accepted in the United States.U.S. GAAP. Inherent in such policies are certain key assumptions and estimates made by management. Management regularly updates its estimates used in the preparation of the consolidated financial statements based on its latest assessment of the current and projected business and general economic environment. Additional information regarding the Company's Critical Accounting Policies and Estimates is included in Item 77. of the Company's Annual Report on Form 10-K for the year ended March 31, 2015.2016.
As discussed in Item 7 of the Company’s Annual Report on Form 10-K for the period ended March 31, 2015, one of our critical accounting policies is the evaluation of goodwill and indefinite-lived assets for impairment. As a result of the SoftBank Merger in July 2013, we recognized indefinite-lived assets at their acquisition-date estimates of fair value. The estimated fair values were determined based on numerous assumptions and estimates, such as Company forecasts, discount rates, growth rates, among others as well as our then-current stock price. During the quarter ended December 31, 2014,
events and changes in circumstances triggered an impairment evaluation, which resulted in an impairment loss on our Sprint trade name of $1.9 billion. The stock price at December 31, 2015 of $3.62 was below the net book value per share price of $5.12. Subsequent to the balance sheet date, the stock price has decreased further to $2.84 at February 3, 2016. The quoted market price of our stock is not the sole consideration of fair value. Other considerations include, but are not limited to, expectations of future results and an estimated control premium.
Sustained declines in the Company’s operating results, forecasted future cash flows, growth rates and other assumptions as compared to the estimates utilized for the purposes of evaluating our goodwill and indefinite-lived assets as of December 31, 2014, as well as a significant, sustained decline in the Company’s stock price and related market capitalization, could affect the results of future impairment assessments and potentially lead to a future material impairment.
FINANCIAL STRATEGIES
General Risk Management Policies
Our Boardboard of Directorsdirectors has adopted a financial risk management policy that authorizes us to enter into derivative transactions, and all transactions comply with the policy. We do not purchase or hold any derivative financial instruments for speculative purposes with the exception of equity rights obtained in connection with commercial agreements or strategic investments, usually in the form of warrants to purchase common shares.
Derivative instruments are primarily used for hedging and risk management purposes. Hedging activities may be done for various purposes, including, but not limited to, mitigating the risks associated with an asset, liability, committed transaction or probable forecasted transaction. We seek to minimize counterparty credit risk through credit approval and review processes, credit support agreements, continual review and monitoring of all counterparties, and thorough legal review of contracts. Exposure to market risk is controlled by regularly monitoring changes in hedge positions under normal and stress conditions to ensure they do not exceed established limits.
OTHER INFORMATION
We routinely post important information on our website at www.sprint.com/investors. Information contained on or accessible through our website is not part of this report.
FORWARD-LOOKING STATEMENTS
We include certain estimates, projections and other forward-looking statements in our annual, quarterly and current reports, and in other publicly available material. Statements regarding expectations, including performance assumptions and estimates relating to capital requirements, as well as other statements that are not historical facts, are forward-looking statements.
These statements reflect management's judgments based on currently available information and involve a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. With respect to these forward-looking statements, management has made assumptions regarding, among other things, subscriber and network usage, subscriber growth and retention, technologies, products and services, pricing, operating costs, the timing of various events, and the economic and regulatory environment.
Future performance cannot be assured. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause actual results to differ include:
our ability to obtain additional financing, including monetizing certain of our assets, including under our existing or future programs to monetize a portion of our network equipment,or spectrum holdings, or both, or to modify the terms of our existing financing, on terms acceptable to us, or at all;
our ability to continue to receive the expected benefits of the Handset Sale-Leaseback,our existing financings such as receivable and handset financings, including additionalany future tranches;
our ability to retain and attract subscribers and to manage credit risks associated with our subscribers;
the ability of our competitors to offer products and services at lower prices due to lower cost structures;structures or otherwise;
the effective implementation of our plans to improve the quality of our network, including timing, execution, technologies, costs, and performance of our network;
failure to improve subscriber churn, bad debt expense, accelerated cash use, costs and write-offs, including with respect to changes in expected residual values related to any of our service plans, including installment billing and leasing programs;
the ability to generate sufficient cash flow to fully implement our plans to improve and enhance the quality of our network and service plans, improve our operating margins, implement our business strategies, and provide competitive new technologies;
the effects of vigorous competition on a highly penetrated market, including the impact of competition on the prices we are able to charge subscribers for services and devices we provide and on the geographic areas served by our network;
the impact of equipment net subsidy costsinstallment billing and leasing handsets; the impact of increased purchase commitments; the overall demand for our service plans, including the impact of decisions of new or existing subscribers
between our service offerings; and the impact of new, emerging and competing technologies on our business;
our ability to provide the desired mix of integrated services to our subscribers;
our ability to continue to access our spectrum and acquire additional spectrum capacity;
changes in available technology and the effects of such changes, including product substitutions and deployment costs and performance;
volatility in the trading price of our common stock, weakcurrent economic conditions and our ability to access capital, including debt or equity;
the impact of various parties not meeting our business requirements, including a significant adverse change in the ability or willingness of such parties to provide service and products, including distribution, or infrastructure equipment for our network;
the costs and business risks associated with providing new services and entering new geographic markets;
the effects of any future merger or acquisition involving us, as well as the effect of mergers, acquisitions and consolidations, and new entrants in the communications industry, and unexpected announcements or developments from others in our industry;
our ability to comply with restrictions imposed by the U.S. Government as a condition to our merger with SoftBank;
the effects of any material impairment of our goodwill or other indefinite-lived intangible assets;
the impacts of new accounting standards or changes to existing standards that the Financial Accounting Standards Board or other regulatory agencies issue, including the Securities and Exchange Commission (SEC);
unexpected results of litigation filed against us or our suppliers or vendors;
the costs or potential customer impact of compliance with regulatory mandates including, but not limited to, compliance with the FCC's Report and Order to reconfigure the 800 MHz band and government regulation regarding "net neutrality";
equipment failure, natural disasters, terrorist acts or breaches of network or information technology security;
one or more of the markets in which we compete being impacted by changes in political, economic or other factors such as monetary policy, legal and regulatory changes, or other external factors over which we have no control;
the impact of being a "controlled company" exempt from many corporate governance requirements of the NYSE; and
other risks referenced from time to time in this report and other filings of ours with the SEC, including Part I, Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the year ended March 31, 2015.2016.
The words "may," "could," "should," "estimate," "project," "forecast," "intend," "expect," "anticipate," "believe," "target," "plan" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are found throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this report. Readers are cautioned that other factors, although not listed above, could also materially affect our future performance and operating results. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. We are not obligated to publicly release any revisions to forward-looking statements to reflect events after the date of this report, including unforeseen events.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
We are primarily exposed to the market risk associated with unfavorable movements in interest rates, foreign currencies, and equity prices. The risk inherent in our market risk sensitive instruments and positions is the potential loss arising from adverse changes in those factors. There have been no material changes to our market risk policies or our market risk sensitive instruments and positions as described in our Annual Report on Form 10-K for the year ended March 31, 2015.2016.
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Item 4. | Controls and Procedures |
Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports under the Securities Exchange Act of 1934, such as this Quarterly Report on Form 10-Q, is reported in accordance with the SEC's rules. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
In connection with the preparation of this Quarterly Report on Form 10-Q as of December 31, 2015,2016, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of the disclosure controls and procedures were effective as of December 31, 20152016 in providing reasonable assurance that information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and in providing reasonable assurance that the information is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms.
Internal controls over our financial reporting continue to be updated as necessary to accommodate modifications to our business processes and accounting procedures. There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 20152016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
In March 2009, a stockholder brought suit, Bennett v. Sprint Nextel Corp., in the U.S. District Court for the District of Kansas, alleging that Sprint Communications and three of its former officers violated Section 10(b) of the Exchange Act and Rule 10b-5 by failing adequately to disclose certain alleged operational difficulties subsequent to the Sprint-Nextel merger, and by purportedly issuing false and misleading statements regarding the write-down of goodwill. The plaintiff sought class action status for purchasers of Sprint Communications common stock from October 26, 2006 to February 27, 2008. On January 6, 2011, the Court denied the motion to dismiss. Subsequently, our motion to certify the January 6, 2011 order for an interlocutory appeal was denied. On March 27, 2014, the court certified a class including bondholders as well as stockholders. On April 11, 2014, we filed a petition to appeal that certification order to the Tenth Circuit Court of Appeals. The petition was denied on May 23, 2014. After mediation, the parties reached an agreement to settle the matter, and the settlement amount was substantially paid by the Company's insurers. The district court granted final approval of thea settlement in August 2015, and the case is now completed.
In addition, five relatedwhich did not have a material impact to our financial statements. Five stockholder derivative suits related to this 2009 stockholder suit were filed against Sprint Communications and certain of its present and/or former officers and directors. The first, Murphy v. Forsee, was filed in state court in Kansas on April 8, 2009, was removed to federal court, and was stayed by the court pending resolution of the motion to dismiss the Bennett case; the second, Randolph v. Forsee, was filed on July 15, 2010 in state court in Kansas, was removed to federal court, and was remanded back to state court; the third, Ross-Williams v. Bennett, et al., was filed in state court in Kansas on February 1, 2011; the fourth, Price v. Forsee, et al., was filed in state court in Kansas on April 15, 2011; and the fifth, Hartleib v. Forsee, et.et al., was filed in federal court in Kansas on July 14, 2011. These cases were essentially stayed while the Bennett case was pending, and we have reached an agreement in principle to settle the stay has been extendedmatters, by agreeing to allowsome governance provisions and by paying plaintiffs' attorneys fees in an immaterial amount. The court approved the partiessettlement but reduced the opportunity to pursue settlement. We do not expectamount of the resolution of these matters to have a material adverse effectplaintiffs' attorneys fees; the attorneys fees issue is on our financial position or results of operations.appeal.
Sprint Communications, Inc. is also a defendant in a complaint filed by stockholders of Clearwire Corporation asserting claims for breach of fiduciary duty by Sprint Communications, and related claims and otherwise challenging the Clearwire Acquisition. ACP Master, LTD, et al. v. Sprint Nextel Corp., et al., was filed April 26, 2013, in Chancery Court in Delaware. Our motion to dismiss the suit was denied, and discovery is substantially complete. Plaintiffs in the ACP Master, LTD suit have also filed suit requesting an appraisal of the fair value of their Clearwire stock. DiscoveryTrial of those cases took place in that case was consolidated withOctober and November, 2016, and the breachparties are in the process of fiduciary duty case and is substantially complete. Sprint Communications intends to defend the ACP Master, LTD cases vigorously.submitting their post-trial briefing. We do not expect the resolution of these matters to have a material adverse effect on our financial position or results of operations.
Various other suits, inquiries, proceedings and claims, either asserted or unasserted, including purported class actions typical for a large business enterprise and intellectual property matters, are possible or pending against us. If our interpretation of certain laws or regulations, including those related to various federal or state matters such as sales, use or property taxes, or other charges were found to be mistaken, it could result in payments by us. While it is not possible to determine the ultimate disposition of each of these proceedings and whether they will be resolved consistent with our beliefs, we expect that the outcome of such proceedings, individually or in the aggregate, will not have a material adverse effect on our financial position or results of operations. During the quarter ended December 31, 2015,2016, there were no material developments in the status of these legal proceedings.
There have been no material changes to our risk factors as described in our Annual Report on Form 10-K for the year ended March 31, 2015.2016.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None
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Item 3. | Defaults Upon Senior Securities |
None
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Item 4. | Mine Safety Disclosures |
None
Disclosure of Iranian Activities under Section 13(r) of the Securities Exchange Act of 1934
Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added Section 13(r) to the Securities Exchange Act of 1934. Section 13(r) requires an issuer to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, including, among other matters, transactions or dealings relating to the government of Iran. Disclosure is required even where the activities, transactions or dealings are conducted outside the U.S. by non-U.S. affiliates in compliance with applicable law, and whether or not the activities are sanctionable under U.S. law.
After the merger with SoftBank, SoftBank acquired control of Sprint. During the three-month period ended December 31, 2015,2016, SoftBank, through one of its non-U.S. subsidiaries, provided roaming services in Iran through Telecommunications Services Company (MTN Irancell), which is or may be a government-controlled entity. During such period, SoftBank had no gross revenues from such services and no net profit was generated. This subsidiary also provided telecommunications services in the ordinary course of business to accounts affiliated with the Embassy of Iran in Japan. During the three-month period ended December 31, 2015,2016, SoftBank estimates that gross revenues and net profit generated by such services were both under $2,000.$500. Sprint was not involved in, and did not receive any revenue from, any of these activities. These activities have been conducted in accordance with applicable laws and regulations, and they are not sanctionable under U.S. or Japanese law. Accordingly, with respect to Telecommunications Services Company (MTN Irancell), the relevant SoftBank subsidiary intends to continue such activities. With respect to services provided to accounts affiliated with the Embassy of Iran in Japan, the relevant SoftBank subsidiary is obligated under contract to continue such services.
In addition, during the three-month period ended December 31, 2016, SoftBank, through one of its non-U.S. indirect subsidiaries, provided office supplies to the Embassy of Iran in Japan. SoftBank estimates that gross revenue and net profit generated by such services were under $1,700 and $350, respectively. Sprint was not involved in, and did not receive any revenue from any of these activities. Accordingly, the relevant SoftBank subsidiary intends to continue such activities.
The Exhibit Index attached to this Quarterly Report on Form 10-Q is hereby incorporated by reference.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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SPRINT CORPORATION (Registrant) |
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By: | /s/ PAUL W. SCHIEBER, JR. |
| | Paul W. Schieber, Jr. Vice President and Controller (Principal Accounting Officer) |
Date: February 4, 20166, 2017
Exhibit Index
|
| | | | | | | | | | | | | |
Exhibit No. | | Exhibit Description | | Form | | Incorporated by Reference | | Filed/Furnished Herewith |
| SEC File No. | | Exhibit | | Filing Date | |
| | | | | | | | | | |
(3) Articles of Incorporation and Bylaws | | | | | | | | | | |
| | | | | | | | | | | | |
3.1 | | Amended and Restated Certificate of Incorporation | | 8-K | | 001-04721 | | 3.1 |
| | 7/11/2013 | | |
| | | | | | | | | | | | |
3.2 | | Amended and Restated Bylaws | | 8-K | | 001-04721 | | 3.2 |
| | 8/7/2013 | | |
| | | | | | | | | | | | |
(10) Material Contracts |
| | | | | | | | | | | | |
10.1 | | First Step Transfer Agreement, dated as of November 19, 2015, among the originators from time to time party thereto, the lessees from time to time party thereto and Sprint Spectrum L.P. | | 8-K | | 001-04721 | | 10.1 |
| | 11/20/2015 | | |
| | | | | | | | | | | | |
10.2 | | First Amendment to First Step Transfer Agreement, dated as of December 2, 2015, among the originators from time to time party thereto and SLV-III LLC, as lessee representative | | | | | | | | | | * |
| | | | | | | | | | | | |
10.3 | | Second Step Transfer Agreement, dated as of November 19, 2015, among the lessees from time to time party thereto and Mobile Leasing Solutions, LLC | | 8-K | | 001-04721 | | 10.2 |
| | 11/20/2015 | | |
| | | | | | | | | | | | |
10.4 | | First Amendment to Second Step Transfer Agreement, dated as of December 2, 2015, among Mobile Leasing Solutions LLC and SLV-III LLC, as lessee representative | | | | | | | | | | * |
| | | | | | | | | | | | |
10.5 | | Master Lease Agreement, dated as of November 19, 2015, among Mobile Leasing Solutions, LLC, the lessees from time to time party thereto, Sprint Spectrum L.P. and Mizuho Bank, Ltd., as collateral agent | | 8-K | | 001-04721 | | 10.3 |
| | 11/20/2015 | | |
| | | | | | | | | | | | |
10.6 | | Performance Support Agreement, dated as of November 19, 2015, by Sprint Corporation in favor of Mobile Leasing Solutions, LLC | | 8-K | | 001-04721 | | 10.4 |
| | 11/20/2015 | | |
| | | | | | | | | | | | |
10.7 | | Guaranty, dated as of November 19, 2015, by Sprint Corporation in favor of Mobile Leasing Solutions, LLC | | 8-K | | 001-04721 | | 10.5 |
| | 11/20/2015 | | |
| | | | | | | | | | | | |
10.8 | | Second Amended and Restated Receivables Purchase Agreement, dated as of November 19, 2015, by and among Sprint Spectrum L.P., as servicer, certain Sprint special purpose entities, as sellers, certain commercial paper conduits and financial institutions from time to time party thereto, as purchasers, the entities from time to time party thereto as purchaser agents, The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as administrative agent, SMBC Nikko Securities America, Inc., as administrative agent, and Mizuho Bank, Ltd., as administrative agent and collateral agent | | 8-K | | 001-04721 | | 10.6 |
| | 11/20/2015 | | |
| | | | | | | | | | | | |
10.9 | | Second Amended and Restated Receivables Sale and Contribution Agreement, dated as of November 19, 2015, by and among certain Sprint subsidiaries as originators and special purpose entities | | 8-K | | 001-04721 | | 10.7 |
| | 11/20/2015 | | |
| | | | | | | | | | | | |
10.10 | | Fourth Amendment to Employment Agreement, effective November 6, 2015, by and between Sprint Nextel Corporation, now known as Sprint Communications, Inc., and Joseph Euteneuer | | 8-K | | 001-04721 | | 10.1 |
| | 11/12/2015 | | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | |
Exhibit No. | | Exhibit Description | | Form | | Incorporated by Reference | | Filed/Furnished Herewith |
| SEC File No. | | Exhibit | | Filing Date | |
| | | | | | | | | | |
(3) Articles of Incorporation and Bylaws | | | | | | | | | | |
| | | | | | | | | | | | |
3.1 | | Amended and Restated Certificate of Incorporation | | 8-K | | 001-04721 | | 3.1 |
| | 7/11/2013 | | |
| | | | | | | | | | | | |
3.2 | | Amended and Restated Bylaws | | 8-K | | 001-04721 | | 3.2 |
| | 8/7/2013 | | |
| | | | | | | | | | | | |
(4) Instruments Defining the Rights of Security Holders, including Indentures | | | | | | | | | | |
| | | | | | | | | | | | |
4.1 | | Indenture, dated as of October 27, 2016, by and among Sprint Spectrum Co LLC, Sprint Spectrum Co II LLC, Sprint Spectrum Co III LLC and Deutsche Bank Trust Company Americas, as trustee and securities intermediary | | 8-K | | 001-04721 | | 4.1 |
| | 11/2/2016 | | |
4.2 | | Series 2016-1 Supplement, dated as of October 27, 2016, among Sprint Spectrum Co LLC, Sprint Spectrum Co II LLC, Sprint Spectrum Co III LLC and Deutsche Bank Trust Company Americas, as trustee and securities intermediary | | 8-K | | 001-04721 | | 4.2 |
| | 11/2/2016 | | |
4.3 | | Form of the Series 2016-1 3.360% Senior Secured Notes, Class A-1 (included in Exhibit 4.2) | | 8-K | | 001-04721 | | 4.3 |
| | 11/2/2016 | | |
4.4 | | Tenth Supplemental Indenture, dated as of August 9, 2016, by and among Virgin Mobile USA - Evolution, Inc., as new guarantor, Sprint Communications, Inc., The Bank of New York Mellon Trust Company, N.A., as trustee | | | | | | | | | | * |
4.5 | | Eleventh Supplemental Indenture, dated as of November 16, 2016, by and among Sprint Communications, Inc., The Bank of New York Mellon Trust Company, N.A., as trustee and certain subsidiaries of Sprint Corporation as new guarantors | | | | | | | | | | * |
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(10) Material Contracts |
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10.1 | | Sprint Corporation Amended and Restated 2015 Omnibus Incentive Plan | | | | | | | | | | * |
10.2 | | Employment Agreement, dated May 31, 2015, by and between Sprint Corporation and Kevin Crull | | 10-Q | | 001-04721 | | 10.3 |
| | 8/7/2015 | | |
10.3 | | Retention Award Letter for Roger Sole effective as of January 18, 2017 | | | | | | | | | | * |
10.4 | | Guarantee and Collateral Agreement, dated October 27, 2016, among Deutsche Bank Trust Company Americas, Sprint Spectrum PledgeCo LLC, Sprint Spectrum PledgeCo II LLC, Sprint Spectrum PledgeCo III LLC, Sprint Spectrum License Holder LLC, Sprint Spectrum License Holder II LLC and Sprint Spectrum License Holder III LLC. | | 8-K | | 001-04721 | | 10.1 |
| | 11/2/2016 | | |
10.5 | | Intra-Company Spectrum Lease Agreement, dated as of October 27, 2016, among Sprint Spectrum License Holder LLC, Sprint Spectrum License Holder II LLC and Sprint Spectrum License Holder III LLC, Sprint Communications, Inc., Sprint Intermediate Holdco LLC, Sprint Intermediate Holdco II LLC, Sprint Intermediate Holdco III LLC and the guarantors named therein | | 8-K | | 001-04721 | | 10.2 |
| | 11/2/2016 | | |
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Exhibit No. | | Exhibit Description | | Form | | Incorporated by Reference | | Filed/Furnished Herewith |
| SEC File No. | | Exhibit | | Filing Date | |
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10.1110.6 | | EmploymentFirst Amendment to Second Amended and Restated Receivables Purchase Agreement, dated May 1, 2015,as of November 18, 2016, by and betweenamong Sprint CorporationSpectrum L.P., as initial servicer, the Sellers party thereto, the various Conduit Purchasers, Committed Purchasers and Roger Solé RafolsPurchaser Agents party thereto, Mizuho Bank, Ltd., as Collateral Agent, The Bank of Tokyo-Mitsubishi UFJ, Ltd., as SCC Administrative Agent, and SMBC Nikko Securities America, Inc. as Lease Administrative Agent | | | | | | | | | | * |
10.7 | | Amended and Restated First Step Transfer Agreement (Tranche 2), dated as of December 8, 2016, by and among Sprint Spectrum L.P., the Originators from time to time party thereto, and the Lessees from time to time party thereto | | | | | | | | | | * |
10.8 | | Amended and Restated Second Step Transfer Agreement (Tranche 2), dated as of December 8, 2016, by and among Mobile Leasing Solutions, LLC acting for itself and on behalf of Series 2 thereof and the Lessees from time to time party thereto | | | | | | | | | | * |
10.9 | | Amended and Restated Master Lease Agreement (Tranche 2), dated as of December 8, 2016, by and among Sprint Spectrum L.P., the Lessees from time to time party thereto, Mizuho Bank, Ltd., and Mobile Leasing Solutions, LLC acting for itself and on behalf of Series 2 thereof | | | | | | | | | | * |
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10.12 | | Employment Agreement, dated January 2, 2016, by and between Sprint Corporation and Jorge Gracia | | | | | | | | | | * |
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10.13 | | Second Amendment to Second Step Transfer Agreement, effective as of December 2, 2015, by and between Mobile Leasing Solutions, LLC and SLV-III, LLC, as lessee representative | | | | | | | | | | * |
(12) Statement re Computation of Ratios |
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12 | | Computation of Ratio of Earnings to Fixed Charges | | | | | | | | | | * |
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(31) and (32) Officer Certifications | | | | | | | | | | |
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31.1 | | Certification of Chief Executive Officer Pursuant to Securities Exchange Act of 1934 Rule 13a-14(a) | | | | | | | | | | * |
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31.2 | | Certification of Chief Financial Officer Pursuant to Securities Exchange Act of 1934 Rule 13a-14(a) | | | | | | | | | | * |
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32.1 | | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002 | | | | | | | | | | * |
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32.2 | | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002 | | | | | | | | | | * |
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(101) Formatted in XBRL (Extensible Business Reporting Language) |
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101.INS | | XBRL Instance Document | | | | | | | | | | * |
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101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | | | | | * |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | | | * |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | | | * |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | | | * |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | | | * |
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* | Filed or furnished, as required. |